I have read your RULE #1 and today finished your entire BLOG! I have also read your recommended book "Good to Great" to help me figure out how to do a better Management (4M) evaluation.
How do we calculate the BIG FIVE numbers after an important merger or acquisition, for example the acquisition of Gillette by Procter and Gamble. It seems like financial information and chart can no longer be obtain for Gillete (G) on Investools and MSN. Do we need to do some merging of financial data before we calculate our big five? Do we need to calculate the big 5 of Gillette before the acquisition?
In calculating the sticker price, we need to know the Growth Rate and Future PE. Will the acquisition affect the estimation of the growth rate? Is the historical PE for PG still be meaningful in estimating the future PE?
I hope this email is short enough for you and will not affect your snowboarding. Happy 2007! :)
Regards, Yap
A:
This is a really interesting question. Before I get into the Big Five after a merger, let's talk about what happens in most mergers, because I think we're in for a lot of them in the next few years.
The big guys are trying to repeal the act... and for good reason, I suppose. The Big Three Accounting agencies are forcing companies to get crazy by being over-demanding -- a kind of reaction to the previous laxness of the industry.
I got this email recently from Arthur, a self-described "Rule #1 Newbie," and thought I'd share our exchange with readers.
Mr. Town,
I saw you at the Atlanta Get Motivated Seminar (I was the guy cheering for the AMG Mercedes instead of the pickup truck), and read RULE #1 the next day. I've been following your rule #1 blog entries, and I thought you may be interested in the thoughts of a newbie to investing.
Over the past few weeks I've pieced together a watch list of good companies. I quickly realized that it's easy to become discouraged when I spend 20 to 30 minutes on preliminary research and calculating the four M's, only to realize the stock I like is trading near it's sticker price (no margin of safety).
I'm sure that EXBD is on many Rule #1 investors' watch lists. My concern is that the big boys didn't sneak out of this one they rushed out to the tune of a 15 point drop in one day.
Listening to the earnings conference call and looking at the big 5 numbers and the news I can't find a reason for the huge drop other than the slightly disappointing earning. The red arrows appeared too late to avoid this precipitous drop.
Should we even be holding stocks over the earnings announcements? All of the assumptions (above) that made this a Rule #1 company are, in my view, still in place. This looks like a case where the stock dropped to the MOS price and is now a buying opportunity on 3 green arrows. Any thoughts on how to avoid gap drops like this and whether this is a buying opportunity would be appreciated.
Let's dive into EXBD. The question is in two parts: Could we have avoided the 15% loss, and is this a good time to buy?
I've been paper trading since April, studied your book - and referred it to so many others - and now I'm trading with real money. Way more satisfying...
My question is this - I am investing in CTSH and when I initially dipped my toe in the market it was for only $2,000. I had to wait for etrade to receive funds to buy right at the 3 greens. Now the stock continues to grow and I have more money to invest - It's still on 3 greens and all looks good and way below half of the sticker price - Can one purchase at anytime while it's all a go?
Thank you for your kind assistance.
Paula
Here's what I told Paula:
Hi Paula,
You just had an auspicious start to your stock investing, didn't you? If you got in on the greens in January your entry point was $78 and it's trading a month later for $93. Dang, girl. No wonder you want to put more in there! That's 19% in a month. You are kicking butt!
Thing is, though, as much as I'd like to have a crystal ball and know what's going to happen in the next week or two, I don't have one except for those tools you are using so well. And it just doesn't work to put more in in the middle of a trade like this one.
This can come off the high (and is doing just that) as the big guys take some of those great profits off the table to make the rest of their miserable portfolios look good, and that can drive this down. So if I were you I'd be watching for an exit point and then get the bigger bucks ready to go for the next good entry.
Q: Does Phil use the 30-day or 10-day MA (moving average)?
A: I prefer the 10, but I'm finding that the more I do this with tools the more "intuition" the ten day MA seems to require... which is another word for "guessing". I think my preference for it was a transition.
As more and more of you guys use these tools, it's getting clearer that the ten-day MA is just too volatile. You have to be right on top of it. And with all the speaking and traveling I'm doing, that just is too much trouble to be on it that tight. So I'm using the 30 day MA more and more.
Phil Town is writing a new chapter for the paperback version of Rule #1. I get
asked all the time how to manage mutual funds in a 401K, so I thought
I'd add a chapter to show you how to use the free tools out there to do
get a solid 15% return in your mutual funds no matter what the market
is doing.
At least that was the idea before I tried to do research
into the track record of mutual funds. That's when I ran into what may
be an intentionally obtuse screening process on MSN, Yahoo and
Morningstar Premium.
The first two are free sites, as you know, but
the mutual fund screening process is so convoluted and horrible that I
paid $245 for a premium membership at Morningstar -- thinking that surely
the home of all mutual fund research will have an easy search screening
process that will get me the info I want. I was wrong. Morningstar
was as bad as the other two.
Consider my search question: All I want to know is how many
broad market stock mutual funds produced a consistent 15% investing return over
the last ten years.
I think it be educational if you could explain some of the recent Google action on your blog. On Jan 31st all the indicators were positive generating a buy signal around $505, but on Feb 1st the stock dropped by $25 and the stock is now around $460. Why didnt the indicators generate sell arrows prior to the big drop?
regards, Dipankar
My response:
Hi Dipankar,
On the 30th GOOG's Stochastic and MA were green but the MACD was red. On the 31st it all was green at $505. Then the earnings announcement came out after trading and it opened at $490-495 with everything red.
I want to note here that it's a bit dicey to be going in just before an earnings announcement. I do it all the time, but I recognize that the market might not like what gets announced and can turn strong against the stock.
One way to handle that issue is to go in but put in a tight stop loss. In this case that would have saved you some serious pain, kicking you out with about a 2% loss.
Thank you for RULE #1 and for writing an excellent book. As a financial analyst I was never interested in stocks because of perceived risks, but thanks to your simplified approach, I am enjoying this new world. I began investing last August and realized a 37% return (annualized) for the first 3 months, then got emotional and impatient and lost some of it. But I am learning!
I am now investing about $8k in INFY, APOL, and LIFC, and got in based on buy signals, the MOS, the five #s, mgmt, etc. (And yes, APOL is probably risky.)
I was wondering how you use the three tools in comparison to the market fluctuations. I don't want to sell when the entire market goes down a little but there is no bad news on the companies. I would rather buy then! Especially in the last few days when these 3 stocks keep going up and down. Shouldn't I incorporate the fact that the DJIA, S&P, and Nasdaq are all down into my buying and selling decisions?
Maybe a better question is if there are any indicators for an overall stock market crash. (I suppose that's a million dollar question.)
Thanks,
Colleen
My response:
Hi Colleen,
Congratulations on joining the revolution and on your success. You bring up an excellent issue. Do we take into consideration normal market fluctuations? Should we buy when those fluctuations give us our wonderful business at an even better price?
Recent Comments