QUESTION OF THE WEEK: FDP HOMEWORK

Here's a letter from Lynn.  [Names changed to protect the innocent! Letter edited for length.]

Hi Phil,

I have a problem of  a different sort.  I have been studying my butt off with all of this stock research.  I feel like I am understanding more and more but not comfortable yet as I haven't really paper traded anything and haven't really spent any money but I know in time that will come and that's okay.  Like you said, the market isn't going anywhere.  And, for once in my life I feel I have actually been quite patient and okay with it as that is how you teach it and it makes sense to me.  Plus, I also have not lost any money.  Rule #1 rocks

Some guy calls Jerry (my husband) on the phone from S_____ (broker),  telling him he can't lose any money or at least not much, talks to him for probably 10 - 15 minutes and has Jerry spending $20,000 on FDP (Fresh Del Monte produce).  When I found this out I could have killed him.  I asked him why he felt the need to do that.  He said to make a lot of money.  I'm thinking if it sounds to good to be true, more than likely it is.

Continue reading "QUESTION OF THE WEEK: FDP HOMEWORK" »

QUESTION OF THE WEEK: HOW IMPORTANT ARE THE FIRST 3M'S, REALLY?

This week's Question of the Week comes to me from Brad and his dad in Dallas. In a nutshell, they want to know if they can postpone doing the Big 5 Numbers. Read on.

Phil,

My father and I are having a discussion, which by the way, is great that you turned us on to something that we can work together on.

Pop writes:

The success of the Rule #1 method in calculating the present intrinsic value (Sticker) of a stock depends entirely upon its ability to predict the stock's future price per share. Really, only two numbers are needed to do that analytically: (1) future EPS growth and (2) future PE.

Evidently, Mr. Town doesn't trust our ability to accurately predict future EPS growth (else why does he use the analysts' prediction over his own if the analysts' number is lower?) but he has great confidence in predicting future PE (else why does he typically ignore analysts' future PE predictions?).

Continue reading "QUESTION OF THE WEEK: HOW IMPORTANT ARE THE FIRST 3M'S, REALLY?" »

RULE #1 REMINDER: GOLD IS A COMMODITY

This comes to me from Michael, a long-time Rule #1 blog reader. Submitted on May 16.

[Bolded items are my emphasis.]

Phil,

How are you doing?  I have not written in a few months because I know you are slammed and may not have the time.  But, if you do get a chance to read this, I would appreciate it.  I have to say I am TOTALLY disheartened now.  In a matter of 2 days I have lost 15% of my investment, but I have followed the rules and when I got my 3rd red arrow, which was today, it was too late.  I know when you see the stock you are going to shake your head (GG). 

Continue reading "RULE #1 REMINDER: GOLD IS A COMMODITY" »

THE LITTLE BOOK THAT BEATS THE MARKET

People are curious about my take on Joel Greenblatt's book.  Read on to find out what I think.

Phil,

Saw you at a "Get Motivated" seminar in Cleveland, want through InvesTOOLS training - lost $1,000 on options - and THEN read your book.  Now ready for Rule #1 - never lose money.  I also just read The Little Book That Beats the Market by Joel Greenblatt (Columbia Business School Professor and hedge fund manager)  - he also talks about finding good companies at bargain prices and calls it "magic formula investing". 

He talks about Benjamin Graham, the Margin of Safety, EPS and Return on Capital.  However, he adds in Earnings Yield - the bargain price is determined by a higher earnings yield.  Is he just computing Value by a different means?  Also he sets Return on Assets (ROA) at a minimnum of 25%, talks about being committed to holding the stock for a minimum of 3 to 5 years, and says this approach works best with companies with a market capitalization above $50 or $100 million.

How is this different from Rule 1 Investing - is it?  Are these just personalized embellishments?  Why is ROA important   (I'm obviously asking for your opinion on this)?  Thanks.

Carol 

Here's my response:

I like Joel Greenblatt's approach to investing.  He uses a lot of the same key things we look for in Rule #1 investing.  But I thought I'd talk about what he calls the "magic formula" - the Earnings Yield.  Here's how Earnings Yield works:

Continue reading "THE LITTLE BOOK THAT BEATS THE MARKET" »

YOUR HOMEWORK: SONC (SONIC)

This question comes from Tom in Edmond, OK:

Hi. I am just beginning this venture and am paper trading at this time. I have ran the numbers 3x for SONC and I think I finally got the correct MOS ($19.50).  However, I am not 100% sure how to calculate this stock as it just went thru a 3 for 2 split about 2 weeks ago. What is the correct method to do this?

Thanks for the book.

Here's my response:

Hi Thomas,

Stock splits do not change the size of the pie, as you know.  They only slice the pie into more pieces. 

When a business splits its stock, all the services that tabulate the data and provide it to websites like MSN Money and Investools recalculate all the old numbers all the way back to reflect the new number of shares.

Continue reading "YOUR HOMEWORK: SONC (SONIC)" »

HOW TO GET RID OF OLD STOCKS, RULE #1 STYLE

Brian from Florida is learning how to invest with Rule #1 but currently has a portfolio of 16 stocks.  What to do with what he has? 

Dear Mr. Town,

I saw you in Jacksonville Florida in the fall and was energized to get my finances in order.

I am currently on active duty in the Navy.  I have two growing boys who will need college, a baby who is in Hospice and has special needs and a fourth child on the way.

In the past ten years I have gone from an buy/acquire (inherit stocks) and hold diversify model to dollar cost averaging an S&P 500 index fund.

In the past 5 months I have made sure my bad debt is gone.  I have been investing in myself by reading everything I can get my hands on.  I am currently most of the way through your book and I am doing my homework by having read your blog, Automatic Millionaire, Dummies Investing, Millionaire Next Door, Motley Fool book, Mr. Kiyosaki's books and I have recently bought the Intelligent Investor.

Next I have to research and start paper trading.

But, I have one big problem looming over me and stealing my energy.   How do I get out of the businesses I already own?

Continue reading "HOW TO GET RID OF OLD STOCKS, RULE #1 STYLE" »

HOW TO EXTRAPOLATE BETWEEN A 10-DAY & 50-DAY MOVING AVERAGE... PLUS, WHAT TO DO WHEN THE PRICE IS TRENDING DOWN

You can find the content from this post here, in the Comments under Chico's. Reprinted below:

Here's the difference between using the ten day MA as I describe in the book and extrapolating between the 10 and the 50 ("extrapolating" meaning that you see it cross the 10 and then guess about where the 30 would be as the price heads toward the 50 line.) 

Continue reading "HOW TO EXTRAPOLATE BETWEEN A 10-DAY & 50-DAY MOVING AVERAGE... PLUS, WHAT TO DO WHEN THE PRICE IS TRENDING DOWN" »

NAILING THE GROWTH RATE

Quick post about growth rates and moat. Edited for length.

Question:

Hi Phil,

First of all - Great book! The most entertaining and "real" book on investing I've read.

In your eval of EBAY, you take a projected EPS value between the analysts and the CEO's projections. But with DELL, you stick with the CEO's. Please explain.

Thanks in advance for answering me.

Al F.

Answer:

Nailing the growth rate is not all science.  There is a bit of art. 

Warren Buffett suggests that if the growth rate doesn't jump right out at you, it's too close to call -- but then again, he's a genius with a lifetime of experience.  Me, I'm a river guide with half a lifetime of experience, and although growth rates don't just jump out at me most of the time, on the businesses I like, I feel competent enough to call the growth rate. 

Here's the deal with Dell and Ebay:

Continue reading "NAILING THE GROWTH RATE" »

REALITY SETTING IN ABOUT MICROSOFT

A couple of weeks ago Microsoft stock price crashed down to $23, just a bit above the $21 lows in 2002.  What's going on?  Is Microsoft falling apart? 

Nope.  Just a bit of Rule #1 reality check in progress.   

Remember what Ben Graham said about the stock market – that in the short run it's a voting machine but in the long run it's a weighing machine.  In other words, in the short run the market is about what the crowd thinks... but in the long run it's about the true value of the business.

Continue reading "REALITY SETTING IN ABOUT MICROSOFT" »

USING MSN TO HELP BUILD YOUR WATCH LIST

I left the following response under the Comments to the "Is Rule #1 Investing Value Investing?" post.  Sebastian  had asked:

...it seems quite hard to me to find businesses that actually meet the MOS criteria (and of course all other criteria you mentioned) in today's market. Maybe the likelihood of doing so gets bigger in weak years such as around 2000. Or maybe I should look for smaller companies.

A lot of you have expressed similar frustration: can wonderful companies be found on sale, available at a Margin of Safety?  Here's my response to that question:

Hi Sebastian,

Good question about trouble finding MOS friendly stocks.  The first thing is to find businesses you want to buy and make a list of them.  This is called a Watch List because we watch these stocks and wait until we can buy them. 

Continue reading "USING MSN TO HELP BUILD YOUR WATCH LIST" »

CONTINGENT ORDERS: HOW TO CATCH THE GAPS UP

I posted the following as a Comment under this post on Monday, but I'm reprinting it here so you'll all be sure to see it.

Question:

Using analysts' future EPS and PE estimates, the Sticker Price of World [sic] Foods is about the same as its latest market price. But, you still like it. Does that mean you'd keep it if you own it, but not buy more until its market price drops to 50% of its Sticker?

Answer:

Whole Foods is a bit of a unique case for me.  But it may apply to businesses you will own in the future, so I'm going to write about my thinking a bit here. 

Whole Foods is one of the best run businesses I've ever seen on all the levels I'm interested in.

Continue reading "CONTINGENT ORDERS: HOW TO CATCH THE GAPS UP" »

QUESTION OF THE WEEK: THE MOS IS GOOD BUT THE TOOLS SAY "SELL"... NOW WHAT?

A lot of Rule #1 readers are writing in with variations on the same question:   if the MOS is good but the tools say Sell, now what?

Here's how Steve worded it:

Question:

Hi Phil,

Great book. I'm still going thru it and have a question about when two factors collide. For example, I'm running the Big 5 numbers for NBR and they all look really good. Using your calculator, the MOS is really, really high, but I think my last calculation had the MOS around $450+ and the stock is under $40. This seems like a really good buy, but when I look at the chart tools, many of the signals are saying SELL (e.g. MACD just turned negative, RSI is approaching the 50 mark, moving averages are about to cross, STO going below the 80 line).

So my questions:

Is my MOS incorrect?

What to do when two factors collide?

Thanks for any input,

Steve

Answer:

The big guys -- the institutional investors -- control 85% of the money in the stock market, and they don't play the game the way we do.  The game they play is "How did I do this quarter compared to my peers?"

For that reason, they may sell a stock that is well under the Sticker simply because others are selling it... and someone started the run just because they wanted to take profits to make the quarter look better.

Continue reading "QUESTION OF THE WEEK: THE MOS IS GOOD BUT THE TOOLS SAY "SELL"... NOW WHAT?" »

THE TREND IS YOUR FRIEND

I posted the following as a Comment under the Chico's post, but it's important enough that I wanted to repost it here, where you'll all be sure to see it.

Wow you guys are learning fast!  Laura, I'm glad to hear that you just used a small amount to test.  Good job.  It's really important to get the hang of this without getting burned. 

That said, you are all correct that I should have gotten the bear trap stuff in the book.  My bad.  It's a great point that I'll reiterate here. 

There is an old saying that "The trend is your friend."  This saying has been abused horribly by day traders but it applies well to what we do with Rule #1.

Continue reading "THE TREND IS YOUR FRIEND" »

CHICO'S: CASE STUDY RE: THE IMPORTANCE OF VIRTUAL TRADING

Laura left this comment very recently:

I'm having a heart attack today because I bought into Chicos (CHS) when the arrows said to "buy" and I have been watching it in gross detail everyday. I felt good about it closing yesterday at 37. I woke up this morning and it has taken an enormous nose dive and all of the signals have gone to sell. It's killing me to sell right now because I have faith in the wonderful company and I would lose a lot of money. I'm violating Rule 1! If the big guys move so slow, how can this kind of nose dive occur so quickly without any bad news! Anyone can help with advice?

Laura

ARGGGHHHH!!!!  This is not good!  Losing money and getting caught in a big drop just isn't fun.  So first, what went wrong, and second, what to do about it?

Continue reading "CHICO'S: CASE STUDY RE: THE IMPORTANCE OF VIRTUAL TRADING" »

YOUR HOMEWORK: EBAY

Here's one from Kevin in St. Peter, Minnesota. As a reminder, Homework posts aren't intended to be stock picks -- they're examples of the Rule in action.  This particular post gets into why it's important to come up with your own growth rate in addition to looking at what the analysts think.

Hello Phil,

I just finished reading your book (I devoured it in under two days!) and am hoping to use The Rule to help my wife and I be able to retire early (I'm 33, she's 32). I am planning on doing some paper trading for a bit first, and I went to Investopedia.com to open an account for practice. The first thing I did was buy 1000 shares of eBay, just for a test.

