Wednesday, July 30, 2008

Why Cash Flow Works

Most bad business models will go on until the cash runs out. That's why cash flow is a useful predictor, because money losers keep losing money, and driving the stock down, until it goes to zero. Sort of like GM's strategy.

This is basically foreshadowed by Warren Buffet (p. 85 Investor's Anthology), when he wrote these common company foibles:
(1) an institution will resist any change in its current direction; (2) Just as work expands to fill available time, corporate projects or acquisitions will materialize to soak up available funds; (3) Any business craving of the leader, however foolish, will be quickly supported by detailed rate-of-return and strategy studies prepared by his troops; and (4) The behavior of peer companies, whether they are expanding, acquiring, setting executive compensation or whatever, will be mindlessly imitated.

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