April 17, 2005

What is Rule #1 investing?

Rule #1 investing is simple. It’s worked for 80 years. (Not that I'm 100 years old. I've been investing with these ideas for 20 years and they worked well for me). These ideas will still be the foundation of successful investing 100 years from now. You make a list of wonderful businesses ('wonderful' is very specific - a business with a durable competitive advantage). You then determine value, value being different from price (by conservatively estimating future earnings). You then wait to buy that business at 50% off its value, like buying a $100,000 sticker price Mercedes for $50,000. To be able to get that discount you must be patient and wait for market fluctuations. As Buffett says, Mr. Market can be highly volatile in the short run. Sometimes we sit in cash for months or even years waiting patiently for the right price. If we buy wonderful companies at attractive prices we know we are going to make money, because we just bought a dollar for fifty cents. Buffett has been talking about this for years and a lot of investors out there do it. As he says, it isn't hard to do; it just takes patience and knowledge of value. Anyone can learn.

Why doesn’t everyone invest this way?

It’s never been presented in a way that people can understand. Buffett said that people either take to the idea of buying a dollar for fifty cents right away or they don't. He said he has no idea why some people don't. But after talking to a couple of million people about this, I’ve found that when you explain it right, ordinary folks do get it. I think Buffett is talking about the professionals. And the reason they don’t get it is because Rule #1 calls into question all of what they 'know' is 'true' and that’s hard for anybody to do – to question the way you do your business.

Why not just diversify and hold for the long term like everyone says?

It’s a bit of a wake up call to understand that in the last 100 years the stock market has given a zero rate of return excluding dividends to diversified 'low risk' investors 37 years in a row (1905-1942), then 18 years in a row (1965-1983) and now 5 years in a row (2000-2005). That's 60 out of 100. Don't you think that should make us consider that it’s the market run-ups that are unusual, not the other way around? And doesn't it follow from that that long term index or mutual fund investing right after a big run-up might be a recipe for a long term hole in your retirement? Can you handle a zero rate of return for the next 20 years? If not, shouldn’t you take control of your financial future instead of leaving it to the market? Especially if you can learn to invest so you know you won’t lose money?

How can you be certain you won’t lose money?

Answering that question takes me about an hour on stage so I won’t try to answer it completely here except to say that if you can buy a dollar of value for fifty cents then you are certain to make money. The key is to nail the value of the thing you want to buy. And if you can’t nail down the value, then don’t buy it. You wouldn’t buy a used car you didn’t know the value of, would you? Wouldn’t you at least look at the blue book?

But there isn’t any ‘blue book’ for stocks so how do you know the value of a business?

Here’s the key: You have to know that it is a wonderful company before you can figure the value. You simply can’t figure the value of a company that isn’t wonderful, no matter how much you want to. A wonderful company has some sort of durable competitive advantage (Moat) and its future is predictable. Once you find one (and there are lots of them) that you understand (there are less of those), there are tools that will do the following for us, but if you don’t own them, you get out an excel spreadsheet and do the following formulas:

1. =FV(): put in 10 yrs, the growth rate and the current EPS. You get EPS in ten years.
2. Multiply the future EPS by 2 times the growth rate. You get the future stock price.
3. =PV(): put in 10 years, 15% and the future stock price. You get what I call the sticker price – the value.

Understand that this is all useless if you don’t understand the Moat or if the business future isn’t predictable. In that case, move on. There are 14,000 businesses to look at. You’ll find a few that you want to own, that you understand and that you can put a value on. If you don’t find any, don’t buy any. Staying in cash does not violate Rule #1. Buying something you aren’t certain about, does.

How much is enough to get started investing with? Is $1000 okay?

The right amount to start with is $0. You wouldn’t ride a bike down a steep hill your first day, would you? That could hurt. So can investing your own hard-earned money when you don’t know what you are doing. First you have to get started with training wheels. You do it as if you are using real money for awhile and see what happens when you are making all your own decisions. Then, once you’ve gotten it right 10 times, you can start with $1000 for real. With $1000 you buy one stock and remember Rule #1. With $10,000 you still buy one stock. Keep it focused. If you have $100,000 you own maybe 5 stocks. Meanwhile, read Automatic Millionaire by David Bach and The Millionaire Next Door by Bill Danko and anything by Suze Orman and find places in your life to save a little money. About a year from now you’ll be one of the best investors on the planet AND you’ll have money to invest.

How does investing money in the market actually work? Do I need a broker?

