​​​​​​Or you can just buy BRK-B. The best management team, lots of cash, fairly priced.

This. Hopefully this post inspires some folks to step away from these casino like SPACs when there are plenty of companies out there that are undervalued with strong fundamentals that provide significant margin of safety for your hard earned money. Here's a few I picked up on sale at various times last year:

SKYW up 140%

REGI up 260%

STLA up 135%

SOI up 61%

PUMP up 263%

EGY up 97%

SND up 288%

It doesn't take a rocket scientist for the individual investor to find these companies that have positive free cash flow and alot of cash on hand(Margin of Safety) in distressed industries that trade at unnecessarily low valuations.

I cannot stress Margin of Safety enough.

"It is a tenet of my investment style that, on the subject of common stock investment, maximizing the upside means first and foremost minimizing the downside. The deleterious effect of permanent capital loss on portfolio returns cannot be overstated."

Dr. Michael J. Burry

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Value investing is the key to big returns. Buying lows is much easier than selling high.

so, theoretically speaking, what sources could a novice consult to find a company with ‘+ free cash flow’ with cash in a ‘distressed industry’? I’m asking for a friend.

congrats on those nice returns.

Thanks. First I highly recommend reading a couple books first, The Acquirer's Multiple by Tobias Carlisle and The Little Book that Beat the Market by Joel Greenblatt. Both are quick, easy reads. Pair those with Investopedia.com where you can look up any terms you don't understand and get additional education on how to read an income statement, Balance sheet, and Cashflow statement. One Up on Wallstreet by Peter Lynch is another great book to follow up with. Also a relatively quick read.

Next you begin your research which starts with selecting your screening method and a good screener. I look for companies that have low EV/EBIT multiples(Enterprise Value to Earnings Before Interest and Taxes). It's essentially a better version of Price to Earning ratio (PE Ratio) because it adds the net debt of the company to the market cap so you have a better sense of the company's capital structure. I use The Acquirer's Multiple $45 a month screener. Gurufocus(also $45) is another great screener for EV/EBIT or EV/EBITDA screening. Free screeners are plentiful but those usually limit you to PE ratio screening with no EV related screening options.

Once I run the screener I look at the cheapest companies then look for quality. I search for a company that has enough cash to cover all its long term debt, is free cash flow positive in operations, and has decent return on invested capital. Almost all the companies I listed I have never heard of in my life so it's was intriguing to learn about the businesses reading their 10k. Some of these companies are so undervalued while gushing cash I invest after less than 20 mins of reading. I typically invest in 12-15 companies (anything more than that is a pain to track) equally sized.

Overall the key to all this is to realize you are purchasing pieces of a business not pieces of paper. If you take the time to learn how to accurately value businesses in the long run the market will reward you.

In the short term the market is a voting machine, in the long term it's a weighing machine, and it's weighing the free cash flows generated by the business. Your goal is to find companies that are trading at low to rediculously low valuation relative to its cashflows.

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Trip7 , can you please tell us what your annualized rate of return has been for the last 5 years, adjusted for cash flows in and out (XIRR)? What about 10 years? Your posts are very consistent regarding valuation and I’m curious to know how your methods have performed.

For me, plain old long term, buy, hold, sit on my hands of “nosebleed valuation, bubble stocks” has been 30% annualized which is about 20% above the S&P for the same time period. I do expect that to tick down around 1% or so this quarter.

Also, more or less thunderstorms in the summer this year?

I just started value investing last year. Before that I was soley in Index funds and Real Estate with 3% of my money in a "Sandbox" for playing with individual stocks. After extensive research on stocks I jumped into Individual stocks last years and with admitly fortune timing as the Market collapsed and offered me cashflowing businesses at low prices. In 2020 I returned 60%

I have no doubt you did 30% annualized with growth stocks. If you believe that will continue for the next 10 years at current nosebleed valuations good luck. Unless the majority of your portfolio is reasonably valued growth stocks like Google, Facebook and Microsoft history has shown those type of runs that are disconnected from fundamentals end very badly. Time will tell.

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You seem to read a lot about investing. Maybe too much? Everyone, their brother and their pets publish their tried and true method, their valuation models, their fool proof ratio etc. That’s all so complicated. We look for numbers to validate our feelings or something we just read. Conveniently, whomever published the book or article you’re reading can find all the data needed to back up what they sold you.

Im not opposed to reading these types of things for some abstract ideas, but when they narrow it down to something simple like “If XYZ ratio is below this # it’s a buy”, I disregard that.

How is this for value investing; if you invest in a company today, ignoring “valuation” and instead believe it’s product will expand around the world and revolutionize an industry (Tesla comes to mind, often touted as the ultimate overvalued stock) don’t you think today’s price is a value compared to what it is in 10 years?

My problem with looking at “multiples” and “ratios” is they cannot look at the possibility that a company like Tesla will grow car sales, battery sales, solar sales, satellite launch sales, satellite internet sales, car software subscription sales, boring company sales, electrical grid rebuilding sales and so on. Dividing this number by that number just simply cannot take potential into account. Do your value models take into account WHAT these companies are doing with all of that cash? If so, how does that fit into a mathematical equation. To me, what they’re doing with the money is more important than the money itself. Are they investing in technology? Sales? Advertising? Management bonuses?

The only shot we have is investing in companies poised for significant growth. I’m talking 10x and beyond. Sure, I can invest in a paper company with great cash flows but what returns will that give me?

My personal favorite example and holding is Shopify. For the years I’ve held it since IPO, it’s always been “overvalued”. It’s valuation was “rich”. It’s “multiples” were stratospheric. And yet, it’s returned over 20x (at times) for me. Will I give some of that back if I keep holding? Sure. The last two weeks I’ve most definitely given some back, but is that because it’s a bad company or it’s multiples didn’t fit into some Wall Street or CNBC model? No. Just tech not being in Vogue the last couple of weeks. Consider what Shopify does, the size of the addressable market and the vision that the leader has for the company and I’ll take that any day over PE.

Admittedly, I don’t know your situation or age so perhaps what you’re doing is best for you. But from a simple future potential standpoint, if you’ve got 20-30 years to retirement, this is the only true shot a lowly airline pilot like me has at Ed Bastian type fortunes.

Final note; do be sure to keep track of your performance vs a benchmark like the S&P, ultimately it’s the only thing that matters.

whew.

With investing there is not necessarily good and bad companies, just good and bad prices. I hope TSLA and SHOP are not significant parts of your portfolio because you likely will give back ALOT causing your future returns over the next 10 years to be drastically different. Heard of the Nifty 50?

https://www.investopedia.com/terms/n/niftyfifty.asp

TSLA and SHOP are story stocks. They are great businesses who's stock prices have become disconnected from reality due to the story/hype. The businesses will be fine, but those who invested at eyewatering prices will likely suffer permanent loss of capital. To justify its CURRENT valuation, TSLA would have to sell more cares than Toyota, VW, and Daimler combined at Porsche margins. Once again Good Luck

If TSLA stock drops 90%(quite possible) I'll be one on the first in line to pick up shares of a great growing business at a reasonable price with downside protection :)


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