I then figured I should put eBay through the ringer. Here goes:

Meaning: I've been using eBay for years, and teach community ed classes on how to buy and sell on eBay.

Moat: I believe that eBay definitely has a Brand Moat, and possibly a Switching Moat as well -- once you're established on eBay you have a high "Feedback Rating", going to a new site would reduce the years of goodwill that you've accumulated.

Management: Pierre Omidyar is the Founder of eBay, and is also Chairman of the Board. The CEO is Meg Whitman, who joined the company in 1998 when it consisted of 30 employees. She has overseen the growth of eBay from a "Beanie Baby swap meet" to a global force that sells big revenue items like cars, houses and islands.

Margin of Safety: I ran the numbers on eBay, and here's the Big Five numbers:

Continue reading "YOUR HOMEWORK: EBAY " »

YOUR HOMEWORK: RESMED, INC. (RMD)

Every once in a while someone gets the hang of Rule #1 Homework on the first try. Read on.

Phil,

"Knowledge is power"  Francis Bacon

My 17 year old son and I heard you at a Get Motivated seminar in Corpus Christi, TX earlier this year.  He had wanted to learn about stocks since he was very small and I had put it off since they scared me--lack of knowledge breeds fear.  I had placed my faith in mutual funds. 

You opened my eyes and I took my son with me to the Investools seminar and they opened our minds to consider investing.

You emphasized practicing our trading before we invested REAL money.  Investools pushes you to move quickly.  I chose to follow your advice.  I pre-ordered your book and audiobook. While waiting for the book and CD to arrive, my son and I practiced with paper trading.  It didn't go very well and we were puzzled.  We thoroughly enjoyed the Investools seminar and using their website but we weren't getting the results we wanted or expected.  (Thank you again for the recommendation of practice, practice, practice!)

Okay, my favorite Icon on Investment,  I think I have found my first wonderful company and I want the teacher's approval or re-direction.

Continue reading "YOUR HOMEWORK: RESMED, INC. (RMD)" »

WHERE TO FIND FREE CASH FLOW INFO ON MSN

Many people are writing in to ask where to find Free Cash Flow on MSN.  Things have changed a bit on the site since I wrote the book. Here's where to look. Let's use WFMI as an example:

  1. Go to MSN.
  2. Enter the stock symbol (WFMI) and hit Return. You get this screen.
  3. Go to the left-hand sidebar, about half-way down the screen.
  4. Click on Financial Results > Statements.  You should end up here.
  5. There's a pull-down menu up top. Pull it down. Choose "Cash Flow".
  6. You'll end up here.

To calculate Free Cash Flow correctly, you'll need to:

Take Net Cash Provided by Operations and subtract the Capital Expenditures.

That's usually a line item under Cash Used in Investing Activities.

You should NOT subtract Cash Used to Buy a Business!

That's just cash invested in other businesses, not cash used to keep this one running.

Free Cash Flow is the cash a business has left over AFTER it subtracts what capital items it needs -- things like manufacturing plants and replacing machinery that broke.

You'll note there are 5 years of numbers here (as mentioned in the book).  Unfortunately, free sites like MSN are only offering 5 Year Data for Cash Flow.  To go back further you'll have to either subscribe to a paid research tool or look up past years' statements in the Investor Relations section of the company website.

I'll add this item to the FAQ on Ruleoneinvestor.com too.

Now go play!

YOUR HOMEWORK: JABIL (JBL)

Here's another homework, from long time reader Michael L.

Phil,

Thank you for the audio version of your book.  It has been wonderful to listen to it over the past two days. 

Although I attended the seminar and have been a subscriber to Investools I have made some trades that were not Rule #1 trades and did lose money.  In one case, 30% in one open!  Check out DESC and look at the day it dropped significantly.  I have a fellow co-worker who has been in the stock since it was at 2 dollars.  He convinced me to buy the afternoon before they were to give their 1st quarter results.  The con-call was after the market closed and needless to say, it was not good and I lost 30% of my total value at the open.  Fortunately it was not 100% as I pulled out, licked my wounds and kept my cash until I followed the Rule, all the way or no way.

Then your book came.  I had some stocks on the radar, but being very trepidations about trading I wanted to read/listen first to figure out what I had been missing.  One particular stock I did the 4 M's on is Jabil JBL and I was hoping you could check out my information and if you had the time, let me know what you think?

Jabil-JBL

Basic information- Jabil is an electronic products solution company providing basically electronics products to the market faster and more cost efficient by providing complete electronics products supply chain.  In short, they make electronic components for items I know I use every day.

Continue reading "YOUR HOMEWORK: JABIL (JBL)" »

YOUR HOMEWORK: PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. (PPDI)

Here's a homework submitted by one of my long-time readers, Tom from Grand Rapids.

Hey Phil,

It's been a while since we last chatted, mostly because my wife and I were busy welcoming the newest and (hopefully) FINAL addition into our family this past November!

At any rate, now that I've got yet ANOTHER college tuition to fund it's time to get back into the swing of things. Panera (PNRA) has become one of my best "friends" over the past few months and I'm gonna stick with it for the foreseeable future. However, I realize that I need to have a few other options available in case the bottom drops out - not to mention the fact that I want to continue to sharpen and hone my "skills" so I can become an Investment Superhero someday too!

Here goes my latest catch:

Pharmaceutical Product Development Inc. (PPDI)

Continue reading "YOUR HOMEWORK: PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. (PPDI)" »

APPLYING RULE #1 TO INTERNATIONAL INVESTING

Every once in a while people ask about foreign companies and commodities, like Chris does below. Read on.

Phil,

I've been reading (very dangerous) about Iran's plans to start trading its oil in Euros and not dollars - they plan to start doing this some time around 03/23 - 03/28 of 2006.  This information got me thinking (also very dangerous) about the Rule # 1 principles and investing/trading in other markets.

  1. Do you trade in international securities or do only trade in U.S. markets?
  2. Generally speaking, does Rule # 1 and associated investment strategies and principles apply to international trading or just to U.S. exchanges?

I'm still very new to these investment principles and not yet ready to involve myself with international trading, but out of academic curiosity, I thought I'd run this question by you and ask.

Thanks again Phil!

Christopher

Here's what I think:

Rule #1 is a universal strategy for investing.  We're not prevented from finding a wonderful business at an attractive price by a national border.

Continue reading "APPLYING RULE #1 TO INTERNATIONAL INVESTING" »

HOW TO READ A 10Q

Every business that has stock owned and traded publicly is required to file a quarterly statement for the benefit of its owners -- the shareholders (us).  The Securities Exchange Commission is one of those government agencies that is really quite important as a watch-dog to protect us little guys from lying dogs (and yet they still slip through the protective net and bite us from time to time.). 

The 10K is the annual report and the 10Q is the quarterly report. 

Continue reading "HOW TO READ A 10Q " »

YOUR HOMEWORK: APOLLO GROUP (APOL)... PLUS APPLYING RULE #1 TO BUYING A SMALL BUSINESS

Here's a new homework submitted by Charlie, a computer engineer and recent college graduate.  His choice of business is Apollo Group (APOL).  Make sure to read the entire post, because he also asks for advice about a business his parents may want to purchase.

Phil,

Thank you so much for your help. Your philosophies have made all the difference in my ability to objectively evaluate a company.

I would like to submit this "homework" to you i have done on Apollo Group (APOL). I would also greatly appreciate your feedback and possibly your objective opinion on a business deal I'm currently working on.

Apollo Group:

Meaning: Apollo group is an industry leader in the online education arena. As the cost of higher education rises, coupled with increased "blue-collar" competition from overseas, Apollo Group is in a position to educate the entire world (most notably China) in the years to come at a lower cost than a traditional university.

Continue reading "YOUR HOMEWORK: APOLLO GROUP (APOL)... PLUS APPLYING RULE #1 TO BUYING A SMALL BUSINESS" »

FOLLOWING THE FLAGS: HANSEN'S NATURAL SODA (HANS)

New homework: David's applying technical indicators to HANS. Read on. [His original letter is dated March 9.]

Hello Sir,

I think I am getting the hang of this (Steve's post was great).

The red line is the "flag" and crossing it is the indication.

If I am correct, today is the day that all 3 red flags are up for HANS and it would be a good time to sell.  After trading shows a bit of a bounce.

Oh, I went back and did the same analysis on another stock I owned (WDC) and sold for a loss yesterday (and after having a gain for a while).  The lines told me to have sold on the 6th and kept my profit.

Am I on the right track here?  I am using one month for the timeframe.  Should I tighten that up a bit?

Preordered and waiting for your book.  Thanks for teaching us.

David

My response:

Hansen's Natural Sodas has been smoking the rest of the soft drink industry.

Continue reading "FOLLOWING THE FLAGS: HANSEN'S NATURAL SODA (HANS)" »

GRMN: WHEN TO RE-EVALUATE A COMPANY'S STICKER PRICE

Mark is a policeman in Kansas City who found Garmin for us about a year ago.  He did the 4M analysis and determined that the business had Meaning, Moat, and Management and that the Sticker Price was $80 with an MOS of $40.  It was priced very near the MOS at the time and Mark jumped in there.  Here is his result to date:

"Looking at my account, it's reporting a net gain of 62.65%.  Much better than the .1% that same money was getting in a savings account!"

He's continued to stay on top of GRMN developments and thinks the products and moat are better than ever.  And here is his question:

"So here's my dilemma, rerunning the same numbers I sent to you in May (P/E = 25, Growth rate of 20%) and updating the EPS to its current $2.85, I get a sticker of $109... so do I sell at my first sticker of $80 or hold out for something closer to $109?"

Continue reading "GRMN: WHEN TO RE-EVALUATE A COMPANY'S STICKER PRICE" »

YOUR HOMEWORK: UNITED HEALTH GROUP (UNH)

A new homework, from John. John's new to investing at the young age of 75 and is interested in a company in the medical field.  Read on.  [I edited his letter for length.]

Hi Phil,

...I have been interested in the Medical Services field for some time. After I came home from the seminar, I started looking for stocks in the Med. field. I found United Health Group (UNH) among many. I understand that a lot of folks will be retiring soon, and that there are shortages in almost every category of medical services. UNH has apparently a long record of verifiable performance and shows a good line of growth.

Continue reading "YOUR HOMEWORK: UNITED HEALTH GROUP (UNH)" »

PROGRAMMING THE TOOLS

I got the following email the other day asking about INFY, the subject of one of my old posts. Read on.

Hey Phil,

If you have a moment, I have a question about INFY. INFY met the 4M test, and recently had, what appeared to be, a strong signal from the tools. Stochastics signaled a buy on 2/21, MACD signaled a buy on 2/24 and MA signaled a buy on 2/24. Since my purchase on 2/28 at $72, it's fallen to $70 and already two of the three tools are signalling a sell.  There has been no bad news according to MSN Money, and India is really being talked up in the media recently.

Basically I'm confused. Based on what you write in your book, the three tools should signal buys when the institutional buyers are too far in to turn back, and yet the price has dropped almost each day for the last week. I appreciate that the tools may be wrong some of the time, but is there any way to tell when they are? Why are they wrong sometimes?

Any help would be greatly appreciated.

Thanks!

Chris

Continue reading "PROGRAMMING THE TOOLS" »

WHY CNN'S TOP STOCK PICKS MOSTLY DON'T WORK FOR RULE #1 INVESTORS

This chart was posted on CNN Online (without my surly comments, of course, since they didn’t ask for my opinion). 

I added the "Here’s why I don’t like it" comments, below, to give you an idea of how a Rule #1 investor might see these businesses through the “Don’t lose money” lens.  With only one exception these businesses have no Margin of Safety and most are massively overpriced.

Continue reading "WHY CNN'S TOP STOCK PICKS MOSTLY DON'T WORK FOR RULE #1 INVESTORS" »

THE FOUR M'S: QUICK RECAP

Here's a recap for those of you just discovering Rule # 1.

The key to Rule #1 investing is certainty.  You are certain to make money if you buy a wonderful business at an attractive price.  To know that all we need are 4 M's:
 
MEANING

Every business is about something.  Make sure you know what that something is.  What does this business mean?  What does it do?  And does it match your values?  This M is about understanding the business enough to know you like it for the long haul.  [Reading: Annual reports and 10K on the business website.]

Continue reading "THE FOUR M'S: QUICK RECAP" »

REVALUING GOOGLE AND WHOLE FOODS

Two of my favorite businesses have turned in less than expected growth rates for earnings, which prompted fund managers to dump stock in both of them.  WFMI dropped from $80 to $64 (-20%) and Google dropped from $460 to $350 (-24%).  If you are using tools either on MSN or Investools (or wherever), you just paid for whatever they cost by avoiding taking these horrendous losses.  We were out of Google at $440 and out of WFMI at $77.  Lovely.  But now what?  These are both wonderful businesses, but now what are they worth?

