Understanding how money moves through a business is at the heart of smart investing. The world of finance is full of complex jargon and endless stock market chatter. It’s easy to lose sight of what really matters. Free cash flow is more than a technical term. It’s the foundation for finding businesses that can thrive and reward patient investors.
In this episode of the InvestED Podcast, we dig into the concept of free cash flow. We explain what it means, how to calculate it, and why it should matter to investors. Our decades of experience let us answer the questions that many new investors have. Together, we will clarify these ideas and make them more approachable.
But investing isn’t only about numbers. We show how your values and understanding of a business can shape your investment decisions. When you focus on companies you truly understand, you can invest with greater confidence. Tune in to learn how mastering these basics can help you become a better investor.
Here are three reasons why you should listen to this episode:
Discover how to calculate free cash flow and use it to spot strong businesses.
Learn how to align your investments with your personal values for greater confidence and clarity.
Gain insights from real-world experience to help you invest with patience and confidence.
Resources
Rule #1s "InvestED" Podcast and Website: Website | Apple Podcast | YouTube
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Danielle Town: Website | LinkedIn | Instagram | Facebook | YouTube | X (Twitter)
Understanding Free Cash Flow
Smart investing starts with understanding how money flows through a business. Many people get caught up in market noise and complicated financial talk, but the basics matter most.
Free cash flow is a key number that reveals the real health of a company. It shows how much cash a business truly generates, not just what it reports on paper.
When you focus on free cash flow, you can spot companies built to last.
Buffett-Style Investing
Once investors understand free cash flow, the next step is using that insight to guide smart decisions. This is the heart of Buffett-style investing. Rather than chasing trends or reacting to every headline, this approach emphasizes patience, discipline, and a long-term mindset.
This means waiting for the right opportunity and never feeling pressured to invest just because others are jumping in. Most professional fund managers can’t do this because they’re forced to act quickly to keep clients happy.
As individual investors, we have the freedom to be patient. “I like the term patient money,” as Danielle said. Because this “patient money” approach lets us avoid unnecessary risks and only invest when we find a truly great business.
Rule #1 Investing is all about understanding a company deeply before putting your money to work. You don’t have to act fast or feel rushed by others’ expectations. Instead, you can take your time, look for quality businesses, and wait for the right price.
What is a Real Investment?
What makes an investment “real”?
A real investment is one where you have a strong degree of certainty about the outcome. You need a clear framework for predicting how a business will perform.
This isn’t about guessing or hoping for the best. It’s about having confidence based on real data and a proven process.
True investing means understanding a business’s fundamentals and recognizing its competitive edge. It’s trusting its management and knowing the difference between price and value.
These are the pillars of Rule #1 Investing. When each of these points is clear, you move beyond speculation and make decisions rooted in real conviction.
Calculating Free Cash Flow
Knowing how to calculate free cash flow is a must for any serious investor.
Start by looking at a company’s cash flow statement. Find the “cash from operations” line, then subtract capital expenditures, such as money spent on equipment or property.
The result is free cash flow, or the real cash left over after a business pays its bills and reinvests in itself.
Many people rely on earnings per share, but this number can be misleading. Earnings often include accounting adjustments that don’t reflect actual cash in the bank.
Free cash flow, on the other hand, shows what’s really available to owners.
The Role of Free Cash Flow in Investing
Free cash flow is a tool for valuing a business and understanding its true potential. When you think like a business owner, it’s the money you’d have in your pocket at the end of the year. This perspective helps you see through accounting tricks and focus on what really matters.
Using free cash flow to value companies allows you to better predict how long it will take to recover your investment. This approach leads to more grounded, less risky decisions.
Start with the free Rule #1 Investing course to learn these basics step by step. Access practical lessons and tools designed to help you build real investing skills.
Aligning Investments with Personal Values
Investing is personal. The money you put to work should reflect your values, not just your financial goals.
When you imagine owning an entire business, you’re forced to consider what that company stands for and how it treats people. This mindset keeps you connected to your investments and makes the process more meaningful.
Thinking Like a Business Owner
Imagine as if you own the whole company, which is also known as “investing fiction”. This helps you judge whether you’re proud to be associated with its actions and mission.
Would you feel good about telling your family you own this business?
If the answer is yes, you’re on the right track. This approach makes investing more than just numbers. It’s about personal connection and responsibility.
Using Your Investments to Reflect Your Ethics
Your investment choices are powerful. Most money in the market comes from everyday people, not just big institutions.
By choosing companies that align with your ethics, you “vote” for the kind of business practices you want to see. This can influence how companies operate and even shift entire industries. Investing with your values can lead to both financial and personal rewards.
The Importance of Understanding Businesses
Knowing a company inside and out is critical. Danielle emphasized this by saying, “We need to be capable of understanding the business. We need to make sure that the business has some sort of moat, some sort of intrinsic competitive advantage against other businesses. We need to make sure that its management has integrity, and we need to know that its price is lower than its value.”
