Thread by @trengriffin

1/ You find a lamp and after you rub it a genie appears and offers you one of two businesses:

1. Business A generates $10,000 in "earnings" each month;

Or

2. Business B generates $10,000 in "free cash flow" each month?

Would you select Business A or Business B?

2/ Cash flow rather than reported earnings is what determines value for an investor. You can't spend someone's opinion that a business generated an accounting profit. Earnings are only a clue about future cash flows. That and other clues about cash flow can be misleading or not.

3/ Why do so many investors focus on earnings rather than free cash flow ?

"convenient availability, single-number simplicity, auditors provide presumed authority and a shortcut, freeing investors from the need to assess long-term cash-flow prospects." expectationsinvesting.com/pdf/earnings.p…

4/ "The core of expectations investing is to correctly anticipate changes in the market’s implied expectations for a company’s long-term cash flows."

Lazy investor use of shortcuts like earnings and P/E ratios is your opportunity to purchase assets at a significant discount.

4/ "Correctly anticipating changes in a company’s competitive position (and the resulting cash flows) that are not reflected in the current stock price" creates wealth.

Of course, the free cash generating ability of a business isn't an annuity. Work is required to create wealth.

5/ "The 'earnings' and P/E ratio shortcuts exact a significant toll because they view value through the rear-view mirror. Investors, however, must squarely face the future."

The expected stream of *future* cash flows, properly discounted, determine long term stock prices.

6/ "Earnings includes no charge for the cost of capital.

Earnings exclude incremental investments in working and fixed capital a company needs to sustain growth.

It is possible to compute earnings using alternative, equally acceptable accounting methods."

It is less work tho.