You Can Be A Stock Market Genius is a book about investing in special situations like bankruptcies or spinoffs.
This book was a positive surprise as I didn't like the author's other book The Little Book That Beats the Market and the title screamed "snake oil".
The book provides a good overview about the opportunities that can occur during special situations and the author illustrates the "theory" with interesting case studies covering some of his own investments. Some of the content is a bit dated as the book was written almost 20 years ago (in 1997) and it would be nice to have an updated second edition with what the author learned in the meantime. Anyway, it was an instructive read for me and hopefully some of the ideas will be useful in the future.
Follow the Yellow Brick Road – Then Hang a Right
[...] the basic premise of most academic theory is this: It is not possible to beat the market consistently other than by luck. This theory, usually referred to as the efficient-market or "random walk" theory, suggests that thousands of investors and analysts take in all the publicly available information on a particular company, and through their decisions to buy and sell that company's stock establish the "correct" trading price. In effect, since stocks are more or less efficiently priced (and therefore, you can't consistently find bargain-priced stocks), it is not possible to outperform the market averages over long periods of time.
[...] diversification addresses only a portion (and not the major portion) of the overall risk of investing in the stock market. Even if you took the precaution of owning 8'500 stocks [the total of U.S. stocks], you would still be at risk for the up and down movement of the entire market. This risk, known as market risk, would not have been eliminated by your "perfect" diversification.
While simply buying more stocks can't help you avoid market risk, it can help you avoid another kind of risk – "nonmarket risk". Nonmarket risk is the portion of a stock's risk that is not related to the stock market's overall movements. This type of risk can arise when a company's factory burns down or when a new product doesn't sell as well as expected. By not placing all your eggs in a buggy-whip, breast-implant, pet-rock, or huckapoo-sweater company, you can diversify away that portion of your risk that comes from the misfortunes of any individual company.
[...] two things should be remembered: 1. After purchasing six or eight stocks in different industries, the benefit of adding even more stocks to your portfolio in an effort to decrease risk is small, and 2. Overall market risk will not be eliminated merely by adding more stocks to your portfolio.
If you spend your energies looking for and analyzing situations not closely followed by other informed investors, your chance of finding bargains greatly increases. The trick is locating those opportunities.
Some Basics – Don't Leave Home Without Them
Without a basic level of knowledge and understanding, you can't tell a great investment from a real dog.
There are really two reasons to do your own work. The first is pretty simple. You have no choice. If you are truly looking at situations that others are ignoring, there will rarely be much media or Wall Street coverage. While there is usually plenty of industry or company information available, some of it quite helpful, almost none will focus on the special attributes that make your investment opportunity attractive. [...] The other reason to do your own work is closely related. As much as possible, you don't want to be well paid merely for taking big risks. Anyone can manage that. You want to be well paid because you did your homework. If you are one of the few people to analyze a particular investment opportunity, it follows that you are in the best position to assess the appropriate payoff for the risk taken. Not all obscure or hidden investment opportunities are attractive. The idea is to place your "bets" in situations where the rewards promise to greatly outweigh the risks.
The payoff to all your legwork and analysis is the opportunity to invest in situations that offer unfair economic returns. Your extraordinary profits will not be a result of taking on big risks; they will be the justly deserved pay for doing your homework.
One perennial problem is the overwhelming incentive for analysts to issue "Buy" recommendations. The universe of stocks not owned by a customer is always much larger than the list of those currently owned. Consequently, it's much easier to generate commissions from new "Buy" recommendations than from recommendations to sell.
It's much safer to be wrong in a crowd than to risk being the only one to misread a situation that everyone else pegged correctly. As a result, getting fresh, independent thinking from analysts is the exception, not the norm.
It doesn't pay for Wall Street analysts to cover stocks or investment situations unless they can generate enough revenue (read commissions or future investment-banking fees) to make the time and effort involved worthwhile. Therefore, smaller capitalization stocks whose shares don't trade in large volumes, obscure securities, and unique situations are generally ignored. Ironically, the very areas that are uneconomic for large firms to explore are precisely the ones that hold the most potential profit for you.
It makes sense that if you limit your investments to those situations where you are knowledgeable and confident, and only those situations, your success rate will be very high. There is no sense diluting your best ideas or favorite situations by continuing to work your way down a list of attractive opportunities.
[...] no matter how many different stocks you buy, investing in the stock market with money that you will need over the next two or three years to help with rent or mortgage payments, food, medical care, tuition, or other necessities is risky in the first place.
