Reported profit can be shaped. Cash is harder to fake. Buying the companies richest in free cash flow was one of the biggest winners we have tested.

Rank every company by the free cash flow it produces against its enterprise value, keep only those actually generating cash, and buy the cheapest thirty. We built 258 portfolios this way, one for every month you could have started, and held each for one, three and five years, to see past the average to the spread underneath. It compounded at roughly 24.6% a year against the market's 13.9%, turning ten lakh rupees into about eighty six lakh while a plain index fund reached thirty eight. Very few things we have run made more. But that number is only half the story.

Cash is a cleaner signal than earnings

Most value screens rank on reported profit, and reported profit can be flattered by accounting choices long before any cash changes hands. This one sidesteps the argument by ranking on cash itself, and by refusing to buy a company that is not generating any. The effect on the ordering is striking: sort every stock into ten buckets by cash cheapness and the returns climb almost step by step, from the dear end to the cheap end, with a rank correlation of −0.84, one of the tidiest sorts we have seen. When the cheapness is backed by real cash, cheaper really did mean better.

The ride you had to survive to collect

Now the other half. Strip away the tidy averages and look at every start month, one bar each. Over a single year, eight in ten holds landed between −24% and +103%; the luckiest start more than doubled at +145%, the unluckiest lost −52%, decided by nothing more than timing. At its worst the portfolio fell about 67% peak to trough, twice the fall of the index. This is not a strategy you could hold with your eyes closed. Its reward came bundled with a level of pain that shakes most people out at exactly the wrong moment.

What you were actually buying

The pain has an explanation, and it sits in the holdings. This is a deep, unglamorous basket: fertiliser makers, oil and gas, and paper mills, the kind of lumpy, cyclical businesses the market leaves cheap precisely because their cash flows lurch about. About two thirds of it was micro cap, a third sat in materials and commodities alone. That is where the cash cheapness lives, and it is also why the ride is so rough: you are being paid to hold the companies most investors find too dull, too small, or too volatile to bother with.

A rich strategy, and an uncomfortable one

Free cash flow yield is close to the purest expression of value: buy real cash cheaply and let time do the rest. It worked, and it worked handsomely, but only for an investor who could sit through a two thirds fall in a basket of small, cyclical businesses without flinching. The cash filter is what makes the cheapness honest, and honesty, over five years, was rewarded every single time. Whether you have the stomach to actually hold it is the question the backtest cannot answer for you, and it is worth answering before the next downturn answers it for you.

So we took it to Krest, and ran it through the whole test.