Phil Town

NEWS 12 CONNECTICUT

Hey folks,

I just wrapped a 9-minute segment for "12 On The Money" -- a program on News 12 Connecticut. If you live in Southwestern CT, please tune in. You can find more info on my updated Events Calendar.

Be sure to select "See by Month" from the drop down menu, and then go to May. Click on an event for further details.

Thanks!

QUESTION OF THE WEEK: DAILY VS. WEEKLY CHARTS

This week's question comes from James, and is about how to read the three tools described in Rule #1.

Question:

Hi Phil Town,

I have a question about your book. On page 210, the 3 charts show when to buy and sell Starbucks. I tried to duplicate the charts on the web, and they match if I select the weekly (instead of daily view). However, the buy and sell trigger points are very different between the daily and weekly charts. For example, the daily chart show all 3 buy signals on 9/2 and all 3 sell signals on 9/22. The book and my weekly chart show all 3 buy signals on 9/20. Why the discrepancy? Should I use daily or weekly charts?

Thanks,

James R.

Answer:

Hi James,

When you shift from daily to weekly charts, the inputs change from days (8 days, 17 days, 9 days) to weeks (8 weeks, 17 weeks, 9 weeks).  That creates a whole different chart. 

I recommend you use the weekly chart inputs for long term situations since the signals to get in or out are going to come much more slowly than with daily charts.

An example of that sort of situation would be when you have money in mutual funds in a 401K that can't be moved so quickly.  You use the tools with a weekly data input mostly so that you'll get out in the event of another market melt-down, but you don't have to get in and then out a week later as you might with a 'faster' toolset.

Ahhh. And there is more: When a business splits its stock like SBUX did, the changes in price sometimes change the historical chart.  I'm not sure why this happens since theoretically it shouldn't, but it does.  Perhaps it's because some charts have smoothing built into them that changes them historically.  In other words, what you see today may not be exactly what you see in 3 years.  Such is life.  And yet another reason that I tell you guys that you won't make money with tools.  You make money by buying a wonderful business at an attractive price.  Tools just help you keep from losing it in a crash and help take the fear out of investing. 

Now go play!

Phil Town

RULE #1 PAPER TRADING JOURNAL

For those of you looking for the Paper Trading Journal mentioned in Rule #1, I'm uploading it here and will also be adding it to the Rule1investor.com Resources.

This spreadsheet works like a tally of your money in and money out. When you run out of lines, you can copy and paste previous entries and then type in your new data. The columns on the far right keep a running tally of your balance.

Download rule1papertradingjournal.xls

Please note: the numbers entered into this journal are only an example. 

Thanks for your patience. Phil Town

RULE #1 QUESTION OF THE WEEK: TIME OF DAY TO TRADE, + USING TRAILING STOPS

As promised, here's a reader-submitted question for the week of April 16th.  This one is a two-parter.

Question:

Hi Phil,

I have not come across this yet on your blog, but I would like to know your thoughts/approach as to when in the trading day you tend to buy a stock. Do you pull the trigger during a specific time period of the trading day (e.g., during market-open frenzy, wait until the last hour of trading “when the smart money” transacts, just before Wall Street’s lunch, after, other), or are you watching the ticker continue to move in the right direction, then buy? Other? And, do you put a sell order in at the same time to auto-bail if the stock drops to a certain level while you’re doing a “Get Motivated” seminar?

Thank you,
Don

Answer:

I tend to either buy at the end of the day or, if I can't, I just put in a market order at night and let it execute on the opening.  I do use percentage trailing stops that I put in after I get the first red arrow (or if things start to look dicey about further advances).  I don't mind getting stopped out after a big run up.  I can always just buy back in, no big deal.

Nothing sacred about this stuff.  Just the way things work for me.

Question:

Forgive me if it’s in your book, but would you share your “rule of thumb” for an appropriate % to consider for the trailing stops.

Regards,
Don

Answer:

I routinely put in a 10% trailing stop loss that just tracks along with the rise in price.  But I almost never get stopped out because I check the tools every night to see if it's time to bail.  I'm usually out of there well before the price slides even 5% off its high.

