In one sentence: A rerun of 069: Phil explains why payback time should use free cash flow rather than the earnings per share used in the book, with a rental-house example and the "investing fiction" of owning the whole company. Only Danielle's short New Year intro is new.
Key ideas
- Rerun. The talk is 069; see it for the full notes. The new part is Danielle's intro: it is an early episode that is, in her words, a good overview of Rule #1 and Buffett-style investing, offered as a primer with the show close to its 500th episode. [00:00–01:00]
- Patient money. Following Buffett works, but professionals can't wait in cash as long as their clients let them. A private investor can. [02:00–06:00]
- Free cash flow is the number behind all four filters. Understand, moat, management and price all come back to it. [07:00–09:00]
- Why not earnings. Earnings per share is an accrual-accounting figure and not spendable cash. Phil used it in Payback Time for simplicity. [10:00–13:00]
- How to calculate it. Operating cash flow minus purchase of property and equipment, and read the footnotes. The rental house example gives $8,000 from $12,000 of rent. [13:00–19:00]
- The investing fiction. Act as if you own the whole company. It makes you ask whether you'd be proud to own it, so it also tests your values. [19:00–23:00]
- Speculation vs investing. Phil and Danielle disagree on whether venture capital counts as gambling, and settle on a "range of certainty" that is much narrower for Rule #1 businesses. [25:00–35:00]
- Why it matters for payback time. Free cash flow can be half or one and a half times earnings, which moves the payback time by a half or a third. [35:00–37:30]
How it maps to RuleOne
- Same as 069: the stock pages show free cash flow (operating cash flow minus capex), and the payback-time view uses it.
Buffett, Munger and Graham links
- See 069: Buffett's 1986 letter on owner earnings, and Phil's paraphrase of discounted cash flows, which is not a quote to rely on.
Words to know
- Free cash flow: cash from operations minus purchase of property and equipment.
- Patient money: capital free to wait in cash until a real opportunity appears.
- Vault episode: a rerun of an earlier episode.
Try this
Pick a company on All stocks. Compare free cash flow per share with EPS on its page and compute payback time both ways. Write down which is shorter and why.
Check yourself
- What is new compared with 069?
Answer
Only Danielle's short New Year intro placing it as a basics primer near the 500th episode. - Why use free cash flow rather than EPS for payback time?
Answer
EPS includes accrual items that aren't cash, so it can overstate what you could take out of the business. - A rental brings in $12,000 and costs $1,000 tax, $1,000 insurance and $2,000 of upkeep and improvements. What is the free cash flow?
Answer
$8,000.
Short quotes
"Following what Warren Buffett does works." (Phil, ~02:00, auto-transcribed)