So one way to create an attractive risk/reward situation is to limit downside risk severely by investing in situations that have a large margin of safety. The upside, while still difficult to quantify, will usually take care of itself. In other words, look down, not up, when making your initial investment decision.
[...] individuals and professionals systematically overrate the long-term prospects of companies that have done well recently, and at the same time underestimate the value of companies that are underperforming or unpopular at the moment. Relying on objective measures like a company's book value and historical earnings to determine value may help eliminate some of the emotional and institutional biases likely to be found in more future-based valuation methods.
Buffett tries to focus on well-managed companies that have a strong franchise, brand name, or market niche. In addition, his investments are concentrated in businesses that he understands well and that possess attractive underlying economic (that is, they generate lots of cash) and competitive characteristics. In this way, when Buffett buys a business at what appears to be an attractive discount to current value, he also benefits from the future increase in value generated by owning all or part of a business that is well situated.
[...] according to Buffett, the risk in buying poor businesses is that much of the bargain element of the initial purchase discount may well be dissipated by the time a catalyst comes along to unlock what appeared to be the initial excess value.
Simply because you'll be looking for investments in out-of-the-way places doesn't mean that you can't or shouldn't apply some of the wisdom gleaned from studying the winning methods of a Graham, Buffett, or Lynch.
The list of corporate events that can result in big profits for you runs the gamut – spinoffs, mergers, restructurings, rights offerings, bankruptcies, liquidations, asset sales, distributions. And it's not just the events themselves that can provide profits; each such event can produce a whole host of new securities with their own extraordinary investment potential.
Are there any drawbacks to investing in these special corporate situations? Two come immediately to mind. The first you know: it will take some work. [...] The other drawback may or may not apply to you. Although some of these extraordinary corporate events play out over a period of years, others transpire over a period of months. Your investment advantage is usually at its greatest immediately before, during and right after the corporate event or change. Your window of opportunity may be short and therefore your holding period may also be short.
Chips Off the Old Stock – Spinoffs, Partial Spinoffs, and Rights Offerings
Spinoffs can take many forms but the end result is usually the same: A corporation takes a subsidiary, division, or part of its business and separates it from the parent company by creating a new, independent, free-standing company. In most cases, shares of the new "spinoff" company are distributed or sold to the parent company's existing shareholders.
Stocks of spinoff companies, and even shares of the parent companies that do the spinning off, significantly and consistently outperform the market averages.
Why do companies pursue spinoff transactions in the first place? Usually the reasoning behind a spinoff is fairly straightforward:
- Unrelated businesses may be separated via a spinoff transaction so that the separate businesses can be better appreciated by the market.
- Sometimes, the motivation for a spinoff comes from a desire to separate out a "bad" business so that an unfettered "good" business can show through to investors. This situation [...] may also prove a boon to management. The "bad" business may be an undue drain on management time and focus. As separate companies, a focused management group for each entity has a better chance of being effective.
- Sometimes a spinoff is a way to get value to shareholders for a business that can't be easily sold. Occasionally, a business is such a dog that its parent company can't find a buyer at a reasonable price. If the spinoff is merely in an unpopular business that still earns some money, the parent may load the new spinoff with debt. In this way, debt is shifted from the parent to the new spinoff company (creating more value for the parent). On the other hand, a really awful business may actually receive additional capital from the parent – just so the spinoff can survive on its own and the parent can be rid of it.
- Tax considerations can also influence a decision to pursue a spinoff instead of an outright sale.
- A spinoff may solve a strategic, antitrust, or regulatory issue, paving the way for other transactions or objectives.
The spinoff process itself is a fundamentally inefficient method of distributing stock to the wrong people. Generally, the new spinoff stock isn't sold, it's given to shareholders who, for the most part, were investing in the parent company's business. Therefore, once the spinoff's shares are distributed to the parent company's shareholders, they are typically sold immediately without regard to price or fundamental value. The initial excess supply has a predictable effect on the spinoff stock's price: it is usually depressed.
Another reason spinoffs do so well is that capitalism, with all its drawbacks, actually works. When a business and its management are freed from a large corporate parent, pentup entrepreneurial forces are unleashed. The combination of accountability, responsability, and more direct incentives take their natural course. After a spinoff, stock options, whether issued by the spinoff company or the parent, can more directly compensate the managements of each business. Both the spinoff and the parent company benefit from this reward system.
