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The Impact of OCF
Operating cash-flow per share (OCF)
The OCF experience has helped many investors realize their dream of a meaningful, well-funded retirement. Do you share the same dream? Are you satisfied with the growth of your Personal Retirement Account (PRA)? How do you feel when your financial planners, advisors, and stock brokers make more money than you… managing your money? Who is more interested in your PRA than you? Financial planners, advisors and stockbrokers who are primarily interested in PRA? Some of the greatest investors in history and many analysts put more weight on operating cash flow per share (which we call (OCF)) than earnings per share (EPS).
The fact is that EPS is more easily manipulated. History has proven that, using EPS, unscrupulous managers and accountants can make a company’s strength look better than the truth. Cash, on the other hand, is difficult – if not impossible – to counterfeit. Whether you have cash or not. Therefore, OCF is a useful method to determine the true strength of a company and provide a picture of its ability to weather a storm like a market downturn.
Cash is king! Without cash, a company cannot stay in business for long.
Due to the fact that EPS is the ‘mantra’ of Wall Street, the measurement that all bankers point to, managers tend to focus entirely on numbers like net income and EPS and ignore cash and operating cash flow. A company can report positive earnings and still suffer a negative OCF. If a company is regularly spending more cash than it’s taking in… what do you think? Enron, WorldCom, Adelphi, Global Crossing and many other companies have collapsed over the years due to this EPS-emphasis mindset. It also led to the demise of the Arthur Andersen accounting firm and several fines and penalties on major brokerage houses.
Because of the magic of accounting, EPS has become a game of smoke and mirrors. Creative accounting provides different versions that are more like a fairy tale than a true picture of a company’s strengths. Despite all the fines, penalties, failures, Wall Street is eating away at its twisted mentality. Remember, estimates are always just estimates, but Wall Street often forgets that. However, this creates opportunities for investors who have the tools to assess the true strength of companies over the long term. They can take advantage of exiting companies before their EPS based collapses. They can then take advantage of market overreactions.
EPS can be used to obscure some short-term problems such as burning cash at too high a rate. While EPS is rising, the actual cash and cash flow position is deteriorating at an alarming rate. At some point a company will have to face this problem, and when they do, their value drops sharply. In the final weeks before Enron’s demise, all the great brokerage houses were saying buy, buy, buy. But the metrics that are available now, and looking back at Enron’s history, would say sales, sales, sales – even though EPS was at an all-time high for Enron.
Studying OCF will help you spot companies that are burning cash faster than they are taking it in, regardless of their net income or EPS numbers. It will also help you identify companies with strong OCF and more likely to grow with greater security. Doesn’t it make sense that a ‘model portfolio’ made up of companies with strong OCF would be a safer and better investment than any other method? Thousands of investors have lost all or part of their portfolios to managers, investment advisors and stock brokers.
That’s about to change. Research proving the effectiveness of OCF has been developing for about ten years. In fact, the ‘model portfolio’, using OPS as the primary measure (ignoring other measures) has outperformed the stock market, mutual funds, 401ks and the S&P 500.
Good news for the average small investor is just around the corner. Education is now being developed to help you maximize your personal retirement account. With all the best technology available, it’s in an easy-to-use format that doesn’t require you to be a day trader, economist or PhD in money management. It has been reported that in the first quarter of 2009, small investors will have access to the same information that is currently available only to the most savvy and wealthy investors.
A portfolio based on a positive OCF number will help you sleep at night. It will accomplish one of the key things a leading consultant taught… “No matter what you want to invest; let the Rule of 72 (determines how quickly your investment doubles) work for you. OCF-Based ‘Model Portfolios’ Other It has a proven track record of delivering two to three times higher returns than traditional portfolios based on any methodology.”
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