Last week I wrote an article about why and how we sometimes have to take a step back and look deeper at the fundamental factors of a systematic fund in which I have invested, the Avantis Global Small Cap value UCITS ETF: What does Avantis Global Small Cap Value UCITS ETF’s do 23% Cashflow -return?
My regular reader Themnotleft left a comment and wonder how useful to know the price-to-cash flow and he realizes that two ETFs he possesses in those criteria.
There are many ways to appreciate companies and your systematic active value strategy can use something else, and sometimes it is precisely from the companies that the fund owns is also cheap based on price-to-cash flow.
All in LTAM (Ishares MSCI EM Latin Amer ETF) case the region is simply cheap!
But the thoughts of Thinknotleft are also not too far from mine. How relevant is this?
I think knowing certain nuances can be the difference between having the conviction to buy and just keep, about crisis and uncertainty, versus … Papers hand over what you possess.
I send two e -mails to find out what others think about this. The first is to do Avantis, because this is their fund and the second is to Tobias Carlisle to Tobias, from Value after hours” GreenbackThe ETF Zig And Ak -Multival. I have not received anything that I don’t know about both short answers.
But yesterday I saw Tobias Carlisle release this tweet:
This price-to-cash flow-stuff can interest him enough to do some work haha!
Professor Kenneth French (half of the nobel-winning Fama-French) gave everyone granted information about data about His Dartmouth page.
We have data about cash flows that go back to 1952, which is around 73 years old. If we compare a value -weighed portfolio of people with the lowest price to cash flow (blue) with those with the highest price to cash flow (orange), you see a clear gap in performance. If the low price for the cash flow has made a comeback at any time, the lines will beg.
This graph shows the spread between the one with the highest cash flow return minus the lowest cash flow yield (green line), covered with the underperformance.
The first thing you learn from the blue line is that there will be underperformance from time to time. And the underperformance can be quite large.
The green line shows a good outperformance.
Everything changes in 2014.
Then all companies with a lowest cash flow return suddenly did so well. So much so that the underperformance makes people think that something has changed structurally.
Tobias, who pays more attention to this than most, has no at all:
- Loose monetary policy?
- Shortages?
- Software eats the world?
- Mania?
- The singularity?
- Flows?
People have tried to attribute, but not a clear answer. Maybe it’s a combination of this.
If it is so difficult to identify afterwards, you wonder if you can identify for this.
The last graph suddenly cash flows divided by the market return value. The blue is the low decile and red the high decile.
From this you can see that those with a high cash flow return regularly have a yield of 20%, so the 23% I am talking about is not something new.
If it is not clear, these are not only small caps, but also in the US shares in general.
Here is the definition of Kenneth Frans van Cashflow:
The cash flow that is used in June of year T is the total profit before extraordinary articles, plus the share of the equity in depreciation, plus deferred taxes (if available) for the last tax year end in T-1. P (actually me) is praise times shares outstanding at the end of December of T-1.
I try to use chatgpt to break it down for all of you:
Components:
- Income for extraordinary items
→ This is similar to Netto -Inkomas From continuous operations. - Plus depreciation
→ added a non-continuous costs, just like in the indirect method From calculating the operational greenhouse current. - Plus deferred taxes (if available)
→ These are non-continuous tax costs, often included in the reconciliation of income to OCF.
Interpretation:
This formula is effective:
Operational greenhouse current ≈ Netto income + depreciation + delayed taxes
It excludes:
- Changes in working capital
- Non-operational items such as capital expenditure or financing flows
What it makes:
- A partial measure for the operational greenhouse streamNo complete free cash flow
- More representative of cash generated by operations Then only rough income
This is closer to EBITDA then anything.
So for about 10 years, companies with low income, low cash flows, before even the expenditure for capital expenditure performs better than those with cash flows to spend.
What do you get stuck in the end
On the one hand, a winning strategy can be one that has given investors the best return for the past 5 years.
Many would tell me “Isn’t growth or return what we are looking for at the end after all the Kyith?”
That’s true.
But what happens if what you buy does not work?
Or more realistic, does it not work immediately? For 2 years?
Most will just be sold out and go to the next shiny things.
And it will take a while before they realize. How come nothing takes forever?
The truth may be that nothing always works. The consistent relative underperformance in the second graph should tell us that the growth sometimes loses value and sometimes opposite.
That’s the nature.
It is when people assume that there is something that always works.
I think we talk too much about this large cap versus small cap, quality versus value, value versus growth too much .. that we tend to forget what we buy.
And I think it is reassuring to know that if you stick to a basket with shares that tend to generate cash flows that are high, compared to their price, you know that you are sticking to something that is not overly expensive.
I see so many people who dissess that diss. Say that this does not work or that.
When I ask them why they don’t put more money in the strategy they have chosen (which is not the one she diss), they say it is too “frothy” or “expensive”.
You should see my eyes roll while I see those messages.
The formula that is taught us to appreciate a company is the cash flow model above. We consider the cash flow that a company can earn back today with a discount nuisance (R).
The cash flow (CF) can grow with a certain growth rate (G). Your stock can grow at a rapid pace, or the growth rate can also be negative.
It reminds us that … fundamentally we pay for today, the total cash flow is in the future.
How would you feel if you own a number of companies whose cash flow without growth is actually very low, compared to what you pay today?
Not good.
It is unfair for you not to consider the greater growth Kyith.
Yes you are right.
But it is also much more difficult to accurately estimate the degree of growth of an individual company. The saving grace is that if you buy a portfolio of shares with high growth, things can work.
But you have to ask yourself what the great growth has caused in the past ten years and would those factors still be present for the next twenty years you need?
That is up to you to find out.
I don’t have an accurate answer. I suspect you won’t have that so well. Your answer is just a good gamble. And you believe enough to put your pension funds in it.
The traditional way of investing is to put more emphasis on the cash flow today.
The growth is just the icing on the cake. If it happens, it’s good.
But you want to make sure that you do not pay too much for the cash flow today. You want to ensure that even if growth does not happen, the cash flow is so ridiculous that the market will realize its value.
For those who understood these basic principles, with some of their systematic-active strategies, this would make them able to build up the conviction to retain, even if it does not work (I say that this is generally applicable, not only value-related strategies)
Ultimately, apart from the proof of premiums shown by Mr Carlisle with the data of Professor French here, your understanding of what returns on the drives is quite important.
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Kyith is the owner and some writer behind investment canals. Readers coordinate investment canals to learn and build stronger, stronger power foundations, how to have a passive investment strategy, to know more about investing in Reit’s and the notes and bolts of active investing.
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From 2004 to 2019, Kyith worked as an IT operational engineer. He is currently working as a senior solutions specialist in insurance. All opinions about investment canals belong to him and do not represent the views on providing.
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