You need a broker but you don’t need to pay a lot per trade. Somewhere between $5 and $11 is the most you should pay. Google “online brokerage”. You’ll get a list of websites. Scottrade was the first on the list when I did just now. Good company. $7 per trade. Ameritrade is good, too. $11. Pick one, call the toll free number and a nice person will guide you through opening an account. Its just like opening a checking account. You put a $1000 in an account and you’re ready to go. You click on the trading button, put in the symbol of the company you want to own, the number of shares, click market order and review and then, if it looks right, click buy. The broker will immediately buy the stock at the best price and take the money from your account. When you sell the stock, they reverse it and put the money back in your account. Simple.

How much time does it take to invest your own money?

It takes me about 15 minutes a week or so. Some weeks several hours while I’m playing around doing searches. Some weeks when I don’t have any money in the market, I spend less than a minute a day. What makes it so quick is having a fairly short list of businesses that I am interested in owning and having good tools that do most of the work. If one of the businesses on my list starts getting a lot of institutional money into it, it's time for me to take action. Otherwise there isn’t anything to do. Jim Cramer differs with me on this. He thinks it takes about an hour per company per week and you need 5 companies minimum. That’s five hours a week. But then Jim is doing this to make money. I’m doing it so I don’t lose any and that takes a lot less time, I guess.

How long will it take me to create a good list of companies that I like?

Maybe this is where Jim Cramer and I can agree about time. Like I said, it's quick once you have a watch list. But putting your watch list together might take you some time. Figure about 4 to 10 hours of research per company that ends up on the list depending on how much you already know. If you don’t know anything about anything, like you don’t know where you shop or what you buy or why, then this is going to take you longer because you have to decide what kind of things you like and understand. For most of us, we already have a pretty good idea because we shop all the time and have already decided we like Whole Foods Market better than Ralphs or Walmart better than Kmart. Obviously you won’t put 4-10 hours into everything you look at, but when it gets narrowed down to a few candidates then you put in more time on a few of them. The financial research is very quick with the best tools, slower with the free stuff, but so what. There’s no rush. The market isn’t going anywhere, believe me!

What if I am a complete novice? Will I be able to do this?

You are my favorite student. Of course you can learn to do this and you don’t have any bad habits. You can learn correctly from the start. Just take it one step at a time, don’t use real money, remember Rule #1. And start going shopping for a business to buy today. The sooner you get your shopping list together, the sooner you can buy something and start letting those smart business people make you rich.

What will happen when the ‘baby boomers’ start taking their money out of the market?

That starts now, actually. For a while, you won’t notice. But in a few years there will be less money going into retirement accounts than is coming out. At that point, Rule #1 investors are going to be in position to make millions. The point is this – this is not a market that you can just leave your money in for the long haul and expect to have a nice return in 20 years. It could easily be zero over the next twenty years for the market as a whole. Meanwhile, some stocks are going to go on sale big time and if we buy them right, we are going to do very, very well. That is what we are preparing for… a return to the S&P at 7 times earnings with tons of great companies to be had for 50 cents on the dollar. Then we’ll all just load up the truck and get rich.

Where do I go to get research if I can’t afford professional tools?

Before I even get into this let me remind you that farming is just digging a hole and putting in a seed. Some farmers still dig the hole with a stick. Some do it with a big tractor. The tractor is a lot faster but, and here’s the point, you don’t NEED the tractor. Is it better? Yeah. Faster? Yeah. Do a better job? Yeah. But you can still farm if you can’t afford a tractor.

That said, the stick way of investing (to use this analogy to death) is to get the annual reports and dig through them. Slow, painfully slow, but doable.  If you look around, you'll find some free internet tools that have info on thousands of stocks. They have terrible search tools but once you know the company you want to research they have about 70% of what you need there for free if you don’t mind digging around to get the data out.

Beyond that you will need to Google for news and management and use an Excel spreadsheet to figure value (as above). Then I would add a few key indicators: MACD, Stochastic and Moving Average. Read up on these and program them for the kind of investing you are doing.

That’s about the cheapest bunch of tools I know of if you want to do this without an integrated toolset.

What is the best set of tools? What do you use?

Most of you can’t afford NOT to have an integrated fast set of research tools because you won’t do it the old way! You just don’t have 5 to 10 hours a week first off because you have a life and second because investing isn’t all that entertaining. And you don’t love Excel spreadsheets either.