Continue reading "REVALUING GOOGLE AND WHOLE FOODS" »

YOUR HOMEWORK: INFOSYS (INFY)

Every once in a while a student submits a perfect homework. Here's one, with my comments at the very bottom.  This is a good opportunity to learn by example.

Phil,

As they say, Wisdom begins in wonder. I came across your blog by accident, started reading with a lot of cynicism, and now have incredible respect and trust in your advice. I am a 28 year old software engineer in Phoenix and have 50k in savings which I hope to invest wisely over the next six months. Here is my first homework. [Infosys -- INFY]

Continue reading "YOUR HOMEWORK: INFOSYS (INFY)" »

THE KEY TO INVESTING WITH CERTAINTY

For starters -- know your company.  Otherwise you're gambling. Read the following reader email and my response to see what I mean.

Greetings.

I stumbled upon your site tonight and found some of your postings rather interesting.  I read some of your "rule number one" ideas which seem to lend themselves towards a general idea of "finding a wonderful company at an attractive price." 

In one of your postings about Google, you mention this, and continue on about paying attention to short term indicators.  For a little fun I glanced at the now infamous Montpelier Re Holdings.  I'm no technical pro but it seems this stock is on a bit of a turnaround.  The company and the stock price was beaten to a pulp after the huge storm season last year.  So, given that the management is sound, 2006 storm predictions are calm, and the company is expected to make a profit recovery over the next few quarters, MRH appears undervalued. 

Now, considering the light shed by these short term indicators, do you believe this is a good time to jump on board, or should one wait for more concrete signs of strength? 

Thanks for your input.

Here's what I told him:

Continue reading "THE KEY TO INVESTING WITH CERTAINTY" »

YOUR HOMEWORK: COLDWATER CREEK (CWTR)

Here's a new homework, reader-submitted.

Phil,

I don't think I've seen this one on the blog and I'd like to figure it out.  I'm using Investools and a little MSN.  I have to be able to get past all the math stuff -- I know where I shop, I know what I like and I'll google the CEO later but, if I can't do this part it isn't going to matter.

  • ROIC 18%
  • Cash looks good -- I think maybe a little jumpy the last 3 years (does it have to always go up or can it be in a range?)
  • Rule of 72 --  I went to MSN  and rounded to .70 and started there. 3.6 is the # of years for equity to double once then the 72 part I get 20% equity per year.  I know there is another step here I just don't know what it is.
  • Current stock price is 32.56
  • Investools says the est target price is 125.80
  • Their growth rate is 29% -- which is higher than what I said
  • Historical P/E is above 50 which you can't use because 50 is tops right?

Which part of this is right, wrong and what am I missing?  Thanks so much for your help.

Kathy L.

Continue reading "YOUR HOMEWORK: COLDWATER CREEK (CWTR)" »

APPLYING RULE #1 TO REAL ESTATE

Ever wondered if the 4M's of Rule #1 investing can be applied to making real estate decisions? Here's your answer:

Phil,

I would like your opinion on other forms of investing.  For example, I currently have an option to buy a mobile home park.  It is a relatively small one, with 18 hookups.  There are currently 12 trailers on it and they are individually owned.  The current owner of the land gets $200/month/lot for lot rent.  So, he is currently grossing $2,400/month.  His only expenses are: $300/month taxes, and $1,000/month water bill.  When he owned all the trailers and had the park full, he was supposedly netting about $4,000/month.  He will sell it to me for about $1,200/month.

Continue reading "APPLYING RULE #1 TO REAL ESTATE" »

YOUR HOMEWORK: NUCOR (NUE)

I got this email from Kellie on January 25. Read on. My response follows.

Phil,

As a construction guy, I get Nucor.  They make steel.  Steel reinforced concrete has become the backbone of construction.  Most agree we have another 8 year run on total construction growth.

Nucor is a "good to great" company.   After burying Bethleham Steel, they continue to dominate their industry by being the lowest cost steel producer in the US.  As a farm kid, it's understandable why they locate plants in rural areas and utilize farm people in production.

The numbers:  EPS= 8.20, PE=9.2, Historical PE=28.86, Target Price from Investor toolbox= $277.43 (based on analists projection of between 16 and 17% growth and using hist. PE of 28.86.)

It looks to me that big money has started coming in this week.  I see Nucor as a wonderful company that has been in an industry that has been ignored lately.  Are things beginning to change?

Kirk

Here's what I said:

Continue reading "YOUR HOMEWORK: NUCOR (NUE)" »

IS GOLD GOOD?

Quick post about Gold (GG). A lot of you are writing in to say you're buying it or considering buying it.

Gold obviously is a commodity -- so if you are investing in gold, be aware that your protection against a price drop, your moat, is based on scarcity and fear.  If you think the world is going to be a more fearful place in the future, gold is good. 

The thing to remember is that betting on commodities is usually just that -- betting.  It's not investing Rule #1 style unless you KNOW that scarcity is going to create the demand to drive the price.  Copper may be in that boat, but I'm no expert and to play the commodity game, you better know what you are doing.  And then, again, thank God for the arrrows!

Now go play,

Phil

RULE #1 WARNING: BEWARE OF SHOPPER'S DISEASE!

I get a lot of questions from people asking how many businesses they should be in compared to how much they have overall to invest. The letter that follows is from someone who came down with a case of what I call "Shopper's Disease" -- the desire to be in a bunch of businesses instead of only one.

Phil,

Hello!  It's been a while since I've written but let me tell you what's been going on.  I have bought/sold a handful of stocks and I think I've learned some lessons.  I've been acting on emotions; therefore, I'm down about $150 (invested $3500 total)!  But... it might be the best $150 I've spent because I think I got the hang of how things work when a little patience is involved and hopefully I got a few things out of my system.  I'm sure there are a lot of beginners out there that buy and as soon as the stock starts going down, they panic and sell.  That's what I've been doing. Not to mention it cost me $7 for every buy and sell I do on Scottrade!  As it turns out, if I would have held everything I initally purchased the end of October and the beginnning of November, I would be up!  But no... I had to buy/sell, buy/sell, etc... you get the picture.

Continue reading "RULE #1 WARNING: BEWARE OF SHOPPER'S DISEASE!" »

WHERE TO FIND QUARTERLY CONFERENCE CALLS

Heads up for Rule # 1 investors doing 4M research: the Seeking Alpha network of sites is posting company conference calls within 6 hours of their going live. If you need a reminder re: how to read a quarterly conference call, check out this post on WFMI.

THANK YOU, GOD, FOR THE TOOLS

From time to time Mr. Market does some bad stuff to 'buy and hold' investors, which would mean us if it weren't for the great tools we use to follow the big money in or out of the businesses we want to own.   Mr. Market did some bad stuff these last few days in a business I like a lot – Google.  Frankly, if it weren't for great Tools I would be beating my head on the desk after today's market tumble. You know Rule #1:  Don't lose money.  There are two things we have to do to be sure we don't violate The Rule.  The first side I've written about a lot here: Find a wonderful business that is available at an attractive price.  The second is to watch the direction the big guys are moving their money and get the heck out of there when they start to bail out. 

Continue reading "THANK YOU, GOD, FOR THE TOOLS" »

HOMEWORK: SEAGATE (STX) / A.K.A. "WHEN TO IGNORE ANALYSTS' GROWTH RATE PROJECTIONS"

Here's a homework from Jesse, for anyone interested in HDD technology. Jesse found himself a company that seems to be growing at a rate the analysts don't trust. Read on for a side-by-side analysis of the company's valuation using both the analysts' conservative estimate and our own.

Greetings Phil!

I hope you had a Merry Christmas, I certainly did.  Now down to the nitty gritty.

I was doing some searching to line up my next stock after I sell ATI (ATYT). It has done very well for me, far exceeding the 15% target, but I will probably sell after the new year, and sit in cash for a little bit while I hammer this thing out a bit more, and read your book.

That said, I came across a company Seagate Technologies (STX) and they manufacture computer hard drives. This has meaning to me because I'm a computer guy, and I know how the industry works. I would love to own this whole thing.

Continue reading "HOMEWORK: SEAGATE (STX) / A.K.A. "WHEN TO IGNORE ANALYSTS' GROWTH RATE PROJECTIONS"" »

HOMEWORK/4M COMPANY: COGNIZANT TECHNOLOGY (CTSH)

Dave Thomas is a realtor who is doing a little diversification of all that real estate money he's been making.  His pick is Cognizant Technology. CTSH does outsourced Information Technology solutions.  They just blasted through the tech downturn in 2001.  If anything it accelerated their business.  What that could mean is that the worse the economy the more business they pick up.  Pretty cool. 

The reason I'm writing about them now is because I've been getting a number of emails from people like Dave who have seen the potential of CTSH as a Rule #1 business. I will now confess that I've had this one on the side for some time, think the business is wonderful and that it's available at an attractive price.  So let's get this beauty out of the closet and show it the light of day.

Continue reading "HOMEWORK/4M COMPANY: COGNIZANT TECHNOLOGY (CTSH)" »

HOW TO SET UP EXCEL FORMULAS

I've had a lot of emails come in asking how to set up formulas in Excel. (Here's a link to an online Excel tutorial for beginners.) Basically, we can use Excel formulas for figuring out three things:

  1. The future EPS
  2. The future value per share
  3. The present value per share (or what I call the Sticker Price)
Start by collecting three ingredients (just like baking a cake):
  1. Current twelve month EPS - (On investools it's automatically on the valuation page.  On MSN Money go to company report and find it on the list of stuff.)
  2. 10 year average PE (or 5 year) - (On investools it's automatically on the valuation page.  On MSN Money go to Financial Results, Key Ratios, Price Ratios.)
  3. Estimated EPS growth rate - (On investools the analyst estimate is automatically on the valuation page.  Change it if you think it's too high.  On MSN go to earnings estimates, earnings growth rates and you'll see the analysts' average estimate.  Use a lower one if it's too high.)

Continue reading "HOW TO SET UP EXCEL FORMULAS" »

HOMEWORK: CANDELA (CLZR)

Here's a new homework submitted by a reader who needed some help with the Big Five Numbers and Moat. Read on:

Hi Phil,

I bought this stock [CLZR] for my son, Shane, because a client at Bellagio suggested it. This was before I met you.  Okay, now I know it was gambling!  But, it's going up.  I bought it at 9.37 and it's over 14 now.  I own 55 shares.  So now I'm backtracking and putting it to your test, so here goes:

Continue reading "HOMEWORK: CANDELA (CLZR)" »

WFMI AS AN EXAMPLE OF BRAND MOAT

There has been some interesting discussion about Whole Foods (WFMI) in the comments under my recent post. I'm reprinting one of my responses here so everyone can read why I think WFMI has a moat that won't easily be breached.

Thanks for your viewpoint [re: WFMI's high prices harming its ability to establish a moat against Trader Joe's, Wild Oats, and other organics grocers], and I have to say, points well taken -- but, in my humble opinion, mistaken.  Here's why:  WFMI is in the brand business, not the price business.  So as long as the lines are long, they would be nuts to start dropping prices -- unless they can keep their margins high by using their growing buying power to lower their costs.  Which is, of course, is what they are going to do as they get bigger. 

Continue reading "WFMI AS AN EXAMPLE OF BRAND MOAT" »

WFMI TODAY

I've been mentoring Major Clay Edens about getting him the money he needs to retire comfortably in a few years. His goal is to buy a 42' boat and travel the Caribbean islands.  He's started doing his homework by practicing the 4M's and taking a look at my WFMI posts.  But he still had a few questions about identifying a wonderful company. Read on to learn where WFMI is today, and how I as a Rule #1 investor interpret its position. For those of you who need visuals, there are charts and graphs with this post.

Phil,

As you will see with some of my figures I did have some trouble, but I am hoping that based on your experience and familiarity with WFMI, you will be able to quickly identify them. I used your Blog to try and build a YUMMMY report with enough detail to show myself I had the ability, I was confused as to where to find the information for the MOAT, and doing the calculations for the MOS.

Clayton

Continue reading "WFMI TODAY" »

4M ANALYSIS: BP

People ask me a lot of questions about retirement funds and packages. Here's a letter from S____.

[Edited for length.]

Phil,

Most of my parents' retirement acccount is invested in BP (British Petroleum) stock. Either 50% or 100% of the portfolio. My father has 3 years to retirement - even though he'd like to retire now.

As you may be aware, BP is the only individual stock they are allowed to invest their retirement in at this date. That's how 401k's, etc. work.

One of the reasons I wanted to buy the program you offered is to make sure they can better determine when to buy and sell to maximize the growth. The last thing I want to see is for something unforseen to come up with BP stock and them lose a chunk of their portfolio due to a drop in the price.

Is there a fee a could pay you to watch this stock for my parents and educate them on what factors are effecting their stock and whether it's likely to go up or down drastically so that they can continue to maximize their 401k versus taking a potential hit?

