You can have a lot of profit, but not have a lot of free cash flow.
A brilliant read breaking down Free Cash Flow (FCF) and how it calls the shots on growth, more than 'profit' does.
commoncog.com/blog/chinese-b
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You will mostly find that almost every company is overvalued if you use fcf method for valuation. So it's difficult to do this. Your universe would most likely be psu
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Buffett buys high FCF companies at cheap prices. Usually when markets are irrational, and when he can’t, he sells the narrative of “come sell your company to me, I’ll give you a certain multiple of your earnings, and you can still run it.”
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It doesn’t change the fact that he *only* buys companies with good FCF. Without that, he doesn’t even offer.
Munger recommends reading Hagstrom’s books for a breakdown of their technique.
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every valuation ultimately is fcf. Growth companies are just companies who's fcf is" expected "to be differed to future. Buffet method of buying companies with current high fcf lead to you buying just cash cows and miss growth firms. If you can identify growth + high fcf great!
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You’re absolutely right, with two caveats: 1) if you buy a company with current high FCF that’s mispriced by the market, you’ll still net a return (e.g. Buffett bought Amex during the salad oil scandal) 2) Buffett rejects the growth/value categorisation completely.
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(I’m reading this tweet and already cringing, because it leaves out nuance like how he looks at book value, and also how many of his techniques no longer work in the current market climate, but forgive me, Twitter is not good for nuance)