PHIL TOWN

Does "Flash Trading" Affect Rule #1 Investors?

Anthony and Valerie Ball spotted a great article at MSN Money about nano-second computer trading at Goldman Sachs and other investment banks and hedge funds.  Read it to get clear that your mutual fund manager has a serious issue about buying and selling at reasonable prices. 

The question is whether this sort of "flash trading" - high volume small trades in parts of a penny - affects a Rule One investor in any sort of way.

Pay Attention Now

Phil Town doesn't do a lot of predicting about the market direction.  The market doesn't matter.  What matters is whether you are buying wonderful businesses and what price you are paying for what you are getting.  But the question keeps coming up about how far down this market can go before the bottom.

In the last 100 years, the market has gotten into single digit PE ratios at least once per decade in 7 of the last 11 decades.  We were there in the 70s repeatedly, and the last time was at the beginning of the 80s when I started investing.  Then double digit PEs for almost 30 years. 

So of the 4 decades when the market sustained moderate to high prices in the last 100 years, 3 of them just happened.  But now we're right at the bleeding edge of sliding into single digits on the DJIA.  So this is a kind of historic moment.  For the first time in over twenty years, we're starting to see very good businesses go on sale big time.  This is when great investors in the Rule #1 tradition load up the truck.

I've been telling you to wait.  To stay in cash.  To protect yourself by being very careful about valuations.  You've been doing good.  You're ready.  Now is the time to begin consuming great businesses.

Is HANS a Buy Now?

HANS (Hansen's Natural sodas) has great numbers.  But it's not enough to have great numbers.  Remember the 4Ms? 

The numbers tell us there must be a moat, but "Is it going to last?" is a question that is only answered by the first M -- the Meaning of the business.  Do you know this business?  If you do, you should be able to handle this question well:  Is HANS going to definitely be here and still growing in 20 years?  That is the key question.

Buffett and BNI

A few weeks ago, Ven left the following comment:

Phil Town,

I just read Michael Brush's article "How Buffet is Playing This Market" on MSN. He says that Buffet is investing in BNSF Railway, but according to Investools, the BNI stock is not a bargain. In fact at the present it is at 77.00, with a valuation of 73.77. Of course I know Buffet knows what he is doing, but is this a good investment for me because Warren says it is?

Thanks,
Ven

Ven asks how it is that Buffett could buy BNI in spite of its price being higher than its value. 

Well, we have to ask, what is the value of BNI?  Buffett has been buying it in the high $70s and low $80s.  Is the value really less than the price? 

Setting Up Your Own Berky

This post is the Part II of Phil Town's two-part series on Berkies

Mr. Buffett’s BERKY (Berkshire Hathaway is Mr. Buffett’s Berky, for those of you who are just tuning in) gets its cash flow from businesses Mr. Buffett owns.

[I know that the cash comes from businesses that Berkshire Hathaway owns, but I’m setting this up as an analogy, so bear with me.] 

The guys who run those businesses are well compensated for passing up the excess cash to Mr. Buffett’s Berky.  In order to set the game up so that they will send him the cash, Mr. Buffett put his CEO’s on a compensation system that rewards high return on equity (ROE). 

[NOTE: Or high return on Capital, which is a bit different.  For the purposes of this post, it works better that we stick with ROE rather than ROIC, even though ROIC is better in the real business world.]

Because of the way Mr. Buffett set up compensation and rewards, the more cash his CEO’s get off their books (by sending it on up to the Berky), the lower the denominator that they are using to divide into their earnings to get ROE... thus the higher the ROE. 

Good system.  Keeps everyone working toward the same goal -- well run businesses and lots of cash to the Berky. 

You can do this, too. 

Mr. Buffett's Berky

Last post I wrote about the necessity to trade if the big guys are getting out, and waiting until they get back in to come back in ourselves.  And I also said there is another way to go.  You can create a BERKY.

A BERKY is a kind of Berkshire Hathaway -- the investment account/company that Warren Buffett uses to hold cash while he’s thinking up something to invest in. 

Mr. Buffett’s Berky is an incredibly important part of his investing strategy.  It's what allows him to accept the downs of the market.  With his Berky, he has the luxury to take a long view.  He can buy into a business even while the news is horrible and the stock is going down like a brick, because he knows that if it keeps going down, his Berky will provide him with more cash to use to buy in at the lower prices -- and he can keep on buying as long the price keeps on going down.