Kind Regards,

S____

I think the deal is that her father works for BP and is sort of forced to buy BP stock for his retirement 401(k), and it's the only stock he has.  She thinks he's 100% invested in just BP for his retirement (or maybe 50%) and she is worried.

S____, a student, is interested in finding someone who can advise her parents directly about what to do.  I'm flattered but I don't do advice or OPM investing simply because frankly, it's usually a huge pain to advise people or invest their money.  They call you.  Ughhh.  Those phone calls can interfere with golf, fishing, snowboarding, hunting and travel.  I'm learning to tango.  I don't have time for phone calls.

Continue reading "4M ANALYSIS: BP" »

HOW TO READ A QUARTERLY CONFERENCE CALL (PART FIVE)

Here's the fifth and final installment on how to interpret a company's Quarterly Conference Call. In this case, the company is WFMI (Whole Foods).

I will now turn to our growth goals for fiscal year 2006 and beyond. Please refer to our press release for more detailed guidance information.

In fiscal 2005 we produced very strong operating results which exceeded our own expectations and our initial guidance. The strength and consistency of our top-line growth along with the number and quality of the stores in our development pipeline have given us the confidence to raise our 2010 growth goal from $10 billion in sales to $12 billion.

Whoa Nellie!  He's raising the company goal to $12 bil.  Up 20% from where he was last year.   When he announced this goal a couple of years ago, he was going to have to grow at about 22% a year to get there.  Which is where I got my 22% growth rate.   But he's expecting to do even better.  Good news for our MOS.

Continue reading "HOW TO READ A QUARTERLY CONFERENCE CALL (PART FIVE)" »

HOW TO READ A QUARTERLY CONFERENCE CALL (PART FOUR)

More analysis on WFMI's Quarterly Conference Call... Picking up from where we left off yesterday...

We currently operate eight stores within the 60,000 to 80,000 square-foot range, with an additional 21 stores of that size in development, five of which are relocations. We are confident about the potential future returns of these larger stores, as we believe they appeal to a broader customer base, take longer to reach maximum capacity, and are less vulnerable to competition as they create a higher barrier to entry.

John is saying that WFMI is digging a wider MOAT. The brand is becoming harder to compete with.

Continue reading "HOW TO READ A QUARTERLY CONFERENCE CALL (PART FOUR)" »

HOW TO READ A QUARTERLY CONFERENCE CALL (PART THREE)

Continuing from yesterday... Interpreting WFMI's quarterly conference call.

During the fourth quarter we opened five new stores: a 51,000 square foot store in Baton Rouge, Louisiana; a 74,000 square foot store in Columbus, Ohio; a 59,000 square foot store in Denver, Colorado; a 38,000 square foot store in Boston, Massachusetts; and a 61,000 square foot store in Omaha, Nebraska. Baton Rouge, Omaha and Columbus are new markets for us. We ended the year with 175 stores and 5.8 million square feet in operation.

They got 175 stores.  Good thing to know, right?   Because how many can they have and how fast are they opening them up?

Continue reading "HOW TO READ A QUARTERLY CONFERENCE CALL (PART THREE)" »

HOW TO READ A QUARTERLY CONFERENCE CALL (PART TWO)

OK. Picking up from where we left off yesterday... reading WFMI's quarterly report.

Our gross margin, direct store expenses and G&A results as a percentage of sales were consistent with our historical averages and with our stakeholder philosophy of producing earnings growth through sales growth rather than through significantly leveraging these particular expenses.

More jargon for kinds of expenses and kinds of net income.   Fuggettaboudit.

Continue reading "HOW TO READ A QUARTERLY CONFERENCE CALL (PART TWO)" »

HOW TO READ A QUARTERLY CONFERENCE CALL (PART ONE)

It is now illegal for a business to tell the Big Guys anything before they tell me.   Yeah, baby!  You gotta love that!  So to make sure they don't end up in Martha's cell block, the CEOs now hold a quarterly conference call open to anyone.   

The magic of technology lets me and you sign in for the call just like a Big Guy -- and we can even ask questions.  But usually I let the Big Guys ask since they get paid for it and usually ask lots of harder questions than I can ever think of.   

The call starts with summary of how my business (remember its ALL MINE (or yours) is doing.  Since the language these guys use to say how they are doing is business language, it can sound incomprehensible and scary.   But it isn't after you've had a bit of language training.  Really good businesses that really do believe their owners should know what's going on even transcribe the call for us to read later (or even listen to).   The briefing below is from Whole Foods.   I'm going to translate it for you guys.  (I chopped it wherever it got boring so here's the link for the whole thing.)  My comments will be in bold.

Continue reading "HOW TO READ A QUARTERLY CONFERENCE CALL (PART ONE)" »

THE MINIMUM SIZE BUSINESS

Someone recently asked me what my minimum BVPS would be to consider a company.

There is no minimum book value per share for a couple of reasons.

First, any book value per share is meaningless without knowing how many shares are out there.  What we really care about is the total value of the business.  We talk about that book value in "per share" prices, but that's just convenient and useful because we almost always buy pieces of a business instead of the whole thing (even though we think of it as buying the whole thing).  Seeing the business in terms of its smallest piece makes it easier for us to figure out what our particular pieces are worth.  Other than that, the per share thing is useless information.

Considering book value or equity (not "per share"), the second reason we don't have a meaningful minimum is that the key to good investing is buying a wonderful business at an attractive price -- and wonderful businesses can, for a very small investor, be very small or very large.  Obviously a small business will have a small BVPS.

The key is knowing you've got the 4 M's.  We can buy all of a laundry business with a book value of $10,000 and Sticker Price of $50,000, or we can buy pieces of Exxon.  This is the beauty of learning The Rule:  it applies equally to purchasing a small laundromat or a piece of Exxon.  And it's so simple: Wonderful business, attractive price.

Now, having taught you all that, I have to also teach you that for you and me the difference between large or small public businesses (businesses that have registered with the SEC to trade pieces of the business in stock markets) and small private businesses is liquidity.

What liquidity measures is your ability to get in or out instantly.  Little investors have liquidity in many more public businesses than big investors do.  We use that to our advantage with the arrows.  If a business is trading at least 1 million shares a day and is priced at $2 or more per share, there is enough liquidity for Rule #1 investors to invest $10,000 or so.

Obviously the $50,000 laundry does not meet the liquidity requirement.  That means that if you buy it, you may not be able to find a buyer to sell it to in some convenient time period. And that makes for more risk unless you really got a great deal, right?  So, after years of doing lots of public and private businesses, I've come to prefer the liquidity of public businesses.

Now go play!

Phil

WHEN INSIDER SELLING ISN'T A BAD THING

A new letter:

Phil,

My question:

I was looking at the MSN investment site tonite and noted on the insider trading link that every single insider who has traded [WFMI] has sold-- millions of dollars worth of shares. Am I missing something or didn't you say that when the insiders are selling it's time to get out?

Sincerely,

Greg K.
Omaha

Greg has a good question: A lot of Whole Foods insiders, including the President, are selling stock. The President dumped 50,000 shares at $135.  And that was most of what he owned. Is the guy worried?  Does he know something we don't know?  Insider selling is always a serious red flag that screams "get out" unless there are mitigating circumstances.

Continue reading "WHEN INSIDER SELLING ISN'T A BAD THING" »

TRADING VS. RULE #1 INVESTING

Hope you all had a good Thanksgiving. Here's an interesting question from Marvin.

Phil,

Need your opinion on something else I have been reading.

It started with Bill O'Neill's book again and was reiterated by some different websites.  They say not to buy stocks under $10 or $15 dollars.  They say that cheap stocks are cheap for a reason.  The one thing that I have noticed is that there are a lot of stocks out there that are under $10 dollars.  I have been looking at the Biotechs and the biotechs seem to have more than their share of under $10 stocks.  How do you feel about cheap stocks?

The reason I ask is I am trying to refine my search rules, do I throw out all the stocks under $10 or $15?

Later...

Marvin

Marvin is asking how he should understand advice from Bill O'Neill (and others) to NOT buy stocks worth less than $10 or $15.  To understand my answer to Marvin's question you need to know where these advisors are coming from.  Not buying stocks that sell for $10-$15 is a trader issue, not a Rule #1 investor issue.

Continue reading "TRADING VS. RULE #1 INVESTING" »

YOUR HOMEWORK: YANKEE CANDLE CO. (YCC)

Here's a homework submitted by Shane (who also did Staples). Yankee Candle Co.

Phil,

I think I have a stock that may be a viable one for my portfolio.  Following is my research, but first let me say a couple of things.  I have not yet been to the training.  I go next Friday.  I have listened to some of the cd's but I have read for several hours on your website.  I don't think I've got it all figured out but here is what I do have.

After some research, I thought I would start with Yankee Candle Company.  Why?  My wife loves them.  There is the MEANING.

Continue reading "YOUR HOMEWORK: YANKEE CANDLE CO. (YCC)" »

YOUR HOMEWORK: STAPLES (SPLS)

Here's an interesting workup.  Notice how Shane is seeing the CEO discuss MOAT.  The things the CEO thinks of as protection against competition - customer service, being the best -  add up to one kind of moat: Brand. 

If they continue to execute on these things, people will continue to buy the brand.  And if they don't, then the moat will be breached and the sales will deteriorate.  So, Shane, if you do this one, you will need to watch to see if the Moat is still good in your business.  Keep an eye on customer service.  Now, on to Shane's letter, and my critique at the end.

Phil,

I am doing an analysis on Staples, spls.  Here is what I have so far.  Let me know what you think.

Continue reading "YOUR HOMEWORK: STAPLES (SPLS)" »

CALCULATING DELL'S STICKER PRICE

Those of you who are using Investools Valuation Tool need to be aware that a calculator is only as good as the numbers you put in it.  Garbage in, garbage out.  I was curious about Greg's assessment of Dell, so I used the valuation tool and immediately saw what had his attention: Dell is priced at $29 but has a Sticker (or Target) Price of $64.  Very attractive if you believe the numbers, so let's look at what's going into the calculation of value, since it's critical to knowing if we have the all-important Margin of Safety.

Continue reading "CALCULATING DELL'S STICKER PRICE" »

HOW DO YOU REALLY KNOW YOU KNOW A COMPANY?

Here's an exchange I had with Greg, who's been trying to find something to buy.  He understands how to run the numbers, but he's stumbling on Meaning and Moat.  Read on.

Phil,

Dell does seem cheap, but no one seems to be taking the bait.  And I don't feel like I KNOW the business.  In fact, I am not sure how to really know any business.

I have read several entries on your blog where you say that you agree with the research someone has presented and often let them know something that they didn't see, but then you tell them that if you only knew the company you might invest in them too, but you don't so you won't. 

So how do I know a business like Dell that is selling many products worldwide with competition coming at them from every angle and from every country.  Some of their competition I have never even heard of because it is some small company in China or Taiwan or somewhere churning out no-name computers at dirt cheap prices and some overseas markets are eating them up. 

I feel like if I waited until I knew a company, I would have to wait until I was the CEO of the company.  Since this will never happen, I feel like I can't properly invest in anything. 

Continue reading "HOW DO YOU REALLY KNOW YOU KNOW A COMPANY?" »

WHY RULE #1 WORKS

I got this message from Jim yesterday. He wants to get started with Rule #1, but he has some concerns about taking risks. Our exchange below is a good, broad intro to what we're doing here on the site and in my book.

[edited for length]

Dear Phil,

I saw you last week in Omaha and was energized.  I was inspired to hear your story and so desperately want to make forward progress in mine.  I have had a number of setbacks including a failed business, a brain tumor & then nearly a year with no work.

I am thrilled to be alive, proud to be an American and Thank God every day that I am a Christian who had faith enough to "just keep working and hoping for a better day tomorrow."  (I may sound like a space cowboy, but I am not.  3.0 GPA from Nebraska, All-American Swimmer at NU, outside sales rep in 6 industries over the last 20 years that required intense crash course learning.)

I am writing because my wife is a total skeptic.  I don't blame her after some of my poor decisions.  She will freak out if I tell her I am gathering money to invest in the stock market. 

Continue reading "WHY RULE #1 WORKS" »

HOW TO KNOW IF AN ADVISOR IS SMART

If you've ever gotten a mail or email like this one, it's nice to know how to evaluate not only the stock they are touting, but also the investing wisdom of the touter:

XYZ Profit Picks: XXXX Is A Winner!

"Energy is going to keep rising and we have found the perfect company for our readers. This company is on the move and making money. This company can very easily go over $X.XX fast, so get in early and enjoy another great pick. Good luck and we are glad to bring you great success with our picks."

This is from an unsolicited email I got today.  But most of your financial advisors are doing something more or less similar.  So how do you know if they have a clue?