RULE #1 HITS #1

Today, April 16,  Rule #1 is the #1 NY Times Advice/How To Bestseller.  You can also read a recent New York Times review of the book here.

RULE #1 CLIFF'S NOTES

This checklist came to me from reader Justin Brand. I think he did a fine job of distilling the Rule #1 process down to a simple list.  Since he's offered his notes up to everyone, feel free to make good use of them.  The first half of his Cliff's Notes applies to all, but the last part is written specifically for Investools users.

RULE #1 INVESTING: CLIFF'S NOTES

#1:  The 3 Circles

1. Figure out what types of businesses have MEANING to you.
2. Check the industry group [i.e. Yahoo Finance Industry Center] for other names that "pop out" at you.
3. Put about twenty of them in a list for further evaluation.
4. What does this business mean?  What does it do?  And does it match your values?

#2:  The Castle's Moat

Determine what trait gives this company its competitive advantage.

WHEN TO RE-DO THE BIG 5 NUMBERS

When should you re-calculate the numbers... and when should you decide that your Wonderful Business has become Un-wonderful? 

 

Every business that has stock in the public markets is required by the SEC laws to file a quarterly report.  The quarterly report filing with the SEC is called the 10-Q... Q for Quarter.  The annual filing is called the 10K.  K for... whatever... Kilo.  Oh.  There's the old guiding days sneaking back in.

 

The 10Q's come out at various times because not all businesses are on a calendar year.  However, a lot of them are, which means that the end of the year is December 31 and the end of the first quarter is Mar 31. 

The numbers, however, do not come out on March 32. The accountants have to get all the numbers and do an audit and certify them and then get the CEO to sign off that the numbers are real, and all that takes some time.  The 10Q's come out a few weeks after the end of the quarter. 

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 Town,

I just finished reading your book (I devoured it in under two days!) and am hoping to use The Rule #1 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:

NEW BLOG FEATURE: MONDAYS AT 9 A.M.

Hi folks.  Thank you for all the wonderful mail you've been sending in.  I've learned a lot from reading your comments about Rule #1 and I'm excited to be a part of your first steps toward financial freedom.  I owe all of the success of Rule #1 to each and every one of you.

Though I'd love to continue mentoring each of you one-on-one as you learn how to apply the Rule and build your Watch Lists, the sheer volume of emails coming in makes it impossible for me to keep up.  But don't worry -- I'm not leaving you alone out there with all those unfamiliar numbers and charts.  Starting next week, look for a new feature on this blog.

Every Monday at 9 a.m. PST (noon EST) I will post 1 reader-submitted Rule #1 Homework or question, along with my personal critique or response.

Questions will be selected at random from all those received the previous week.  Use the Contact Form on the Official Site, selecting the subject "Rule #1 Homework", to submit a question.

Thanks for submitting your comments about the book. Hearing how excited many of you are reading Rule #1 is beyond thrilling.

Keep up the good work... and don't forget to play says Phil Town.

USING THE TOOLS TO MANAGE YOUR MUTUAL FUNDS

Several readers (among them, Yolanda from California) have written in with the following question:

Could you suggest a book or website to find mutual fund tools like you have taught us for stocks i.e. MACD, Stochastics, Moving Average, etc. Or do these tools work the same for mutual funds?

I mentioned this briefly in the back of the book, and I'll try and talk about it some more at some later date (when I'm not racing around the country talking to people about Rule #1!).

For the present, here's how you can keep an eye on your mutual funds using the tools mentioned in the book:

1. Create a portfolio of all the mutual funds in your 401K.
2. Create charts that are using weekly data input instead of daily data input so that the 8-17-9 MACD is using an 8 week, 17 week and 9 week data input.  That will slow the arrows down a whole bunch.
3. Apply that sort of chart to each fund. 

One way to do this is to just go with Index funds or broad market funds or ETF's like DIA, QQQQ or SPY and get in on three greens and out on three reds.  In an up market you won't do as well as the market, but in a down market you'll be out in cash. 

I did this as an example with Janus 20 from 2000-2005.  The fund lost something like 15% over that time if I'd stayed in.  But with the tools set like I just showed you, the same fund gave a 100% return (about 15% per year compounded over 5 years).  Pretty significant difference when the market crashes!

Now go play. Phil Town