PHIL TOWN

Timing When to Buy or Sell Based on Tools

Phil Town answered this in the comments yesterday, but I think it's worth reiterating here:

It's easy to decide if it's too late to buy or sell based on tools.  You have three tools (MACD, Moving Average, Stochastic) and all of them have to say the same thing at about the same time.  Say within a couple of weeks or less. 

So first one tool goes green (gives you a buy signal) then another one... so now all you're doing is waiting unemotionally for the third signal.  It could be any one of the three.  If it's the Stochastic then when it goes green, you buy the next day. 

But what if you missed it?  Then you wait and see if if the price returns to the Moving Average line and bounces off.  If it bounces off you buy, if it doesn't the you'll get your first red, right, so you don't buy.  You wait. 

Now go play.

Phil Town

Using Trading Tools

The arrows that Phil Town uses are at Investools and they make for easy analysis, but virtually every research site and online broker now has these key tools.

In Rule #1 I show you how to set them up on MSN Money, and the principle holds for Yahoo, TD Ameritrade, Scottrade etc. You may not have arrows on the chart, but it's not rocket science to read the actual indicator and make a decision.

Read them like this:

Stockpiling: You Better Know Your Business is Wonderful

Here's a letter I recently received from a Rule #1 reader:

Dear Phil Town:

I have done very well with Rule 1 investing, and I am very disciplined about it.

However, one of my wonderful companies, Immucor (BLUD), which meets every criteria and then some, was served a subpoena by the Department of Justice relating to anti-trust and the stock plunged as much as 34% in one day.  For many days before the announcement, the stock had been going down, even after a good earnings report in early April.  I kept asking myself, “Who’s dumping this stock?” and happily buying more.

Is there some way I could have seen this coming?  Am I correct in not panicking and taking the view (as some analysts have) that there is most likely nothing to this investigation?  Have you ever experienced this “disaster” phenomenon?

Regards,

Jan

Jan has given me a wonderful example of the difference between stockpiling (or consuming) a business and trading it.  In both cases, we want the business to be wonderful, but if we are going to stockpile this business as it goes down in price, the bar is raised for knowing that the business is wonderful.  Trading sucks up some of the risk.

The Third M

The four M’s of RULE #1, Meaning, Moat, Management and Margin of Safety, are the key to finding wonderful businesses on sale.  The third M – Management – is the hardest to evaluate.  There are no tools to objectively decode the passion, honesty and owner-orientation of the CEO of a business.  You have to do the homework.  And you have to know what you’re looking for.

A good friend of mine, Steve Farber, and I worked together many years ago consulting to executives about becoming better leaders.  Steve just wrote a really great book and I want you to read it.  Its title says it all: Greater Than Yourself. 

That’s what I want my CEO to think and feel about the business I own.  I want him to sublimate himself to the task of making my business successful and a positive contributor to life on earth on all levels – certainly for me, the owner, but also for the people he’s leader, the suppliers, the customers and the environment. 

Steve is a great writer.   His first book, The Radical Leap, was named one of the best 100 business books of all time.   I read Greater Than Yourself in an evening.  It will help you spot a great CEO.  Even better, it will help you be a better leader yourself.

Now go Play.

Phil Town

Is it Fear, or is it Greed?

I got this comment from JNS on April 2:

Phil Town, I keep hearing the words, "be greedy when others are fearful and fearful when others are greedy". Doesn't this market seem like we should be fearful? This bull-run seems mis-leading when most stocks seem overpriced based on The Rule #1 principals. In this case, what can one stockpile?

I love the point about overpriced stocks.  Even though the market price has dropped 45% from its high, we can't assume things are on sale any more than we would if we saw an "ON SALE 45% OFF" at a jewelry store.  We have to ask, "45% off of what?" 

Please pay attention to JNS's point and do a solid Rule #1 valuation.  That said, there are things on sale if you know where to look.  But that requires you build an expertise in a few industries in the market so you can know when you know. 

So where to look now?  We look where there is great fear.  And where is that?  Certainly in the financial stocks, right?  And all over the retail market.  Restaurants.  Clothing stores.  Auto related. 

And what to look for?  Durability.  A business that will definitely be here in 20 years.

So tell me, JNS, what area of the market are you deeply interested in?  And in that area, are there values much higher than prices or is it the other way round?

Now go play.