To try another analogy, you can make nice furniture with hand tools … if you are careful and patient and have plenty of time. But most of us … hey we need a table saw and a power drill to do it because we just don’t have the time or patience to plod along.

The best integrated tools I know of are made by Investools, a public company, IED,, started by GE Capital and partnering with CNBC and BusinessWeek among others. Almost effortless to use, fully integrated searches across 14,000 stocks, seamless research connected with good portfolio management tools and paper trading tools.  These tools cut my investing time down to minutes a week.  Well worth checking out.

And in the interest of full disclosure - I am on stage around the US urging people to learn to invest and promoting an Investools workshop.  The workshops go from basic to advanced and range in price upwards to over $10,000. 

April 18, 2005

Why would someone with a secret to getting rich on the market devote so much to teaching the secret?

Buffett has been teaching this stuff in every meeting and annual letter and interview for 45 years.  His teacher, Ben Graham, wrote two books about it and taught it at Columbia for 30 years while running the Graham-Newman Fund. 

At some point in your life it's no longer about the money, if it ever was.  Heck, I had enough money when I was a guide making $4000 a year.  At some point your life starts being about having a blast.  And it turns out that helping others do well is the most fun thing in the world.  First you do for your family and your kids, then your friends.  Then, if you're lucky and blessed for it, you end up with a larger audience.  I get a lot of letters from people who used to lose their money and now make 25% a year with less risk than people who are taking in mutual funds or real estate... and that is a really cool thing.

April 27, 2005

What if I have a lot of debt? Should I invest in the tools and start investing?

One of the great advantages of being in the military a long time ago is that I don't get too worked up about the little things that go wrong in my life now.  Once you've been shot at, everything else seems relatively minor.  So the first thing I can tell you about having too much debt is to keep it in perspective.  Nobody died, we're still healthy, we're still in the game.

Having said that, its still hard to shake the pressure that debt puts on you.  It's like you're on a tread mill and no matter how fast you run, you get nowhere.  So to fix this we've got to get better training and we've got to do stuff different. 

First the training:  Read Automatic Millionaire by David Bach.  Get it from Amazon or The book will help you start finding money even while paying down the debt.  (Here's Bach's website for info on his coaching program if you need more help than the book:

Based on what you learn, make a plan and stick to it.  Keep the goal in mind and in a couple of years (or maybe 5 or so, doesn't matter) you will be both debt free and you will have money to invest.  And you'll have one more incredible gift to yourself if you follow what I tell you next.

So getting to your question: should you pay for investing tools when you're loaded up with debt? 

Like the cool African in Gladiator said at the end, "Not yet, my friend, not yet." 

Usually a lot of debt means you are paying top interest rates - maybe higher than 18% a year.  Remember that our target for our return on invested money is 15%.  And do you remember Rule #1?  Rule #1 in this case would tell you that if you are paying 18% and making 15% you are not playing by the Rule.

In fact, to justify borrowing to invest, we have to apply the Margin of Safety criteria but times 2.  So if our investment is likely to give us a 16% return, the most we can pay for debt is 4%.  If you can borrow at 4% and invest with Rule #1 certainty then sure.  But you can't have certainty in your first investments because you are just learning.  Therefore, I'd say for almost everyone who has debt problems you should pay off the credit card debt first.

Meanwhile, while you are paying off the debt, you are going to be banking the most important thing you can bank: investing experience.  I would recommend this whether you have debt or not: if you are a just starting Rule#1 type investing, then I want you to paper trade $100,000 until you know you know what you are doing.  It might take you 2 months.  It might take you two years.  But that's okay because you are banking experience.  And meanwhile, you are getting rid of the debt.

And here's a secret to getting rich fast: Use other people's money.  Big secret, huh?!  Okay so it isn't.  The secret lies in GETTING other people's money.  And here's the secret to that secret: Build a great track record as an investor, even by paper trading and the money will seek you out.  Investors are always looking for someone to put money with who has a good track record.

So whaddya gonna do? 

1) You're going to read Bach. 

2) You're going to pay down debt. 

Meanwhile you're going to study Rule #1 investing (on this site and then in my book) and start building a track record by paper trading.  And then, in a couple of years, you'll start with a little saved money to practice for real.  Then you are going to attract investment capital (which I'll show you how to do later) and in 10 years you are going to be a millionaire.

You can also find this post here.

April 28, 2005

What will I Llarn in the training workshops you talk about in your seminars?

