Phil Town

Rule #1 and Market Fluctuations

This question came in from Colleen last week:

Dear Phil Town

,

Thank you for RULE #1 and for writing an excellent book.  As a financial analyst I was never interested in stocks because of perceived risks, but thanks to your simplified approach, I am enjoying this new world.  I began investing last August and realized a 37% return (annualized) for the first 3 months, then got emotional and impatient and lost some of it.  But I am learning!

I am now investing about $8k in INFY, APOL, and LIFC, and got in based on buy signals, the MOS, the five #s, mgmt, etc.  (And yes, APOL is probably risky.)

I was wondering how you use the three tools in comparison to the market fluctuations.  I don't want to sell when the entire market goes down a little but there is no bad news on the companies.  I would rather buy then! Especially in the last few days when these 3 stocks keep going up and down.  Shouldn't I incorporate the fact that the DJIA, S&P, and Nasdaq are all down into my buying and selling decisions?

Maybe a better question is if there are any indicators for an overall stock market crash.  (I suppose that's a million dollar question.)

Thanks,

Colleen

My response:

Hi Colleen,

Congratulations on joining the revolution and on your success.  You bring up an excellent issue.  Do we take into consideration normal market fluctuations?  Should we buy when those fluctuations give us our wonderful business at an even better price?

Rule #1 Question of the Week: What's an ADR?

This came in from Greg S. last week:

Q:  Help.  What does this mean?  I'm almost at my third sell signal with INFY, but I don't know if it's meaningful.  What's a "swap into ADR's"?

http://yahoo.reuters.com/news/articlehybrid.aspx?type=comktNews&storyID=urn:newsml:reuters.com:20061121:MTFH56475_2006-11-21_09-24-25_BOM232273&pageNumber=1&imageid=&cap=&sz=13&WTModLoc=HybArt-C1-ArticlePage1
http://host.businessweek.com/businessweek/technical.html?Timespan=63&0val0=204&0val1=8&0val2=17&0val3=9&1val0=208&1val1=30&1val2=0&2val0=210&2val1=14&2val2=5&2val3=0&3fval0=204&5fval0=208&6fval0=210&csym0=&graphtype=0&gsize=11&gstyle=4&symbol=infy

A:  INFY is an Indian back office custom software company.  Because they want capital from investors, they listed in the U.S. as an ADR. 

ADR stands for American Depository Receipt.  Essentially it lets the stock trade on the U.S. markets. 

This is a good thing for INFY since it gives them access to a lot bigger store of capital so that the shareholders can get full value for their investment.  It is a good thing for us because it forces foreign companies to provide the same accounting and insider information as a listed American corporation, which means it's safer than trying to figure out what's going on with a foreign business listed on a foreign exchange. 

There are about 1000 foreign companies that are listed as ADRs on U.S. exchanges.

In other words, this is not a big deal.  However, I noted in the article that they are letting some big shareholders sell to Japanese investors.  I'd watch out for that.  Could be insiders wanting to get cash at a high price without having to disclose their insider trade in the U.S.  Theoretically they should disclose.  But they might be sliding around it.  Watch insider trading carefully.

Other than that, INFY is a wonderful business.  So what's it worth?

Now go play.

Phil

HOW TO READ "INSTITUTIONAL OWNERSHIP" ON MSN

This question comes from Nitin in Elk Grove, CA:

I recently read your book and am researching potential Rule #1 companies. My question is regarding the importance of institutional ownership. I seem to recall that somewhere you recommend looking only at stocks that have 60% or more institutional ownership. Does that mean that I should exclude the others from analysis? Some stocks like INFY that otherwise look pretty good have low institutional ownership (I think only 11% for INFY).

My response:

First, let's get everybody on the same page.  On MSN Money put in INFY and on the left menu click on 'ownership'.  Notice where it reads "Ownership Information" it says shares outstanding are 554 million.  And right below that it says "Institutional Ownership" 11.40. 

But notice that below that it also says "Mutual Fund Ownership" 33.01.  I consider all these guys "institutional".  They, as a group, are the 'Big Guys' I write and speak about.  So the Big Guys own 44% of INFY.  (For MSN 'Institutions' are non-mutual fund Big Guys.)