Phil Town Rule #1

For Those with 401(k)s: is Now a Good Time to Re-enter?

Phil Town got this question last week from long-time reader, Jon:

Any tips on re-entry on company type plans for those who exiting with the tools in 2008? Whether we should look more at stockpiling a little at a time with some percentage of funds (whether the market is going up or down), or look at tools as an entry, such as a 200MA. The limits of moving funds within in these planes makes this process more difficult.

Wow, I hope you didn't miss my urge to buy back in a few weeks ago.  Now it's time to to check the arrows on your 401(k) funds (and shift to SPY if you can do it in your 401(k) and put 1% per year in your pocket instead of some fund managers).

There is no entry now, I think.  We're at the 8000 point on the Dow and it is shaping up to be a ceiling just as it was a floor for over a month.  All the tools are sliding to a sell signal.  So this is not an entry point.  If it pops out of 8000 and you're doing FACs, I'd hit it.  If you're doing arrows, you are looking to sell here sometime, because you got in at somewhere between 6700 (on two greens and my blog) and 7400. 

I'd say prepare to exit.  It's going down unless there is some really good news somewhere to stimulate a lot of money sitting on the sidelines.  If not, a lot of profit taking is already underway.

Now go play.

Phil Town

Trading RIMM on Arrows and FACs

A few days ago Phil Town got this note from Chuck:

Thank you for the 43% gain thus far using Rule #1!  That said, I’m licking my wounds on my latest transaction. I purchased RIMM on 03/11 at 40.00/share based on a $42 MOS. I then got out on 2 reds on 03/25 at 41.71 following your advice on your blog regarding a stock that’s either moving sideways or going down.

Had I stayed in until 3 reds I would have caught the ride all the way up to 60.10 as the stock rose 7.61% today during trading hours and then another 22.43% after hours because of better than expected earnings.

With such a big run up in the last 2 days would you still get in or wait for a pull-back considering there are 3 greens? Any advice on how to trade on 2 versus 3 reds in the future?

Chuck is doing great with RIMM but had a question about when to get in (and out).  He's not stockpiling it, he's trading.  He had a MOS at $42.  Without comment on the MOS, let's look at the RIMM chart. 

Phil Town on How to Go from $52,000 to Retired in 5 Years

Last week Phil Town got this comment from Jarrod at PhilTown.com:

I am 30 years old no debt and have a net worth of $52,000 cash. My goal is to be retired by 35 years old. To reach that goal is now the time to go all in?

How to go from $52,000 to retired at age 35 in 5 years:

The time frame is too short to stockpile stocks and be sure to retire in 5.  We need more like 20 to make that work.  So you're going to trade using Phil Town strategy and tools.

1.  You'll live to 95, so retirement is 60 years.
2.  You'll need at least $50,000 a year in 2009 dollars.
3.  Assume you're trading and making 30% adjusted for inflation (so 34% or so before inflation).
4.  Assume you're adding $10,000 a year for next 5 years.
5.  In 5 years you'll have $283,000 in 09 dollars.
6.  You'll have to make 18% after inflation to get $50,000 a year in 09 dollars.
7.  Conclusion: Doable, but you are not retired clipping bond coupons on some beach in the South Pacific.  You're still investing.  Better if you had more in the nest egg in 5.

Q: How to get more when you have less?
A: Leverage.  Other people's money.

Q: How do you get other people's money?
A: Four ways:

1. Trade on margin: 50% loan.  You'll more than double your return to $558,000.
2. Trade derivative (options) so your dollar represents only a small portion of the underlying security
3. LP: Raise $600,000, 34% ROI is $2.4 million in 5 years.  You keep $500,000. Plus you got $40,000 a year to manage it.  This is more or less what Buffett did in the 50's and 60's.
4. Put half the money in a startup and help make it go big.

Now go play.

Phil Town

Sunday on MSNBC's Your Business; and Twitter

Set your DVRs - this week I taped an episode of MSNBC's Your Business, where I talked about factoring (because business loans are hard to get these days.)  The episode airs on MSNBC at 7:30 EST.  And subscribe to the MSNBC Your Business video podcast on iTunes or Zune.

I also joined Twitter and you can follow Phil Town at philbtown to receive my tweets on investing -- particularly what I'm analyzing. Caveat: not necessarily what I'm stockpiling. I'll use it to talk about PAYBACK TIME too.

Now go play.

Phil Town