Here are key points to consider when evaluating a business:
Can you clearly understand what the company does?
Does the business have a durable competitive advantage?
Is management trustworthy and acting with integrity?
Is the current price lower than the company’s true value?
Answering these questions gives you a strong foundation for making smart investments. If you can’t confidently say yes to each one, it may be wise to keep looking.
Take your investing knowledge to the next level with the Rule #1 Virtual Investing Workshop. Get practical experience, live coaching, and proven strategies to help you find strong companies for your portfolio.
The Role of Certainty in Investing
Certainty is what separates investing from speculation. The key is to build a high level of confidence in your analysis before you commit your money.
While no investment is ever 100% certain, you can narrow the range of possible outcomes. Focus on businesses with predictable cash flows and strong economic characteristics.
The more you understand the business and its future prospects, the more confident you can be in your investment decisions.
How Regulations and New Trends Shape Investing Opportunities
Regulations and market trends continue to change how people invest. The landscape is always evolving, and staying informed is essential for making smart decisions.
Easier Access to Startups
SEC regulations once limited who could invest in startups. However, recent updates have made it easier for more people to participate. Crowdfunding platforms now allow everyday investors to back companies they believe in, not just wealthy insiders.
Need for Investor Education
As more people can invest in startups, understanding financial statements and cash flow is more important than ever. Simple knowledge can make a big difference.
Democratization of Information
The internet gives everyone access to research and company data. This levels the playing field for small investors to also make smarter decisions.
Increased Responsibility
With more freedom to invest comes the need to be careful and informed. The right knowledge can help avoid unnecessary risks and make smarter decisions.
Building Wealth with Confidence and Clarity
Building lasting wealth isn’t about making quick moves or following the crowd. It comes from having patience and knowing what you own.
When you take the time to understand a business and its cash flow, you bring more certainty into every decision. This approach means you can wait for the right moment and avoid unnecessary risks.
True confidence as an investor comes from clarity, discipline, and a commitment to your own process.
Expert Advice & Powerful Quotes
“Following what Warren Buffett does works. Number one, no big surprise there. Okay. Number two, almost no other professionals can do it, because it requires the ability to stay in cash for longer periods of time, then fund managers are allowed by their investors.
“I like the term ‘patient money.’”
“We need to be able to be capable of understanding the business. We need to make sure that the business has some sort of moat, some sort of intrinsic competitive advantage against other businesses. We need to make sure that its management has integrity, and we need to know that its price is lower than its value.”
“Look at the operating cash flow line, which is the top third. It's a bold line there. It says cash from operations, or cash flow from operation, something like that. Look at that line and then subtract down about three or four lines later, there'll be a line that says, purchase a property and equipment. Subtract that line from operating cash flow, and you have a simple, pretty accurate way to get at what we call free cash flow.”
Danielle Town – Attorney, Author & Investing Advocate
Danielle Town is a best-selling author, attorney, and passionate advocate for empowering new investors. She has a background in law and a deep curiosity about financial independence. Danielle is dedicated to demystifying investing for anyone seeking financial control. She co-authored Invested, sharing her journey learning value investing with her father, Phil Town. Danielle believes anyone can build confidence in investing by focusing on clarity, patience, and wisdom.
Through her writing, podcasting, and teaching, Danielle helps others cut through the noise of the market. She guides people in developing sound investing habits that last. Her approach encourages aligning money choices with personal values and long-term goals. Danielle shows that investing is a lifelong practice, built on steady learning and self-awareness. She inspires anyone to take the first step and make smart, values-driven decisions.
📌 Expertise: Value Investing · Financial Education · Personal Finance · Mindful Money Management
🔗 Connect: Website | LinkedIn | Instagram | Facebook | YouTube | X (Twitter)
Principles and Patience: The Heart of Rule #1 Investing
When markets are unpredictable or feel overwhelming, it’s easy to second-guess your next move. Rule #1 Investing is not about jumping on the latest trend or making rushed decisions. It’s about taking your time, staying disciplined, and investing only in what you truly understand.
Listen to the Full Episode – In this InvestED Podcast episode, we break down the real meaning of free cash flow and why it matters. We share practical ways to measure a business’s health and explain how patience leads to better investment choices. The conversation offers clear steps for building more certainty into your investing process.
Reflect on Your Own Process – Consider how you make investment decisions. Are you focusing on the fundamentals? Things like cash flow and company values, instead of reacting to short-term noise? Slow down, trust your research, and stick to your principles. The more you understand, the more confident you’ll become as an investor.
Explore More – Visit Rule #1 for more episodes and resources on building your investing discipline. Discover workshops, tools, and stories that support your journey to becoming a mindful and successful Rule #1 investor.
With patience and principle-driven discipline, investing becomes more than a numbers game. It’s a process of learning, building confidence, and making choices that last. That’s the Rule #1 way to lasting financial success.