Continue reading "HOW TO KNOW IF AN ADVISOR IS SMART" »

SHIELDING YOUR $$ WITH MOS

Ben is a SWAT officer.  I really like this guy.  He deserves to do what he wants with his life when he's done protecting us.  I'm going to help him make that happen. 

This post is also a great starting place for all beginners.

On 11/3/05, Ben S. wrote:

Mr. Town, Ben S. here from Apollo. I wanted to see about getting started? I know ur very busy any suggestions on were to begin   Thanx Ben

From:  Phil Town
To:  Ben S.
Date: Thu, 3 Nov 2005

Hi Ben!

Great.  Let's get started.  First read my blog.  Find the Archives and click on February this year - start there and just go through the posts to get a feel for what's going on.  If you see the post on Garmin, the guy who found that one is a cop in Kansas and he just rocked it.  About 50% gain in 4 months.  So read through, then let me know when you're done and we'll go through one business together: Harley Davidson.  And see if we want to own it these days.

Phil

Continue reading "SHIELDING YOUR $$ WITH MOS " »

YOUR HOMEWORK: ASVI

Well folks, Jason Hawkins has just pulled up what might turn out to be a very nice gold nugget.  Read his analysis (from 2 separate emails), then go to the bottom to see what I think.

Email #1:

Phil,

Let me give this stock evaluating thing a try.  I would appreciate your feedback.  I ran a Global Search using the InvestTools website and below was the criteria:

Phase 1 :  Minimum 5 green Arrows
Phase 2:  MG/Zacks min. 3.25
Price Pattern: min. 2.5
Volatility : min. 2.0

I figured a sticker price of $54.01 taking into account the 50% margin of safety.  The current stock price is $22.97.  (Did I do this right???) ASVI... The stock recently got the 3rd green arrow representing a buying signal.

Continue reading "YOUR HOMEWORK: ASVI" »

YOUR HOMEWORK: QUALCOMM (QCOM)

Jeff is deep into Qualcomm. Here's his analysis, then mine.

Hi Phil,

I really like QCOM, here is my analysis:

Meaning

By partnering with and acting as an enabler to the business activities of these participants, QUALCOMM ultimately enables consumers, professionals and government entities — the end users who benefit from the success of the wireless industry today and into tomorrow.

Continue reading "YOUR HOMEWORK: QUALCOMM (QCOM)" »

FACTORING IN THE BIRD FLU: THE EFFECT OF GLOBAL EVENTS ON YOUR INVESTING DECISIONS

Here's a quick Q&A from Sandra.

Hi Phil,

Please bear with me, I'm still trying to catch on.

Let's say Sanderson Farms met Rule # 1.  Do you factor in global events, like the bird flu? How does this effect your decision?

Thanks,
Sandra

Good question, and one we haven't addressed yet. Here goes:

Continue reading "FACTORING IN THE BIRD FLU: THE EFFECT OF GLOBAL EVENTS ON YOUR INVESTING DECISIONS" »

HOMEWORK: MSC INDUSTRIAL DIRECT CO. (MSM)

This Homework was submitted by Chad, an Investools user. Read on:

Phil,

I have noticed the investools valuation analysis numbers are much different than what I find on other sites. What numbers would you say are correct? Am I just looking at them incorrectly? For example Projected P/E for MSM. I looked at Yahoo finance and it shows a P/E 1 yr @ 19.32 but the investools shows a 1 yr P/E of 57.34. If I want an accurate assessment of P/E what should I be looking at?

I have looked into this company for a couple reasons which lead me into my 4M's:

Continue reading "HOMEWORK: MSC INDUSTRIAL DIRECT CO. (MSM)" »

HOMEWORK: TRUE RELIGION JEANS (TRLG)

Kat at eGirl Investments is interested in True Religion Jeans, TRLG. She knows someone with the company and has heard they're growing so fast they had to move 3 times in the past couple years. Here's how I did a quick analysis.  This took, by the way, about 1 minute to decide and then 10 minutes start to finish using Success tools

Here's the one minute: It has a two year track record, a new brand of high end jeans, great numbers and absolutely no possible way to predict if it will be around in ten years, much less twenty.  Would you want to own this business if it was the only way for your family to get money for the next 100 years, or would you like to own something just a little more predictable? 

Continue reading "HOMEWORK: TRUE RELIGION JEANS (TRLG)" »

HOMEWORK: MANNATECH (MTEX)

One of my Homework students, Robin, did her 3 Circles exercise, then went to the Industry Sector list to find something that has Meaning to her. She came up with Mannatech (MTEX), a maker of nutritional products.

I asked her to research Moat. Below is what she said.  Make sure you read to the end, because I found some information that may change her mind about her understanding of this company.

First, I asked her to identify Mannatech's moat from our list of 5. Here's her response [edited for length]:

Phil,

The Moat and Mannatech. How about ALL of them?

Continue reading "HOMEWORK: MANNATECH (MTEX)" »

HOMEWORK: SANDERSON FARMS (SAFM)

I just read this article by Bill Rempel, a guest commentator on Free Market News Network, an excellent, if advanced, market thoughts forum.  He does an analysis of a chicken business from the point of view of a value investor

He's looking specifically at Sanderson Farms.  After going through some of the numbers for Sanderson, Bill looks at price vs. value and thinks that the price today is somewhere between fair and a real bargain depending on one's assumptions about growth. 

Here is his conclusion:  "In summation, the picture I see is a small, growing company that is poised for long-term success, whose stock is currently trading at a significant discount."
 
I thought I'd do a quick Rule #1 analysis and see if we agree.

Continue reading "HOMEWORK: SANDERSON FARMS (SAFM)" »

HOMEWORK FOLLOWUP: STRYKER CORP. (SYK)

Remember our Stryker Homework? Here's a followup from Lyn:

"I did a little more research on Stryker and found out that the earnings dip in 1998 and 1999 were due to the acquisition of Howmedica from Pfizer.  And last year Stryker acquired SpineCore, Inc. and reported only 3% growth but the underlying growth was 29%.

The orthopedic implants industry itself may have a slight slow down due to pricing power but in the Grand Scheme of things they are talking only about 1% or 2% which is not a dramatic change.  Styker as a company itself has been conservative with their pricing increases.  So even if a 2% price increase goes to 0% it really will not affect their ability to continue their 20+% growth.

So this company is looking more and more like a Rule #1 Company!  Am I missing anything important?"

Nope. And then she asks whether, if the price starts to move up, we should jump in.

Answer:  We only go when the big guys go.  We're trying to buy something that is going to go up 50% in a reasonably short time - a few months.  It won't do that without Institutional money piling in there, so there isn't any real point in trying to get in way before these guys do.  So wait for the arrows or, if you are on MSN, watch the three Tools:  MACD, Slow Stochastic and Moving Average.

RULE #1 RECAP POST: 4M AND MORE

A lot of readers have been contacting me with repeat questions about doing a 4M analysis. Because of this I took a cue from the Carnival of the Capitalists and decided to host my own mini-Carnival here on the site, as a recap of useful Rule #1 posts that have all the info you'll need.

I'll link to this post in the sidebar and add all of this to the FAQ as well.

First, here's a basic summary of Rule #1 investing from the FAQ, and the site disclaimer, which explains what Rule #1 is about, and why you have to make your own decisions about what companies to buy. My Watch List post covers the same.

Now, onto the fun stuff...

Continue reading "RULE #1 RECAP POST: 4M AND MORE" »

ON WATCH LISTS: WHY YOU MUST DO IT YOURSELF

One of my regular readers, Jon, asked in the comments what stocks are on "our" watch list... so I thought I'd better remind everyone that "we," collectively, don't have a watch list.  I have one.  You have one.  And some of the companies might be the same, but probably not entirely.

The reason "we" don't have a list is entirely based on Rule #1: Don't Lose Money.  In order to not lose money, what we buy has to have Meaning to us, individually.  For a business to have Meaning, we have to understand what it does well enough to know it is a business that is going to be doing well 20 years from now -- and that it doesn't violate our own moral code.  "We" don't have a moral code.  You do, and I do.

Continue reading "ON WATCH LISTS: WHY YOU MUST DO IT YOURSELF" »

THE BIG FIVE, NAHMEAN

There are five numbers that we have to look at to determine whether a business has a Moat.  Moat, of course, is some sort of protection by which a business automatically wards off competitors.

Protection comes in a lot of flavors.  Some bad boys protect their urban businesses with tech nines, nahmean.  But we don' be investin' dere, bro, nahmean?  We gonna move up to a better class of management that does their fighting with their brains, not their bullets.  It's a lot safer and has a much more consistent success rate.

So we wantsome sort of Brand (when you want a Coke, a Pepsi just won't do), Secret (patents and trade secrets), Switching Cost (too much hassle & expense to switch from Windows to a Macintosh), Toll Bridge (can't advertise to all of Washington, D.C. without buying ad space in the Post), or Low Price Moat (Walmart).

Any of these offer protection without a lot of fighting.  No tech nines. Just an occasional lawyer. The Big Five numbers are a clue that there is a big Moat in place.  And if the Big Five are bad, ain't no moat, bro.  You want to defend that castle you better count your ammo, nahmean?
 
The Big Five are just:
  1. Return on Invested Capital (ROIC); and the growth rates for
  2. EQUITY
  3. EPS
  4. SALES
  5. FREE CASH
We want to see all of these at 10% or better and not dropping.

Continue reading "THE BIG FIVE, NAHMEAN" »

THE STOCK SPLIT GAME

Starbucks just announced it's going to split its stock 2 for 1 at the end of the month. What is going to happen to the stock price? Nothing actually, although it's going to look like something big happened. Stock splits don't change the market cap or the sticker price (which we know are often different) one single cent. Not a penny. All a stock split does is change the number of shares and the price per share. I'll repeat: this does not change the the total value of all those shares by even one cent.

Continue reading "THE STOCK SPLIT GAME" »

HOMEWORK: STRYKER CORP. (SYK)

Lyn did a great job of analyzing Stryker (SYK), a maker of orthopedic products.  Read on:

Phil,

Here's my homework.  If it's any good, maybe you can post some of this on the website. First the BIG 5 numbers:

Continue reading "HOMEWORK: STRYKER CORP. (SYK)" »

HOMEWORK: OIL STATES INTERNATIONAL, INC. (OIS)

Another great homework of sorts from someone using the INVESTools software. (Not a true homework, as he's already bought the company I break down for him after his letter.)

Hi Phil,

I really enjoyed your recent presentation in Cincinnati.  I am also really looking forward to your book coming out in March.

I took your advice and purchased the professional investing tools from success magazine and have started to put the information into practice.  I only purchased the 1k program so I will stick to buying stocks for now (the other programs offer the options course for big $$).

I recently purchased OIS for my first stock. 100 shares at $34.90.  Has appreciated a little so I will continue to sit tight and let the arrows be my guide.

I have just a couple of questions for you if I may.  When you go to the "valuation analysis" on the website to find the target price so you can look for stocks at least 50% of that number.. the site has a built in "discount rate of 15%" on the far left.  Is that number supposed to be 15% becasue I know you can change that field? If not 15%, what number should be used?  Also, can you buy small cap nasdaq with the same rules and still be a prudent investor or is it best to stay with the NYSE?

I really appreciate any insight you can provide.  Thanks so much!

Greg
Dayton, OH

PS Can you recommend other good reading material until your book come out in March?

Continue reading "HOMEWORK: OIL STATES INTERNATIONAL, INC. (OIS)" »

SHOPPING FOR CERTAINTY

Rachael has done a very nice job of looking deeper into Netflix for us.  She's compared Netflix and Blockbuster.  Here's what she found out (Read everything: this is a great example of someone getting a true feeling for a business. My conclusion is at the end.):

I've been digging a little deeper into some reports, and I have to admit, most of the numbers are still meaningless to me, so bear with me here. I looked up the quarterly reports for both Netflix and Blockbuster and found some interesting differences...

Continue reading "SHOPPING FOR CERTAINTY" »

INVESTOOLS SEARCH PARAMETERS, PART II

Here's a followup note from Jon, who wrote in a few days ago to share his Investools search parameters.

Phil,

I forgot to mention that I set each parameter to a minimum of 10%.  I also have since found the EPS consistency for 5 and 10 years which pares the list down to 31 and eliminates the need to look at the trends manually (although, I still like to do that anyway).

I gotta tell ya Phil, when I saw you in Kansas City, I was pretty hesitant about buying the package.  And, after I did, I thought "man, I'm a sucker; I just wasted 500 bucks."  But, now, after having time to really start to use the tools and see what else is really out there - it really is pretty cool.

On another topic, do you use any other technical indicators besides MACD and stochastics for timing your entries and exits?  I've started looking at Bollinger bands and a few others, but I'm trying not to get too enamored in the technicals.  Also, do you primarily use the Big Chart for seeing institutional interest or are there other indicators
that are more specific to a stock rather than its group?  Just curious.

