Two Minutes Reading with the Masters of Investing
When most investors think about picking stocks, they focus on earnings, dividends, or Wall Street ratings. But Kenneth Hackel, a money manager featured in the news, used a different approach: free cash flow.
Why Free Cash Flow Matters 💵
Free cash flow is the money left after a company pays its bills and invests in its business. It’s what can be used to:
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Pay dividends
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Buy back stock
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Reduce debt
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Reinvest for growth
Hackel argued that free cash flow reveals the true earning power of a company, often better than reported profits. For example, a company might look profitable on paper but have little cash left over—meaning it can’t reward shareholders.
His Strategy 📊
Hackel searched for companies with a low price-to-free-cash-flow ratio (a stock price that looks cheap compared to the cash the company actually generates). He also avoided businesses drowning in debt.
This focus helped him deliver strong returns in the 1980s: his fund achieved 21.4% annual returns, beating the S&P 500’s 16.3% over the same period.
Examples in Practice 🏢
At the time, Hackel liked companies such as American Home Products, Lubrizol, and H.B. Fuller. These firms weren’t flashy, but they consistently generated strong cash flows.
Think about it this way: if you owned a rental property, you wouldn’t just care about the appraised value—you’d want to know how much rent (cash) is left after expenses. Hackel applied that same logic to stocks.
Why This Matters for Today’s Investor 🧠
Even decades later, the principle stands. Investors often get caught up chasing hot stories (AI, EVs, biotech) or focusing only on reported earnings. But looking at free cash flow can help you see which companies actually have the money to reward shareholders and survive downturns.
Warren Buffett has long emphasized a similar idea: “The value of a business is the cash that it can generate for its owners.”
Key Takeaway ✅
For long-term investors, focusing on free cash flow is like checking whether your “money tree” is producing real fruit. Stock prices can move with hype, but free cash flow shows whether a company is truly delivering value.
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