Insider participation is one of the key areas to look for when picking and choosing between spinoffs – for me, the most important area. Are the managers of the new spinoff incentivized along the same lines as shareholders? Will they receive a large part of their potential compensation in stock, restricted stock, or options? Is there a plan for them to acquire more?
[...] a theme common to many attractive investment situations is that management and employees have been incentivized to act like owners.
Since in the United States most companies like their stocks to trade between $10 per share and $100, a stock that trades below $10 has, in many instances, fallen from grace. Due to a lower market capitalization at these prices, or the fact that stocks that have fallen from a higher price are inherently unpopular, opportunities can often be found in single-digit stocks as they are prone to be underanalyzed, underowned, and consequently mispriced.
Whenever a parent company announces the spinoff of a division engaged in a highly regulated industry (like broadcasting, insurance, or banking), it pays to take a close look at the parent. The spinoff may be a prelude to a takeover of the parent company. Of course, the spinoff may merely be an attempt to free the parent from the constraints that go along with owning an entity in a regulated industry. However, takeovers of companies that own regulated subsidiaries are very involved and time consuming. One (unspoken) reason for spinning off a regulated subsidiary may be to make the parent company more easily salable. In other instances, the creation of a more attractive takeover target may just be the unintended consequence of such a spinoff.
[...] looking at a parent company that is about to be stripped clean of a complicated division can lead to some pretty interesting opportunities.
As a general rule, even if institutional investors are attracted to a parent company because an undesirable business is being spun off, they will wait until after the spinoff is completed before buying stock in the parent. This practice relieves the institution from having to sell the stock of the unwanted spinoff and removes the risk of the spinoff transaction not being completed. Often institutional buying of the parent's stock immediately after a spinoff has a tendency to drive the price up. That's why, if the parent company appears to be an attractive investment, it is usually worthwhile to buy stock in the parent before the spinoff takes place.
In a partial spinoff transaction, a company decides to spin off or sell only a portion of one of its divisions. Instead of spinning off 100-percent ownership in a division to its shareholders, only a portion of the division's stock is distributed to parent-company shareholders or sold to the general public; the parent company retains the remainder of the division's stock.
[...] although I am a strong advocate of doing your own work, this doesn't mean I'm against "stealing" other people's ideas. It's a big world out there. You can't begin to cover everything yourself. That's why, if you read about an investment situation that falls into one of the categories covered in this book, it's often productive to take a closer look.
[...] shares of a spinoff are distributed directly to parent-company shareholders and the spinoff's price is left to market forces. Often, management's incentive-stock-option plan is based on this initial trading price. The lower the price of the spinoff, the lower the exercise price of the incentive option. [...] In these situations, it is to management's benefit to promote interest in the spinoff's stock after this price is set by the market, not before. In other words, don't expect bullish pronouncements or presentations about a new spinoff until a price has been established for management's incentive stock options.
If you are attracted to a particular spinoff situation, it may pay to check out the SEC filings for information about when the pricing of management's stock options is to be set. In a situation where management's option package is substantial, it may be a good idea to establish a portion of your stock position before management becomes incentivized to start promoting the new spinoff's stock.
There are very few investment areas where insiders have such one-sided control in creating a new publicly-traded company. Because of this unique quality, analyzing the actions and motives of insiders in spinoff situations is of particular benefit.
When it comes to the spinoff area, rights offerings can be an extraordinary opportunity for enterprising investors like you. Rights offerings are obscure and often confusing. Throw in the neglect and disinterest displayed by most institutional investors towards spinoffs, and you have an explosive combination. Generally, a parent company will distribute to its shareholders rights (free of charge) to buy shares in a spinoff. Holders of the rights will then have the right to buy shares in the spinoff for the next thirty or sixty days at a fixed dollar price or for a specified amount of other securities. The rights are usually transferable, which means that shareholders who do not wish to purchase shares of the spinoff can sell their rights in the open market and investors who are not shareholders of the parent can participate in the rights offering by buying rights in the marketplace.
One telltale sign of a bargain offering price is the inclusion of oversubscription privileges in a rights offering. Oversubscription privileges give investors who purchase spinoff stock in the rights offering the right to buy additional spinoff shares if the rights offering is not fully subscribed. Since rights are obscure, require the payment of additional consideration, and usually trade illiquidly for small sums of money (relative to the value of parent-company holdings), there are often times when rights holders neither exercise nor sell their rights. In a case where rights to buy 3,000,000 shares are distributed, but rights to buy 1,000,000 shares expire unused, oversubscription privileges allow those rights holders who purchase stock in the offering an additional opportunity to purchase the remaining 1,000,000 shares on a pro-rata basis. Insiders who wish to increase their percentage ownership in a new spinoff at a bargain price can do so by including oversubscription privileges in the rights offering.