Thanks,

Jon

Continue reading "INVESTOOLS SEARCH PARAMETERS, PART II" »

ON BUD AND THE IMPORTANCE OF EQUITY GROWTH RATE

Here's a followup letter from Dinesh, who pointed out my Bud oversight the other day. Keep reading this post to the end, because I go on to explain why Equity Growth Rate is so important to Rule #1 investors.

Hello Phil,

one more thing...

Buffet bought BUD news came out from company (not from BRK) in April maybe on 21st.  But since then BRK has not make any comments (They make no comments in either case if they are buying or not. that is their policy.). However they need to disclose their holding to SEC every quarter. and they did not disclose BUD in their last report in August. (in which they listed Lexmark, Home depot, Lows and Comcast etc.)

Continue reading "ON BUD AND THE IMPORTANCE OF EQUITY GROWTH RATE" »

HOMEWORK: CENTRAL EUROPEAN DISTRIBUTION CO. (CEDC)

Plenty of good homework to share with readers this week. This one comes from Marvin in Ohio.

Phil,

I have taken the stock class when it was recently offered in Cincinnati.  I have been using your blog and the investools website.  I have learned so much.

I wanted to email you to make sure that I am understanding all of this new found knowledge.  So here is my case study:

Company: Central European Distr Co
Symbol: CEDC
Current Price: 42.12 (9/26)
Phase I: 7/3
MG-Zacks: 4.00
Price Pattern: 4.00

Continue reading "HOMEWORK: CENTRAL EUROPEAN DISTRIBUTION CO. (CEDC)" »

HOMEWORK: NETFLIX (NFLX)

Here's a great first homework assignment from Rachael, who chose Netflix (NFLX) after doing her 3 circles assignment (Passion, Talent, Money) to locate an Industry Sector. I think she did a terrific job. Keep reading.

Hi Phil!

I was reading your blog this morning about the Alex and 4Ms, so I did some research on one of the companies I have my eye on...Netflix (NFLX). Would you mind giving me a critique of my thinking?

Netflix is something that fits into my 3 columns so to speak, movies are a passion of mine, I spend a lot of time watching them (very good at this), and definitely a lot of money too, so this seemed like a good match for me in the "meaning" department. In addition, I admire the company's revolutionary idea that has truly changed the way America watches movies.

Continue reading "HOMEWORK: NETFLIX (NFLX)" »

MORE IN INVESTOOLS SEARCH PARAMETERS

Building upon this earlier post about searching for Rule #1 companies on Investools, here's an email that came in last week from Jon. The parameters he's using may be helpful to others using the software to research Rule #1 companies.

Phil,

I was reading your recent post on searching using InvesTools.  I did a similar type of search this weekend.  I used the prosearch and these parameters:

Continue reading "MORE IN INVESTOOLS SEARCH PARAMETERS" »

MAYBE THIS BUD ISN'T FOR ME AFTER ALL!

Dinesh read my post on BUD and had some questions that deserve a deeper look on my part.  His biggest concern is that debt is rising faster than sales and EPS, and that the business has been buying back its own stock for ten years - which raises the issue of whether it's been undervalued all that time, or if managment has been playing a game with our money.

First let's take at his email, and then I'll post my response to his research at the end.

Hello Phil,

I am regular reader of your Blog and am thankful and grateful for sharing your knowledge so generously with all.

I have a question. I am trying to understand if BUD is YUMMMMy or MMMM.

You mentioned BUD is good buy. Supposedly Warren Buffet also bought.  However I have some doubts. Could you please explain.  I checked 10 years summary on MSN.
From tables it is clear that company's Long Term Debt is growing at higher rate than Sales and Net Income. EPS is growing but at the same time number of shares outstanding is reducing.

Why would any company buy back its shares for 10 consecutive years? Was it undervalued for so long?  If we say that company was using extra cash wisely then why debt was rising?  I am really confused here.  Could you throw some light please.

Thanks & Regards,

Dinesh

Excellent questions so let's dig in and see if we can get to an answer.  I might have to dump this thing if Dinesh's concerns turn out to be valid:

Continue reading "MAYBE THIS BUD ISN'T FOR ME AFTER ALL!" »

WHERE TO FIND MISSION STATEMENTS

Quick note: I just discovered Man on a Mission, a blog that compiles company Mission Statements. This is a great way to begin researching management for potential 4M/Rule #1 companies. Reading a Mission Statement is a good start to finding out whether Management has a BAG (Big Audacious Goal). [If you need a refresher on how to identify a BAG, check out this EXBD post. Scroll to the bottom.]

REFRESHER COURSE: HOW TO BEGIN IDENTIFYING 4M BUSINESSES

The following question came to me from Alex, age 16, who may be the youngest Rule #1 investor to write to me so far. He saw me speak in Boston a few months back and has been emailing me since, practicing by doing a 4M analysis on Delta. For those who, like Alex, don't know where to start when picking a company to research, read on. This is a good refresher for regular readers and a good intro for new ones.

Mr. Town,

I listened with rapt attention to your speech at the Boston seminar, but I must admit that I can't afford success magazine.com and have to use something called smart money instead (same basic idea… imaginary money, buy imaginary stock), and I have very little idea of what I am doing. And I am ashamed to concede this (I hope this doesn't reveal me as ignorant) despite your useful tips and everything, I still have no idea what companies I should be picking…

Alex

My response:

Continue reading "REFRESHER COURSE: HOW TO BEGIN IDENTIFYING 4M BUSINESSES" »

WHAT "UNDERVALUED" MEANS

For those who are new to the blog, I wanted to express again what an undervalued company is in Rule #1 terms. Here's an email I sent to Tom, the same reader from the previous post:

Tom,

Let me add one more thought regarding 'undervalued'. My view of undervalued is formed from buying private businesses and venture capital investments.  I don't see it the way Wall Street sees it at all.  Undervalued, to me, means the following:

Continue reading "WHAT "UNDERVALUED" MEANS" »

USING INVESTOOLS TO SEARCH FOR RULE #1 COMPANIES

For those using Investools to do their company research, here's a helpful exchange that shows how to use their search tools to hone in on potential Rule #1 companies.

Hey Phil,

Just curious about the "Undervalued" section of searches available on the Investools web site. Do any of those searches hinge on the numbers you are typically looking for with respect to an undervalued company?

Regards,

Tom

And I said:

Hi Tom,

The Success "Undervalued" searches are based primarily on inputs that look for a value type stock -- something that has been knocked down in price from where it was or where it should be based on historical data.

Rule #1 is not value investing, so this set of searches doesn't really do anything special for us. You will occasionally find a good Rule #1 stock in there but I can say that about almost any search... except the global search with Phase II inputs of 3.5.

Continue reading "USING INVESTOOLS TO SEARCH FOR RULE #1 COMPANIES" »

START AT THE BEGINNING: LEARN AN INDUSTRY

Here's an email from Keith, who served in the Gulf War and has had some tough times since coming back. We'd been going back and forth about how to get him started in investing when he asked me the following question:

From: keith
Date: Sep 19, 2005
Subject: Weekly Tasks?

Other than the Get Motivated seminar DVD's and workbook. What do you suggest that I do each week since I am a beginning investor (this may be a good thing to put on your blog site if not already there) in the way of Stock Market news programs (such as Jim Cramer's Mad Money), magazines, newspapers, websites, etc. I don't want to analyze things to death, but in essence if I could only watch / read 2 to 3 things within each catogory each week what would they be? OR should I just solely focus on the materials (DVD's, workbook, success website) I have already?

Can't wait to get your book in March '06.

Thanks Again.

Keith

And my response:

Continue reading "START AT THE BEGINNING: LEARN AN INDUSTRY" »

YOUR HOMEWORK: SMITHFIELD FOOD CO. (SFD)

Here's a homework assignment submitted by Rick S. on September 18.

For new visitors to the blog: homework assignments are single-company analyses submitted by readers. (For rules on how to submit a homework, go here... then email me.)

Each homework attempts to show whether a company is a good buy for a Rule #1 investor -- in other words, is it a 4M company?  Is it a wonderful company we understand, and can we get it at an attractive price? (A discount to value?)

I critique students' results here on the blog to see if they're on the right track.

The case study below is a good example of a Homework.  Here's Rick's letter:

Phil,

I've been working on your formula and would like you to critique my work.

The company is Smithfield Foods (SFD). Current EPS is 2.59, Current P/E is 10.6, Growth rate – Historical = 24%, Analyst = 10%. Future EPS (10 Yr) = 6.27, Future Stock price = 125 MOS = 15.68 Currently selling for 27.39. The only variable I wasn't sure where you found it was the analyst projections. (I used the est. earnings for 5 yrs under MSN, research, earnings)

Looking forward to your response.

Rick

And here's what I told him:

Hi Richard:

Smithfield makes pork stuff and ships it all over.  People have been eating pork for about 10,000 years, so it's likely we'll continue. Gotta like that.  I like the work you did on the numbers to verify that these guys have a Brand Moat and have a predictable future, but let me take you through it again my way:

Continue reading "YOUR HOMEWORK: SMITHFIELD FOOD CO. (SFD)" »

WHY SPECULATION IS A BAD IDEA

Imagine that you are a new investor and you get this advice:  Buy businesses that you don't understand, which don't have a track record that you can make any kind of coherent prediction from, and which big institutions are buying but you don't know why.  Oh, and don't even consider what the business is worth or whether the numbers make any sense at all.  Just buy it.  It could go up fast and you don't want to miss the boat.
 
This was the advice many people were hearing from brokers and investment gurus in 1999-2000.  This advice cost so many people so much money that it is truly amazing to see it in print so soon after the 2000-2003 market melt-down.  But there it is, in black and white, at IBD's Investor's Corner on Friday.
 
The article starts off with about as stupid a statement as an investor could ever make regarding your research into a business that you plan on buying: "Ignorance is bliss." 

Actually, the author may be right given that what he is proposing isn't investing at all - it's pure speculation.  Speculators, by definition, are working the greater fool theory of investing -- buying with the hope that an even bigger and even more blissfully ignorant fool will come along to buy this thing from them for more than they paid.  For a born-to-lose speculator, ignorance is, indeed, bliss because knowing that they are about to get nailed for their money would be all too painful.  Better to just stay stupid and hope everything just goes up. 
 
Don't hold your breath while you're waiting for this market to launch.  It could be another 15 years of nowhere.
 
The investing strategy that has compounded money at 20% plus for the last 80 years and will continue to do so for the next 80 years takes the view that the market might not just go up.  Therefore you must buy a stock as a business, know the value of the business you are buying, wait for the inevitable market flucuation, and a buy it at a big discount to value. 
 
Ignorance is bliss?  Not with my money it isn't.

DON'T FORGET THE "MEANING" PART OF 4M

A nice guy named Tim is taking the Success investor education class. He emailed me to ask me about the following. Some of the info I'm using for the analysis is time sensitive, so I'm going to post this as/is and not worry about linking to the numbers online. Everyone should know where to find them on MSN Money and Yahoo Finance by now.

The important thing to look out for here is Meaning. Make sure you understand the business: what it does and what its moat is. Good numbers at a glance aren't enough.

Hi Phil,

I've found a couple of stocks that pass both Phrase 1 and 2 and whose current price is about half of the Target price – OIS and XXIA. Plus both of these stocks had 3 greens as Friday. So, I'm planning to buy both.

My response:

Continue reading "DON'T FORGET THE "MEANING" PART OF 4M" »

GARMIN'S UP... NOW WHAT?

You all remember Mark, right? The Garmin guy? Well he left this comment on the blog a few days ago:

Hi Phil...

Just a short note to tell you that my GRMN position is up 45% as of today! How long should I ride this?

Mark

Here's what I said:

Hi Mark,

Congratulations on bringing Garmin to our attention. A lot of people have benefited because of your work on this. And now, especially if you've done a good job of finding a Rule #1 business with a big MOS, the time will come to ask, when do I get out?

First, understand that the price of a business goes up because the Big Guys, the institutions, put more money into it than they are taking out. That's the only reason the price goes up. Everything else is secondary. That means that anything can go up. Even a bad business can go up if they buy enough of it.

Continue reading "GARMIN'S UP... NOW WHAT?" »

MORE ON THE RULE OF 72

Here's another  exchange I had with someone about Growth Rate & The Rule of 72. I'm also playing around with a new post format for letters. Let me know if you like it.

On 8/29/05, Bret wrote:

Phil,

I've been addicted to your blog site. My wife is starting to call me a "stock geek."  You see once I get interested in something, it becomes somewhat of an obsession.  At least early on.

Anyway, I've been trying to use the formulas from your site in an excel spread sheet.  The one piece of information I'm have the most trouble locating on MSN Money is the Growth Rate for a stock. Could you please tell me where that percentage is located and is it called anything else?

