One of the fastest ways to gain financial freedom is investing. To do so, in today’s highly competitive and inflationary but low-interest environment, we need to make sure that we do so wisely.
Taking into account how fast the economy moves, we also need to ensure that we get much higher returns than the rate of inflation – and in this regard, investment in stocks has become one of the most widely used tools over the years.
Stock market investing has become a key component of almost any economy in the world. From the time of its inception at the turn of the last century, it has been grown at such an unprecedented scale that many investors go to great lengths to create clever strategies such as “Japanese cloud” formations and “economic surprise” indicators. However, no methodology seems to work all the time.
Yet, for the careful investor, there remains one strategy that almost always boosts returns – value investing. The concept of value investing appeals to those who are relatively conservative and persons who prefer making decisions on analysis of the basic financial strength of a company, as well as those who enjoy searching for bargain priced shares.
This is a profound investment strategy that requires discipline and patience; it will reward investors consistently as long as they are willing to study this valuation technique. As a technical strategy, or a way to predict funds that will outperform the market, it is dependent on research, research and more research in its early stages.
The saying “past performance can’t be a guarantee of future performance” may sound familiar to some of you. It holds true even in today’s market. The future is hard to predict. Seeking investments conforming to assumptions or projection about the future without considering the basic facts about a company’s strength or growth potential is unwise.
“However, it is also true that fundamentals are king.”
Past performance can still be a good indicator that reflects the quality of a company’s management, as would be a review of its financial health. Important to serve as a foundation rock to assist the company to endure through tough times and grow further, both factors are often not easily noticed by investors. This in turn makes these stocks full of potential, as more often than not, they are traded below their fair price.
In this context, financial literacy can’t be viewed as a “spare wheel”, but rather it must be viewed as a “steering wheel” instead. It is only with financial literacy can an investor correctly and confidently assess the potential stock’s financial health, especially in regards to whether the company in question is adequately capitalized company and the status of its free cash flow.
So what is free cash flow?
Free cash flow tells an investor how much actual cash a company is left with after any capital investments. For instance, companies that have high debt/equity numbers, especially in an industry facing tough times, would naturally be a warning for investors that they are over their head in debt.
Is financial literacy enough though?
No, it’s not.
Next week, I’ll share how we use this information.