When oversubscription privileges are involved, the less publicized the rights offering (and the lower the trading price of the rights), the less likely it is for rights holders to purchase stock in the rights offering, and the better the opportunity for insiders and enterprising investors to pick up spinoff shares at a bargain price.
[...] no matter how a transaction is structured, if you can figure out what's in it for the insiders, you will have discovered one of the most important keys to selecting the best spinoff opportunities.
Don't Try This At Home – Risk Arbitrage and Merger Securities
Risk (or merger) arbitrage is the business of buying stock in a company that is subject to an announced merger or takeover. Contrary to popular belief [...], risk arbitrage generally involves the purchase of a stock after a merger announcement is already made.
Far from a riskless transaction, the arbitrageur takes on two risks. First, the deal may not go through for a variety of reasons. These may include regulatory problems, financing problems, extraordinary changes in a company's business, discoveries during the due-diligence process [...], personality problems, or any number of legally justifiable reasons people use when they change their mind. [...] The second risk that the arbitrageur is underwriting is the timing risk. Depending upon the type of deal and industry involved, merger deals can take from one to eighteen months to close.
One of the arbitrageur's jobs is to assess the time required for the merger to be consummated.
Don't forget, rate of return is only part of the equation. The risk/reward issue – the ratio of how much you can lose in a situation to how much you can make – is a much more important factor in determining long-term profitability. Too often, in an area that has become very competitive, this factor is overlooked in an effort to achieve what appear to be high short-term rates of return.
Although cash and stock are the most common forms of payments to shareholders in a merger situation, sometimes an acquirer may use other types of securities to pay for an acquisition. These securities can include all varieties of bonds, preferred stocks, warrants, and rights. Typically, these "other" securities are used as partial payment, with the bulk of the acquisition price still being paid in cash and/or stock.
As a general rule, no one wants merger securities.
Not unlike (in fact, incredibly similar to) the dynamics of a spinoff situation, the indiscriminate selling of merger securities, more often than not, creates a huge buying opportunity.
Going-private transactions are particularly interesting because these are situations where the insiders, having decided to purchase the entire equity interest in the company, are indicating a strong conviction regarding the company's future. When available, the opportunity to participate in this type of transaction through the purchase of merger securities is often worth a close look.
Risk arbitrage – NO! Merger securities – YES!
Blood in the Streets (Hopefully, Not Yours) – Bankruptcy and Restructuring
While the securities of companies involved in one stage or another of bankruptcy are often mispriced, that doesn't necessarily mean all bankruptcy-related securities are cheap.
Many times [...] profitable, attractive businesses are forced into bankruptcy because of excessive leverage taken on as a result of a merger or leveraged buyout. In some of these cases, a business was too cyclical to make regular debt payments. In others, over-optimistic projections and too much debt combined to bankrupt an otherwise good company. It is these attractive but overleveraged situations that create the most interesting investment opportunities.
Regardless of your opinion about the outlook for a particular business, though, it is rarely a good idea to purchase the common stock of a company that has recently filed for bankruptcy. Investors who own stock in a bankrupt company are at the bottom of the totem pole in a bankruptcy proceeding. Employees, banks, bondholders, trade creditors (mostly suppliers), and the IRS are all in line ahead of stockholders when it comes to dividing up the assets of the bankrupt company.
While investing in the securities of a company still in bankruptcy entails all sorts of complications and risks, once a company emerges from bankruptcy, there is often an opportunity to make a new but more familiar kind of investment. Holders of the bankrupt company's debt – whether bank debt, bond debt, or trade claims – don't usually get their bankruptcy claims paid off in cash. For one thing, most companies that file for bankruptcy don't have lots of cash sloshing around. While the most senior debt holders may get some cash, usually debt holders get securities in exchange for their bankruptcy claims – generally newly issued bonds or common stock. Therefore the new shareholders and bondholders of a company that has recently emerged from bankruptcy are, for the most part, the company's former creditors.
Your opportunity comes from analyzing the new common stock. Before the stock begins trading, all the information about the bankruptcy proceeding, the company's past performance, and the new capital structure are readily available in a disclosure statement. [...] In short, the past complications of the bankruptcy proceeding are explained while the future (at least management's best cut at it) is laid out for all to see. Only many of the company's new shareholders may not care.