I worked out the spreadsheet for the Eli Lilley drug stock from the blog entry on the 26th and it seemed to work out in my spread sheet.  This stock sounds extremely bloated at this time and if I'm correct, I think the fellow should sell it at the first chance he gets.  It's like dump it and run, FAST!! before anyone realizes.  Am I right?

Continue reading "MORE ON THE RULE OF 72" »

SHORTING STOCKS

Here's a good question I just got asked...

If you find a business that is massively overvalued like LLY seems to be right now, would you short it to make a bundle when it comes down?

Always do a 4M look at a business before you consider shorting (or doing Put options) to see if it has:

You must understand the business or you have no business shorting it. What you must understand is why it has to fail.

Continue reading "SHORTING STOCKS" »

THE RULE OF 72

Here's a question I get asked every day, and an answer I think will help everyone doing a 4M company analysis.

How do you calculate the equity (or book value per share) growth rate? (And I'll expand that to include sales, EPS and cash growth rates.)

I'm going to teach you how to do this in your head. Once you learn it you will understand why Warren Buffett doesn't need a computer to figure out whether he likes a business or not. Here's how:

Continue reading "THE RULE OF 72" »

LLY: HOLD OR SELL?

Eddie from Grand Rapids recently wrote to me to ask advice about what to do with inherited LLY shares. See below.


From: Eddie
Date: Aug 3, 2005
To: Phil

Yesterday in Grand Rapids I told you we (my wife and I) were making 47% interest this year. She corrected me last night and said on our personal portfolio with InvesTools we are making 37%. Obviously, not disappointing at all!!   ;-)

Question. When I returned to the hotel after the seminar my office called and said that we received a registered letter from an attorney informing us that we will receive soon $275,000 from the estate of an elderly supporter of our 501(c) nonprofit Christian ministry.

The attorney wants to know if we want it cashed out (mostly Eli Lilly drug stock), or transferred to our Ameritrade account.

All we know about the stock market is what we've learned from you and your program.

Question 1: Would you advise us to take stock, not have them cash it out?

Question 2: Do you have some advice on what we should do to use this "extra" income to our ministry become an income stream for the ministry?

Thanks in advance for your advice...and THANKS for InvestTools!!

Blessings,
Eddie S.

Continue reading "LLY: HOLD OR SELL?" »

EXBD: MOAT & MANAGEMENT

Here's a followup 4M exchange between me and Jason, who's started digging into EXBD's Moat and Management. He's done a great job so far, but there's still more work to do. See below.


From: Jason Moore
Date: Aug 23, 2005
To: phil town

Phil,

Some tidbits that I have come across from an independent website dedicated to providing information about companies for prospective employees. This pertains to both
CEB's management and, more importantly, its culture (what I believe to be their largest Moat).

Continue reading "EXBD: MOAT & MANAGEMENT" »

ARE NEWSPAPERS REALLY A GOOD BUY RIGHT NOW?

Note: I wrote the following this morning... but couldn't find time to post it until now.

I saw an article in CNN Money about newspapers being undervalued and perhaps ripe for some mergers.   Newspapers are Toll Bridge Moat companies – if you want to advertise in a newspaper, you only have one or two choices in each city... and you have to pay to play.  I can understand that, and if I can find a newspaper that looks at the world in a way I can agree with, this industry group could be a good one to get into at the right time.   Here's how I go about checking it out quickly.

Continue reading "ARE NEWSPAPERS REALLY A GOOD BUY RIGHT NOW?" »

YOUR HOMEWORK: CORPORATE EXECUTIVE BOARD (EXBD)

This homework is from Jason Moore, who saw me speak in Nashville and wanted to take a stab at a 4M analysis. I think he's done a great job so far. Keep reading. The company is Corporate Executive Board (EXBD).

(The screenshots he sent me may be a little blurry, but they'll give you an idea of how he arrived at his results.)


From: Jason
To: Phil
Date: August 3

Phil,

I first heard of your concept at the Nashville Get Motivated seminar a few months ago. I signed up for the one day Success Magazine seminar and followed through and started their Stocks and Options coaching. Since then I continue to read your blog, and I have been very impressed with the way that you respond to your readers. So, I am going to give this thing a shot.

Continue reading "YOUR HOMEWORK: CORPORATE EXECUTIVE BOARD (EXBD)" »

HOW DEEP SHOULD RULE #1 INVESTORS DIG?

I love this comment from Patty H.  She is serious about being a proud owner of whatever she is putting her money into.  Believe me, if more of us feel that way, we will change the way business works.  Read on and see more from me at the end.


From: Patty H.
Date: Aug 15, 2005
Subject: Biotech Investing
To: Phil

Dear Phil,

I have been studying your web page and have become very aware of all the moral issues associated with investing. In Sunday's local paper I read a very interesting article stating that DuPont is now getting into the Biotech world with a green product called Sorona. The logo for the new plastic is "Clothing from a cornfield."  They will use biotechnology to convert corn instead of oil into plastic.

As a nature lover I know I want to invest in a green company so this really peaked my interest. DuPont is not nearly green enough for me so in doing some investigating I found that Sorona resulted from a long term collaboration between DuPont and a company called Genencor International. I started to research Genencor and liked everything I read. They were ranked the number one medium size company to work for the year from HR Magazine, so I knew they were good to their employees. Things started to look up because they were a very green co. too, again something I really wanted. I then found out they were recently purchased by a company called Danisco and their stock would no longer be publicly traded. I was not crazy about Danisco...

Continue reading "HOW DEEP SHOULD RULE #1 INVESTORS DIG?" »

HOW GOOGLE'S NEW OFFERING AFFECTS RULE #1 INVESTORS

I just saw that Google is in the process of diluting its current shareholders by 14 million shares to raise $4 billion, diluting me by 8%.

Remember that Rule #1 investors act as if we own the entire business -- so what does this mean if we like Google and feel like we own the whole thing?

It means the management just decided to take our pie -- which we own all of -- and cut a slice of it out and sell it to someone else.  On a per share basis, they just hacked about $20 a share out of my wallet.  That kind of sucks, doesn't it?

I've given them the right to do it (somewhere along the line the shareholders approved issuing another 90 million shares of stock for just this sort of possibility, so management doesn't have to ask for permission).  But why would I feel good about having 8% of my pie get confiscated and sold to someone else?

Continue reading "HOW GOOGLE'S NEW OFFERING AFFECTS RULE #1 INVESTORS" »

GENERATING EXCEL NUMBERS

I'm getting a lot of questions about where to find the numbers used in the Excel formulas here on the blog, so here's the info, for those who are practicing. Most of this will also be in my book.

Estimated growth rate:  The best proxy for the future growth of value of any business is the equity or book value growth rate.  You can find that on MSN Money by going to "Key Ratios" (under Research: Financial Results in the sidebar), clicking on "Ten Years" and calculating the book value per share rate of growth with the =FV() formula. 

Continue reading "GENERATING EXCEL NUMBERS" »

DETERMINING BRAND MOAT

Hi! I'm back.  My email buddy Jon had some questions about determining Moat. He wanted to know why it is that certain companies, like Panera or Starbucks, have Moat on a commonplace product like sandwiches or coffee. My explanation is below.


On 7/29/05, Jon wrote:

Phil,
The one area that I'm struggling with a little is the moat.  Maybe it's just personal preferences.  I have the same problem with Starbucks.  I can see that they obviously have a moat, I just don't understand why.  I mean, it's just coffee.  I don't understand why people are willing to pay a premium for Starbuck's coffee vs someone else's.  I have the same problem with Panera's sandwiches.  I think they're similar to Schlotski's and to a lesser extent, Quiznos.  They obviously have some competitive advantage or they wouldn't be doing as well as they are.  But is it durable?  I don't know.  I just don't quite "get" it.

Jon

On 8/1/05, Phil wrote:

Good thought on Moat. There are five Moats:  Price (Walmart), Secrets (patents), Switch (ADP back office), Toll (Utility), Brand (Coke, Gillette).  Clearly the first four are not moats for Panera or Starbucks...which leaves Brand.

Continue reading "DETERMINING BRAND MOAT" »

HOW TO RESEARCH MANAGEMENT (PNRA)

I want to show everybody the kind of digging into the management of a business that you can do right around home.  In the Comments on the "Heads up on Panera" post, John is ripping into how Panera is being run and piece by piece the management seems to be doing things better than most businesses that they are going to compete with.  In the process he found out that they have their sights set on a growth rate of 21%.  We can use that number to confirm the Sticker Price.  This is really good work from John so I'm including the whole Comment:

Continue reading "HOW TO RESEARCH MANAGEMENT (PNRA)" »

TOL AND STICKER PRICE

Here's a homework back-and-forth between me and Adam, who saw me speak at the Get Motivated seminar in Philly. Follow along and drop a note in comments if you have anything to add about Toll Brothers (TOL).

I'll put this in the FAQ too because it answers a couple common questions: 1) How to buy $1 for $0.50 and 2) Where to find the Sticker Price / Target Price on Investools Valuation section.


On 7/11/05, adam wrote:

Hi Phil,

My name is Adam L. I saw your seminar in April just outside of Philly. I just purchased investools over the phone last week. I am so excited and ready to do this!!!! I wanted to know if I could regularly email you with questions? Would that be ok? I read David Bach's book "Automatic Millionaire" last year and I have been using some of his strategies to save up and I invested some of that savings into investools....which, I know, will make me a millionaire someday. (hopefully sooner than later). I am looking forward to gaining all the knowledge that I can. I cant wait to read your book next year when it comes out. I guess my first question is...where do I go in the toolbox to find where you displayed the undervalued stock? For example a stock is going for 50 cents but worth 1 dollar. Please help me out I am just getting started and trying to absorb everything I can.

Talk to you soon,

Adam


on 7/12 phil town wrote:

Hi Adam,

Sure, you can send me questions anytime. I'll do my best to respond quickly.

As for getting $1 for $0.50, here's how it works:

Continue reading "TOL AND STICKER PRICE" »

PANERA (PNRA) PART II

John D. signed up to do Investools investor education and tackled an analysis of Panera as one of his first 4M companies. Good timing, considering we're looking at Panera this week. I helped him out with some of his spreadsheet calculations, and he got back to me with some research about PNRA's management. See below.


To: Phil

From: John

Date: July 18

Phil -

Please check this - I did this on Panera Bread Company using the Investools website for info. Let me know if I've got it right now, or where I need to fix the formula. Thanks for the help.

John

Continue reading "PANERA (PNRA) PART II" »

THE WHYS BEHIND THE BUY

Here's an email from John, who's been reading the site and teaching himself how to use the Excel spreadsheets to figure out whether a company is at the right price.  He still had a few questions. With his permission I'm posting his spreadsheet set up and his questions for the rest of you to reference.


To: Phil

From: John

Date: July 14, 2005

Please look at the attached file and let me know what you think.

Sticker Price and MOS Calculation
# of years 10
Growth Rate 22.0% Lower of   Historical or  Zach's
EPS $       2.32
Actual Price $     90.00 Looks Great!!!, Check the YUMMMMY before Buying
Est Future PE              44 Looks Great - under 50!!
Future EPS $16.95
Value Per Share $745.66
Sticker Price $184.31
MOS $92.16

I think I've got the technicals now.  The yellow shaded cells are input and I've added some comment if statements to help see the results more clearly. I have a few questions though for understanding why.

1) Is the Estimated future PE really twice the Growth rate used?  Why?
2) Why do you use 10 years and not more or less time?
3) Why do you use 15% minimum and not more or less?

These questions are for me to understand the whys of what is being done here, so that I can make a more educated "buy" decision.  Any help you can provide is appreciated.  BTW -- I really was affected by your Boston appearance.  It opened my eyes to some opportunities I have available to me.  Thanks man!!


Continue reading "THE WHYS BEHIND THE BUY" »

YOUR HOMEWORK: SNDA (SHANDA INTERACTIVE)

Here's a new homework.

While I was in Europe Alan contacted me with his YUMMMMY analysis of SNDA -- Shanda Interactive Entertainment Limited. Shanda is a Chinese home entertainment company specializing in online gaming (interactive video games, mostly).

Here's his analysis and my response:

[Edited for length]

Continue reading "YOUR HOMEWORK: SNDA (SHANDA INTERACTIVE)" »

YUMMMMY BECOMES MMMM (4M)

A Rule #1 business is a business that has Meaning to us. It also has Moat, Management we admire and a Margin of Safety, meaning we can buy it at a discount. 4 M's.

My publisher, Random House/Crown Publishing, has convinced me to change the YUMMMMY acronym to MMMM, or 4M, to simplify things. I think the changes clarify what we're seeking so I'm into it.

So, from now on YUMMMMY = MMMM. This is how it'll be in the book too. I'll go in and change it on the blog ASAP. You'll notice this change the most in Categories.

Here is the definition of each "M" in the 4M's:

Continue reading "YUMMMMY BECOMES MMMM (4M)" »

HEADS UP ON PANERA (PNRA)

I'm putting this one up quick because I need some feedback from readers.

