Generating Return from Cash Flow
Cash flow investing is at the heart of our investment philosophy. Entrepreneurs understand the value of cash flow. However, most investors tend to focus on chasing after capital growth and beating the stock market, instead of focusing on generating cash flow from investments. This kind of blind focus on capital growth, which involves high risk, often leads to a permanent erosion of capital.
How important is cash flow to your investment return?
One of the most insightful studies on cash-flow investing was done by Rob Arnott (Financial Analysts Journal, 2003). Arnotts study showed that over a 200-year period, North American equities generated an overall total return of 7.9% per year; and an astounding 5% of that return was attributable to dividends; in other words, cash. Cash flow is the single-most important contributor to returns.
Our team seeks solid performing cash-flow investments globally. Owning a diversified portfolio of cash-flow investments is like owning an apartment building. Each cash-flow investment in your portfolio is like a tenant that pays you rent; but instead of rental income, you receive dividend and interest income. The value of your investments appreciates over time as the cash flow in your portfolio grows over time. Similar to owning an apartment building, as the rental income from the apartment grows, so will the value of the apartment building.