Since the new stock is initially issued to banks, former bondholders, and trade creditors, there is ample reason to believe that the new holders of the common stock are not interested in being long-term shareholders. Due to an unfortunate set of circumstances, these former creditors got stuck with an unwanted investment. Consequently, it makes sense that they should be anxious and willing sellers.
[...] a good place to start is the category of companies that went bankrupt because they were overleveraged due to a takeover or leveraged buyout. Maybe the operating performance of a good business suffered due to a short-term problem and the company was too leveraged to stay out of bankruptcy. Maybe the earnings of a company involved in a failed leveraged buyout grew, but not as fast as initially hoped, forcing the bankruptcy filing. Sometimes companies that have made large acquisitions end up in bankruptcy simply because they wildly overpaid to acquire a "trophy" property.
In the end, however, most investors would be best advised to stick to the few companies coming out of bankruptcy that have the attributes of a "good" business – companies with a strong market niche, brand name, franchise, or industry position.
The bad news is that selling actually makes buying look easy – buying when it's relatively cheap, buying when there's limited downside, buying when it's undiscovered, buying when insiders are incentivized, buying when you have an edge, buying when no one else wants it – buying kind of makes sense. But selling – that's a tough one. When do you sell? The short answer is – I don't know.
Whether you own a spinoff, a merger security, or a stock fresh out of bankruptcy there was a special event that created the buying opportunity. Hopefully, at some point after the event has transpired, the market will recognize the value that was unmasked by the extraordinary change. Once the market has reacted and/or the attributes that originally attracted you to the situation become well known, your edge may be substantially lessened. This process can take from a few weeks to a few years. The trigger to sell may be a substantial increase in the stock price or a change in the company's fundamentals (i.e., the company is doing worse than you thought).
Corporate restructuring is another area where extraordinary changes, ones that don't always occur under the best of circumstances, can create investment opportunities. While the term "corporate restructuring" can mean a lot of things, when we talk about restructuring, we won't be talking about minor tweaking around the edges, we'll be talking about big changes. This means the sale or shuttering of an entire division. Not just any division, either. We're talking a big division, at least big in relation to the size of the entire company.
The type of restructuring situations that [...] provide the most clear-cut investment opportunities are the situations where companies sell or close major divisions to stanch losses, pay off debt, or focus on more promising lines of business.
The reason why major corporate restructurings may be a fruitful place to seek out investment opportunities is that oftentimes the division being sold or liquidated has actually served to hide the value inherent in the company's other businesses.
Unless a company is in extreme distress, just making the decision to sell a major division is an extremely difficult thing to do. Most managements that go through with such a plan have their eye on shareholder interests.
There are basically two ways to take advantage of a corporate restructuring. One way is to invest in a situation after a major restructuring has already been announced. There is often ample opportunity to profit after an announcement is made because of the unique nature of the transaction. It may take some time for the marketplace to fully understand the ramifications of such a significant move. Generally, the smaller the market capitalization of a company (and consequently the fewer the analysts and institutions following the situation), the more time and opportunity you may have to take advantage of a restructuring announcement. The other way to profit is from investing in a company that is ripe for restructuring. This is much more difficult to do.
"Baby Needs New Shoes" Meets "Other People's Money" – Recapitalizations and Stub Stocks, LEAPS, Warrants, and Options
Generally, in a recapitalization transaction, a company repurchases a large portion of its own common stock in exchange for cash, bonds, or preferred stock. Alternatively, cash and/or securities can be distributed directly to shareholders through a dividend. The result of a recapitalization is usually a highly leveraged company that is still owned by the original shareholders.
Leveraging the balance sheet (but not overleveraging it) just turns out to be a more tax-effective way to distribute earnings to shareholders [...].
[...] recaps can provide ample opportunity to profit. For instance, in recap situations where debt or preferred securities are distributed directly to shareholders, the profit opportunities can be similar to those available through investing in merger securities. Investors who owned the common stock of XYZ generally don't want the company's debt and preferred securities. Consequently, shortly after being distributed these newly issued securities are often sold indiscriminately.
[...] it's the other part of the recap story that can get really exciting. That part involves investing in the stub stock – the equity stake that remains after the company has been recapitalized.
A warrant gives the holder the right to buy stock at a specified price for a set period of time. While similar to call options, warrants differ in two ways. First, warrants are issued by the underlying company. [...] In contrast, listed call options represent contractual arrangements between investors to buy or sell a particular stock; the underlying company is not involved. The second difference between typical call options and warrants should be of more importance to you. At the time they are issued, warrants usually have a longer time-to-expiration than typical call options. Like LEAPS, warrants can extend for a period of years.