My daughter called me from Oxford today.  She's a Rule #1 investor.  She wanted to go over Panera Bread: PNRA.  See what I think.  So we took ten minutes on the phone and looked at it together.   Until 2000 the business was trying to figure itself out.  Then it got it together and has been on a rocket ride ever since.  For a Rule #1 investor the first question is "Do you want to own the whole thing?" and her answer is...

Continue reading "HEADS UP ON PANERA (PNRA)" »

A LITTLE EXCEL HELP: CALCULATING MARGIN OF SAFETY

Garrett, who recently did a YUMMMMY analysis of St. Joe's, was having a little trouble with the Excel formulas outlined here on the site.  Here's our exchange below. Hopefully my answer will help others figure out the numbers they need to be using in their own valuations.


From: Garrett Smyth
Date: Jun 24, 2005
Subject: Valuation problems
To: Phil Town

Phil,

I know it's not your job to necessarily teach me how to value a company.  I have gone back into your blog and I believe that I have set up my spreadsheet using the formulas that you recommend.  But I keep getting different values than other folks that write into your blog. 

Will you either look real briefly at my spreadsheet or direct me to a reference that you like to use to find the value of a company?

Continue reading "A LITTLE EXCEL HELP: CALCULATING MARGIN OF SAFETY" »

YOUR HOMEWORK: MOAT AND MORE ON ST. JOE'S

Here's the rest of Garrett's analysis of St. Joe's, the paper products company that made a switch to the real estate biz a few years back. I'd asked him to get back to me with his results for Moat, as well as the rest of YUMMMMY. I'll post my comments later.


In a message dated 6/20/2005, Garrett Smyth writes:

Phil,

To bring you up to date with our conversations, the question you posed to me was “Do they have a moat?”

My answer is this.  St. Joe Company doesn’t own all the land in Florida but they do own a significant portion.

Continue reading "YOUR HOMEWORK: MOAT AND MORE ON ST. JOE'S" »

HOW STOCK SPLITS WORK

Last week, Jonathan Welsh -- who's doing his Homework on Toll Brothers, the luxury home builders -- contacted me with the following question about a 2-for-1 split. I figured a lot of people would have the same question:  with 2-for-1, do you really get more for your money -- double the shares? Here's his question and my response.


On 6/14/05, jonathan welsh wrote:

The current sticker price you calculated for Toll was 105/share. It is currently selling at 96/share, which is not even close to the 50% requirement. Toll is having a 2-for-1 split on the 21st of June 2005. With a 2-for-1 wouldn't that get me the same result?  I am kind of new to the concept of getting one additional share to each share held, but doesn't that count as doubling your money?

God  bless!

Jon Welsh

Date: Jun 16, 2005
Subject: Re: toll 2 for 1
To: jonathan welsh

Good question, Jonathan.  The short answer is no.

Here's the why not: 

Continue reading "HOW STOCK SPLITS WORK" »

YOUR HOMEWORK: EVALUATING A COMPANY IN TRANSITION

Here's another piece of homework, submitted by Garrett Smyth of Chattanooga, TN, who was a professional golfer for 15 years before making a career change to sales.

Garrett wanted to know if the YUMMMMY analysis works in determining the value of transitioning companies that are moving into new and different sectors. Below is his question and my response. I'll post more about his progress once he calculates the Moat for the company in question.


On 6/9/05, Garrett Smyth wrote:

Phil,

Question:  What is your feeling about a company that has changed directions from what they used to be to something new?  My example is St. Joe Company in Florida.

St. Joe Company was originally a paper company in Northwest Florida who in 1997 shifted its emphasis away from paper products into real estate development.

Continue reading "YOUR HOMEWORK: EVALUATING A COMPANY IN TRANSITION" »

YOUR HOMEWORK: TOLL BROTHERS, INC.

As I mentioned earlier in the How to Get Mentored post, I'm asking students of investing to do their homework and research YUMMMMY companies on their own... then submit their work to me for evaluation. Every so often I'll post a good example under Your Homework. Be sure to check these out -- they're the best way to learn.


This is a post from Jon Welsh.  He is a former Marine Corps Sgt.  He was part of a small team that did SWAT actions in Fallujah and he's carrying some scars.  The man is one of our young heros.  I'm hoping he doesn't go through what a lot of Vietnam vets went through when they came home to an uncaring country so I'm working tight with Jon.  And he's getting on this Rule #1 stuff.  These are emails from yesterday back and forth between us.   

On 6/12/05, jonathan welsh wrote:

Hello! This is my homework. Well at least half of it.

Y - Yes I would like to own "the nation's leading builder of luxury homes." (Toll website). Toll Brothers builds quality luxury homes in some great areas in the U.S., and they win some prestigious home building awards.

U - They build it in 20+ states, and people buy it. In Phoenix, New York, and California, people are buying plenty of homes for investment reasons. Demand for homes is rising faster than Toll...

Continue reading "YOUR HOMEWORK: TOLL BROTHERS, INC." »

DO YOUR HOMEWORK / HOW TO GET MENTORED BY ME

When I'm out doing speaking engagements, I encourage people to keep in touch with me and shoot their questions over so I can help get them on track with Rule #1. But the thing to remember with investing -- which has a learning curve -- is to actively instruct and not lecture. This is how my mentor did it with me, and it worked. Somehow the work you do yourself has more staying power than something you read off a piece of paper (or web site) from someone else.

This is why I always insist people do their homework and put the companies they want to buy through the YUMMMMY analysis as I've laid it out here on the site (see the Google, Whole Foods and Garmin analyses for detailed examples). Then I have them email me their work so I can give them my opinion.

Some people who write to me don't even know where to start -- what business to analyze. I usually tell them to do this:

Continue reading "DO YOUR HOMEWORK / HOW TO GET MENTORED BY ME" »

GETTING OUT OF WFMI: KNOWING WHEN TO SELL A STOCK

I'm not going to post every time I move in and out of a stock, but I'll post this one so you can see why I sell.

WFMI (Whole Foods Market, Inc.) is a wonderful company at an attractive price. Nonetheless, like any company in this market, it could go down if the institutions start to sell off. Which they do on a regular basis for many reasons - a negative analyst report, bad press, interest rates go up, interest rates go down, sector bad news, or just taking profits ... who knows. Could be anything or nothing at all that starts the selling and then, like lemmings off the cliff, the other institutional guys start selling, too.

Continue reading "GETTING OUT OF WFMI: KNOWING WHEN TO SELL A STOCK" »

WHEN DO YOU SELL YOUR SHARES?

First, everything I say from now on is predicated on owning a YUMMMMY stock.

A business that I own as a business that will, over time, provide me with an earnings yield that will exceed 100% per year.

A business that is highly predictable based on its past consistently high 5 numbers: ROIC and the 4 growth numbers: Gross Profit, Earnings Per Share, Equity and Free Cash Flow. The GEEC numbers. Oh, and it has a big moat - best of its class- and great management. Our YUMMMMY stock has gone up and up. How do we know when it has gone too far and it's time to sell it?

Continue reading "WHEN DO YOU SELL YOUR SHARES?" »

IS GARMIN YUMMMMY? (PART II)

My look at Garmin started with whether I wanted to own it, whether I understood it and whether it had moat.  So far so good.  Next I want to look at management, Value and Yield:

M: Management. Which means Dr. Min Kao, Founder, Chairman and CEO.  Here's the summary I got from articles about him that I got when I googled "Min Kao" Garmin.

  1. Dr. Min Kao's BAG:  (I want to hook up with guys who want to change the world and have really committed themselves to it.  I call that a Big Audacious Goal - BAG):  “To bring GPS to the masses”.  Nice.
  2. How does he intend to do that BAG?  He says he intends to make the best product, at the lowest cost to build,  and to do that he is going to go for vertical integration. 
  3. What kind of guy is Dr. Kao?  He seems like he’s all about this company.  No indication otherwise.

I like the sound of this guy.  He seems like a guy I'd like working for me.  Management gets an A.

Continue reading "IS GARMIN YUMMMMY? (PART II)" »

IS GARMIN YUMMMMY?

Hi Phil,

I saw you write back to Christine on the blog about practicing and sending you the results to see if we are getting it or not.  Well, here’s one.

Garmin Ltd. (GRMN)

This place is a few miles from my home and I love their products.  I’m a gadget geek and GPS is usually involved somewhere.  Garmin makes a variety of GPS related products for the consumer, commercial and government markets.  With GPS devices showing up in cell phones, PDA’s, cars and probably a refrigerator somewhere, I think the market is just getting started. Garmin has a few competitors, but there seems to be enough business to go around.

Continue reading "IS GARMIN YUMMMMY?" »

WHAT NOW FOR WHOLE FOODS?

I popped into Whole Foods last February at 90.  And as a Rule #1 investor getting into WFMI meant that I thought it was YUMMMMY.  Turned out it was!  Since then WFMI ran up to 104 and I bailed at 102.  Then again in at 97 and now its at 120.  That is some serious up.  About 40% in 5 months.  Good.   But here is where it gets real good.  That investment represented about 40% of my portfolio.  That means that my entire portfolio went up 16% in 5 months even if the rest of it was under my mattress.  That is just nuts! And it's all about focus.  If you think you can do that by diversifying, think again.  Remember this:  Diversification is for the ignorant.

Continue reading "WHAT NOW FOR WHOLE FOODS?" »

THIS BUD'S FOR ME?

Warren Buffett just bought a bunch of Budweiser, so I thought I’d write about how I look at it. So I’ll put BUD through the YUMMMMY hoop and see what we come up with.

Do we want to own it all?  Legendary company and I drink Bud and Corona, which they own half of.  So yes.

Do we understand the business?  They sell beer.  Yeah, I get it.

Continue reading "THIS BUD'S FOR ME?" »

Buying Google Stock (Part III of III)

To this point we've decided we want to own Google and that its almost a wonderful company (a wonderful company by definition is predictable and therefore possible to put a value on and Google isn't - see below). It is also available at what might turn out to be an attractive price (but I can't be certain). Now we want to buy it as if it is a business and not a stock. To do so, we have to calculate Yield. But first a word about Mr. Market:

6. Mr. Market: Mr. Market is my partner. He's going to sell me all the Google I want, but he names the price. Mr. Market is often quite lucid and rational. He usually prices the companies he is buying and selling at reasonable prices that reflect a reasonable estimation of future value. I say 'usually' because sometimes he gets emotional. Giddy actually.

Continue reading "Buying Google Stock (Part III of III)" »

Buying Google Stock (Part II of III)

Last post, I decided I wanted to own Google and I understand the company. It's got a lot of moat and tested management. But I've got to figure out the value. Here's how I do that.  Its step #5 of the 7 step YUMMMMY analysis:

5. Margin of Safety: No matter how wonderful the company, you gotta get it at a great price to have certainty about your long term position. Even if you are trend trading you want to know the long term general direction of the stock price. So you have to know the value of Google's business. This is where the real risk comes in with a new company in a new industry - no track record means predictions are so full of debatable assumptions that the prediction of future cash is a dubious proposition. But I do dubious in my "Risky Biz" portfolio so here's how I look at Google's value: How fast can it grow it EPS for the next 10 years?

Continue reading "Buying Google Stock (Part II of III)" »

Buying Google Stock (Part I of III)

I bought Google at $200. I wish I bought it at $100 but I really didn't understand the moat these guys have figured out. And I don't buy anything without an identifiable monopoly (Buffett and Morningstar call it Moat, so so do I). Google had enough of the rest of the things I look for (See YUMMMMY post) to buy it long term in my Risky Business account (about 10% of my capital is available for newish ventures that do not have long term history or for some other reason are not very predictable out 20 years). Let's look at it through a Rule #1 investor's glasses:

Continue reading "Buying Google Stock (Part I of III)" »

YUMMMMY

To students that are having problems when paper trading:  I'm so glad you followed Rule #1 and stuck to paper trades.

Remember: Don’t Lose Money!  Now let me see if I can help you find businesses that will go up and make you some bucks.

First, remember that the tools are just tools; it's up to us to make the furniture.  Just like that, research data is just data.  It's up to us to make the key judgments whether to not to invest. 

Continue reading "YUMMMMY" »

VALUING WHOLE FOODS

I love owning Whole Foods.  It is a great example of a Rule #1 company.

First, Rule #1 investors don’t buy stock.  We buy businesses.  That means we evaluate the opportunity as if we owned the whole thing and as if there was no stock market for the next ten years. 

Second, Rule #1 investors try to buy $1 of value but only pay $0.50 for it.  When we do this correctly we know we are going to make money at some point.  We also know that our risk is less than if we bought a comparable business but paid the full $1 for it.  We call this a Margin of Safety.  I insist on a MOS because I’m not all that smart and need a cushion that can absorb my mistakes in valuing a business or unexpected problems that the business might have.

Continue reading "VALUING WHOLE FOODS" »