Phil Town

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.]

REVALUING GOOGLE AND WHOLE FOODS

Two of Phil Town's 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?

GETTING OUT OF GOOG: A REMINDER WHY THE ARROWS MATTER

Phil Town just posted this in the comments, in response to someone who wasn't ready for the GOOG drop. Thought I'd put it here too so everyone can read it.

Oh man!  The arrows popped me out of Google at around $440 or so.  I posted about it a couple of weeks ago.  Sorry to hear you got nailed. 

Let's talk about that for a minute.  The big guys don't invest like you and me.  They can't.  They have too much money to jump out of the market in 8 seconds, so what they do instead is to try to get an edge on the other big guys with information that is not widely known.  To get that kind of information it helps to have friends in high places in these various businesses.  Not that the friend is going to violate SEC regulations or anything, but when you know people you can get a sense of how things are going at work.

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.

Dear Phil Town,

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]

RULE #1 BOOK: REVIEWS ARE IN

My publisher, Crown/Random House, just sent me the first magazine review of Rule #1.  Publisher's Weekly is the book industry magazine. They publish weekly as you might have guessed and they review about 140 of the 5000 books published that week -- so getting reviewed at all is good.  Out of the 140 they review, they give a red star to 10 books that they think are good books.  This helps the book buyers -- the Barnes & Nobles, Amazon.com, Waldenbooks, Costco etc. determine what to stock up on.  Rule #1 was favored not only with a very nice review but also with a red star. Here's the review:

For amateur investors who admire the incredible returns produced by Benjamin Graham-Warren Buffett-style value investing but can't figure out how to replicate these billionaires' methods at home, Town's investment guide is manna from heaven.

THE KEY TO INVESTING WITH CERTAINTY

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

Greetings Phil Town.

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:

YOUR HOMEWORK: COLDWATER CREEK (CWTR)

Here's a new homework, reader-submitted.

Hello Phil Town,

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.