As with LEAPS, the investment merits of the underlying stock are the main basis for making a warrant investment. Given the benefits of leverage and "protection" offered by warrants over such an extended period of time, it is usually worth checking to see whether warrants have been issued by companies whose stocks appear attractive.
[...] in many cases, option traders (including the quants) view stock prices as simply numbers – not as the prices of shares in actual businesses. In general, professionals and academics calculate an option's "correct" or theoretical price by first measuring the past price volatility of the underlying stock – a measure of how much the price of the stock has fluctuated. This volatility measure is then plugged into a formula that is probably some variant of the Black-Scholes model for valuing a call option. [...] The formula takes into account the stock's price, the exercise price of the option, interest rates, and the time remaining until expiration, as well as the stock's volatility. The higher a stock's past volatility, the higher the option price. Often, however, option traders who use these formulas do not take into account extraordinary corporate transactions. The stocks of companies undergoing an imminent spinoff, corporate restructuring, or stock merger may move significantly as a result of these special transactions – not because historically their stocks have fluctuated in a certain way. Therefore, the options of companies undergoing extraordinary change may well be mispriced.
Since the date of distribution of spinoff shares is announced in advance, knowing this information along with some fundamental information about the underlying companies involved can give you a large edge over option traders who invest "by the numbers". One strategy would be to buy options that expire several weeks to several months after a spinoff is consummated. In the period after the spinoff, the parent company's stock may make a dramatic move because investors had previously been holding back on purchasing the parent's stock until the divestiture of the unwanted business was completed.
Seeing the Trees Through the Forest
Remember, it's the quality of your ideas, not the quantity, that will result in the big money.
It's better to do a lot of work on one idea than to do some work on a lot of ideas.
[Form 8K] is filed after a material event occurs such as an acquisition, asset sale, bankruptcy, or change in control.
Forms S1 through S3 are the registration statements for companies issuing new securities. Form S4 is filed for securities being distributed through a merger or other business combination, exchange offer, recapitalization, or restructuring.
[Form 10] is the form used to supply information on a spinoff distribution.
[Form 13D] is the report where owners of 5 percent or more of a company must disclose both their holdings and their intentions regarding their stake. If the stake is held for investment purposes, it may be helpful to examine the reputation of the investor making the filing. If the investment was made for the purpose of exerting control or influence over the subject company, this filing may be the first sign of, or serve as a catalyst to, an extraordinary corporate change.
Institutional shareholders can file this form [Form 13G], in lieu of a 13D, if the investment is for investment purposes only.
[Schedule 14D-1] is a tender offer statement [...] filed by an outside party. This document provides much useful background information on a proposed acquisition.
The 13E-3 is the filing used for a going private transaction [...]. The 13E-4 is the tender offer statement when a company is buying back its own shares [...]. Remember, both of these situations can be quite lucrative and the disclosures are even more extensive than usual, so read carefully.
If a situation is moving so fast that a couple of hours or days make a difference, it's probably not for you. [...] The important thing is to stock to the few situations that you have time to research and understand.
In most cases, free cash flow gives you a better idea than net income of how much actual cash is flowing through a company's doors each year. Since cash earnings (as opposed to reported earnings) can be used to pay dividends, buy back stock, pay down debt, finance new opportunities, and make acquisitions, it's important to be aware of a company's cash-generating ability.
To calculate free cash flow in its basic form, you would (1) start with net income, (2) add back the noncash charges of depreciation and amortization, (3) then subtract a company's capital expenditures, which usually represent cash outlays for investments in new plant and equipment. The result is a measure of how much free cash flow a company generated that year.
All the Fun's in Getting There
Of course, if you are able to successfully manage your own investments, there can be some side benefits. While everyone knows what money can't buy, there are obviously things that money can buy: a sense of security, a comfortable retirement, and an ability to provide for your family. Even from a religious standpoint, money doesn't have to be such a bad thing. In fact, if it's used to help others, money can be a very positive force.
So, while money can't buy you happiness or even satisfaction, it might buy you something else. If viewed in the proper light, it can buy you time – the freedom to pursue the things that you enjoy and that give meaning to your life.
The barrier to stock market success isn't exceptional brain power, unparalleled business savvy [...], or uncommon insight. The secret, now that you know where to look, is in simply doing a little extra work.