The workshop is going to give you a great set of tools that help you not lose money.  And they will teach you some great short cuts to making money on stocks that have a lot of momentum - which I also like.  But here's the thing that I do slightly differently:  I like to look under the hood of the car.  I like to Google the management, calculate rates of growth, make sure I understand the Moat.  Stuff like that.  To see that take a look at the post YUMMMMY.  I'll be posting more on how to calculate Yield and earnings etc, but until I do, read the Google Part I, II  and III.  It will show you how I went throught the process.

Let me know how you're doing and what your issues are as you go.

You've done enough investing for today.  Now go play!

Can a nurse do this? Start investing with Rule #1?

The whole financial services industry is determined to keep the nurses of the world convinced that they can not invest.  Somehow they think that although nurses are totally qualified to assist in brain surgury, that they can't handle their own money.  But don't feel put down.  They feel like that about the brain surgeon, too.  And his lawyer.  And the hospital administrator and college professor.  Not to mention every single other profession in the world.

You're like the Tin Man and I want to be like the Wizard of Oz and bestow, by the powers, harumphff harumphff, vested in me, from the University of Rule #1, a diploma awarding you a RD - Doctorate of the
Rule.  (You remember the Rule, right?  "Thou shalt not lose money.")  Suddenly, like the Tin Man, you will discover that you have a brain.

The first step, once you know you have a brain, is to use it.  Do not invest real money until you have learned, practiced and know that you know what you are doing.  You wouldn't get on a snowboard and try to
ride a black diamond expert run the first day you put it on.  Just use your new head and act the same way toward your money and you will be fine.

Yes, nurses can do this.  Even better, nurses MUST do this.  Do you remember why?  First because the long run is longer than you have and second because you can do better than the pros.

So get Toto and Dorothy and a few of your other friends and head out together on this great adventure.  And just remember that you are not on the farm with Aunty Em back in Kansas anymore.

If I have $10,000 to invest, is that enough to cover the research costs of the investing tools you talk about?

It's all how you look at it.  If you use the tools I use, you'll spend about $400 a year for the data.  With $10,000 you'll track about 5 stocks but invest in only one at a time.  Two max.  Probably about 6 in and 6 out trades.  About $100 in commissions.  Total costs of about $500 a year.  Thats 5% right off the top.  That means you have to make 5% to break even.  That's a pretty significant overhead.  That's too much.  That's one way to look at it.

But you have to choose how to spend your time.  If you use free data your time factor for investing properly goes way up.  Maybe on the order of this: instead of spending half an hour a week, you could easily spend 5 hours a week.  5 hours a week at 2 bucks an hour is $10 times 50 weeks: $500.  So one way of looking at the cost of data is this: Is it worth $2 an hour to save the time and spend it doing something else?  Heck, a part time job at $20 an hour pays your research costs in only 25 hours a year.  So you do something else to earn the cost of the data and do not include it in your costs of investing until your portfolio can handle the load by itself. 

Another way to see this is that good tools could make a 5% a year difference.  Look at it like that and you don't need to get a part time job.  Pro tools pay for themselves compared to not doing this and watching your 401(k) go nowhere. 

Here's the point, gang.  You find a way.  All of the above ways are valid.  I've done them all.  You can, too.

May 03, 2005

How do I get started? Once I set out to invest, what are my first steps?

1.  Remember your goal: to buy $1 for $0.50. 

2.  To know that you've found $1 you have to know the value of the business.

3.  To know the value you have to be able to predict the future.

4.  The only kind of business that has a predictable future is a "wonderful" company.  Read the YUMMMMY post.  A durable MOAT is key.

5.  Make a list of wonderful companies that are YUMMMMY for you.

6.  Set the margin of safety price.

7.  Make a Watch List with at least 10 businesses.

8.  Wait patiently.

9.  When Mr. Market names your price, ACT!

10. Sell when Mr. Market goes crazy the other direction.

(Notice I didn't mention Group and Insiders and Arrows.  That's for even further protection.  These ten steps will get you started.  I use pro tools that help me search, but you can learn without them.  It's just slower.  And since I use pro tools to search, I also use the other stuff - group tools, insider trading and technical indicators... so I don't violate Rule #1!)

October 14, 2005

Where do I find ROIC in Investools / Success software?

In Investools put in a stock symbol and open up the chart page.  On the left is a menu.  Find the Fundamentals heading and under it Trend.  Click on Trend.  The bottom item on the list of key numbers is ROIC

It stands for Return on Invested Capital which means how much money did these guys make (as a percentage) on their equity and debt that they had to invest.  I want it 10% or better.