Can Investors Determine If A Cash Flow Has Been Manipulated The Impact of OCF

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The Impact of OCF

Operational Cash-Flow Per Share (OCF)

The OCF Experience has already helped many investors realize their dream of a meaningful, well-funded retirement. Do you share a similar dream? Are you satisfied with the growth of your personal retirement account (PRA)? How do you feel when your financial planner, advisor, and stockbroker make more money than you do … managing your money? Who is more interested in your PRA than you are? Whose PRA are financial planners, advisors, and stockbrokers chiefly interested in? Some of the greatest investors in history and many analysts place more weight on Operational Cash Flow Per Share (what we call (OCF) than earnings per share, (EPS).

The fact is EPS is more easily manipulated. History has proven that, using EPS, unscrupulous managers and accountants can make the strength of a company, appear better than the facts dictate. Cash, on the other hand, is difficult – if not impossible – to fake. You either have cash or you don’t. Therefore, OCF is a useful methodology for determining the true strength of a company and provide a picture of its ability to weather a storm – such as market sector downturns.

Cash is king! Without cash a company cannot stay in business for very long.

Because of the fact that EPS is the ‘mantra’ of Wall Street, the measurement that all bankers point to, managers tend to focus solely on numbers like net income and EPS and ignore cash and operating cash flow. A company could report positive earnings and still be suffering negative OCF. If a company is regularly spending more cash than it is taking it … what do you think? This mindset of, emphasizing EPS, led to the downfall of Enron, WorldCom, Adelphia, Global Crossing and many other companies in the last few years. It also led to the demise of the Arthur Andersen accounting firm and many fines and penalties assessed on major brokerage houses.

Thanks to the magic of accounting, EPS has become a game of smoke and mirrors. Creative accounting provides varies versions which are more like a fairy tale than a true picture of the strength of a company. In spite of all the fines, penalties, failures, Wall Street continues to be consumed by its entrenched mindset. Remember, a forecast is always only a guess but Wall Street often forgets this. This, however, does create opportunities for investors who have the tools to evaluate the true strength of companies over the long run. They can take advantage of getting out of companies before their EPS based collapse. They can then take advantage of market overreactions.

EPS may be used to obscure some short-term problems like burning cash at a very high rate. While EPS may be rising, the actual cash and cash-flow situation may be deteriorating at an alarming rate. At some point the company will have to face this issue and when they do, their value drops precipitously. During the last week prior to Enron’s demise, all the great brokerage houses were saying buy, buy, buy. But, the metrics which are now available and can look back at the history of Enron, would have been saying sell, sell, sell – even though EPS for Enron was at an all-time high.

INVESTORS

Studying OCF will help you spot companies that are burning cash faster than they are taking it in regardless of what their net income or EPS numbers might be. It will also help you to identify companies that have strong OCF and will are more likely to have growth with a much higher degree of safety. Doesn’t it make sense that a ‘model portfolio’ made up of companies with strong OCF would be a safer and better investment than any other methodology? Tens of thousands of investors have lost all or part of their portfolios due to managers, investment counselors and stockbrokers who are stuck in a paradigm.

That is about to change. For nearly ten years research has been developing that proves the efficacy of OCF. In fact, ‘model portfolios’, using OPS as their primary measurement (while not ignoring other measurements) have outperformed the stock market, mutual funds, 401ks and the S & P 500.

Good news for the average small investor is right around the corner. Education to help you maximize your personal retirement account is now being developed. With all the great technology available, it in an easy-to-use format that does not require that you become a day trader, an economist, or have a PHD in money management. It is reported that during the first quarter of 2009, small investors will have access to the same information that is currently available to only the most savvy and wealthy investors of all time.

A portfolio based on positive OCF numbers will make you sleep easier at night. It will accomplish one of the key things that one prominent consultant teaches … “regardless of what you have to invest; let the Rule of 72 (determines how quickly your investment will double) work for you. OCF- based ‘model portfolios’ have a proven track record of delivering returns two to three times higher than traditional portfolios based on any other methodology.”

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