Phil Town

Is Investing More Important Than Goofing Off?

Some of you have been wondering where I've been.  I'm going to come clean. Here it is: I've been goofing off mostly. I thought I could goof off and keep up with you guys with some Santa helpers but the goofing off turned out to be quite a lot more time consuming than I expected and my helpers, as great as they are, aren't me.  

Goofing off got the better of me.  It involved a lot of horseback riding in Jackson Hole, Wyoming, around the Southeast, Spain and Africa.  It also involved getting married to Melissa.  

We love horses and Melissa is a truly accomplished rider and 3-Day Eventer (an Olympic sport that tests who is the best all-around rider and horse team in the world).  For our honeymoon we took a safari on horseback across the Masai reservation in Kenya all the way down to the Tanzanian border with Offbeat Safaris.  Our trip organizer was Lucinda Green, one of the greatest Eventers to ever ride and a good friend.  And we threw in a week on a Spanish rancho north of Seville with the Garcia family to learn Dressage on Andalusian horses.  And a week up in Kalispell at the beautifull 'Rebecca Farm' to compete in her wonderful 3-Day Event.

And a lot of time just sitting around thinking, "Damn, life is good."  There are worse things to be doing.

But eventually the urge to invest (and write about it) became overwhelming so I'm back and starting to blog it up again.  

There is a lot to write about in the investing world.  What I like to do is to see what others are proposing ("The 10 BEST stocks of 2011") and then poke holes in every one of their ideas.  I'm not being mean.  I'm being scientific.  You have a hypothesis that the world is flat then you go out and see if you can sail around it.  If you can, your hypothesis is wrong.  

I'm going to be poking a lot here.  Its fun for me and might even, once in a while, be profitable if I find something on the 'list' that is actually on sale.  

And if you guys want to pile in with comments, go for it.  I promise I'll do my best to answer questions.  I won't get to all of them if y'all get busy, but I'll try to answer the best ones.

And don't forget as you get deeper into actually investing on your own, you gotta make sure you can still tell the forest from the trees.  Most people on Wall Street can't any more.  

If you want to have money when you're old, then investing is critical.  No one can do it for you that you can trust unless you're really loaded and even then ... need I say 'Madoff'?  But one of your biggest assets is that you are NOT on Wall Street.  You can see the forest for the trees.  Make sure you keep that advantage by not getting so caught up in investing that you forget to live your life.  Raise your kids, love on your spouse, smell the flowers.

I'll be here for you when you want to dig in on making some money.

Now go play.

Phil

Phil Town joins elite group of entrepreneurs on AOL Small Business Board of Directors

AOL Small Business has been re-launched by a friend of mine, Rod Kurtz, from the Your Business TV show at MSNBC. Also Rod is the former editor of Inc Magazine.  Rod and I have done several shows together and I’ve enjoyed his banter and brain on every one of them. So when he called about joining the AOL Small Business Board of Directors, I said absolutely! The Board is made up of a number of very successful entrepreneurs including Sir Richard Branson, the legendary founder of Virgin Group,  Bob Parsons, the founder of Go Daddy, Rob Dyrdek, the entrepreneurial skateboarder and Lexy Funk, the founder of lifestyle clothier Brooklyn Industries.

 

Unlike many Boards, this one is quite active. Rod regularly sends us a question or two and we all put our personal spin on answering it. Then he posts the answers on the website.  For example, Rod asked us what we thought about President Obama firing General McCrystal and, by extension, how a CEO should handle a similar situation. Here’s what I said:

 

“If your employee is really a superstar, then you don't let them go over some idle chatter, because you'll be playing against them tomorrow. Have a constructive chat and try to build a more respectful relationship... until you just can't take it anymore. Then you fire them. Meanwhile, start finding their replacement. In the president's situation, personal stardom over military stardom with a superstar on call. No-brainer.”

 

My reply is up there with a whole bunch of other replies. I try to keep it short and keep it on brand - which means I answer the questions from the point of view of a Rule One Investor.

 

Check out the site. The things you have to do to become a successful entrepreneur are the same things your public business should be doing to make your investment successful. The more you learn about what Small Business should be doing, the greater your potential for becoming a better investor.

 

Now go play!

 

- Phil Town

Answer the critics with your own Rule One success

Warren Buffett once said that people either get this Rule One type strategy right away or they never do. Paul Brown, a book critic for the New York Times, falls into the latter category. His review, published in the NY Times in April 2010, basically argues the book is ‘intriguing’ but ‘almost nothing here registers as new.’

 

This sort of passive aggression reminds me of a story Dr. Jonas Salk told me a long time ago when I was investing in a business he had an interest in. I was at his home in La Jolla, California, for dinner and Dr. Salk was explaining how critics react to a radical new view of anything. He said, “When I was beginning work on a cure for polio, I learned that when you start something new you’ll go through three phases of interaction with your critics. The first phase happens when you begin to do something most people don’t do. In my case, I believed it was possible to produce a cure for polio with a killed virus. It had been tried before by other researchers unsuccessfully so critics told me I was throwing away my career by wasting my time and funding on something that everyone knew wouldn’t work. So the first phase for your critics is when they say, ‘It can’t be done.’”

 

Dr. Salk went on, “But I believed I had found a way to make it work. I kept at it and trials began to show some good results. Then the critics changed to Phase Two. They said, “Well, okay you have some data but really it’s just trivial and won’t make any difference in the long run.” So the Second Phase for your critics is to say, ‘It’s trivial.’”

 

Dr. Salk smiled mischievously. He said, “Then I was successful and they went to the Third Stage. They said, ‘We knew it all the time.’”

 

I think this may be the evolution of Rule One investing critics. Certainly, the greatest Rule One type investors – Buffett, Graham, Lambert, Ruane and many others – were once regularly blasted by critics for being out of touch, over the hill or just plain lucky. One of the most enduring books on investing ever written – which I dislike so much I won’t even write the title – claims Mr. Buffett is no more skilled at investing than a monkey picking stocks randomly and that his apparent skill and high rates of return are the result of a “statistical abnormality” rather like a guy who tosses a coin and gets 100 heads in a row.

 

Today, however, many experts agree that the market often prices businesses irrationally and if you can buy a business when its stock is priced irrationally low, as Rule One investors attempt to do, you position yourself to potentially make a significant  rate of return. (For an explanation of why that is the case, read Yale professor Robert Shiller’s Irrational Exuberance.)  Today, I believe few experts would go so far as to say Rule One-type investing is wrong and won’t work.

 

What they will say is what Paul Brown said. That we’ve heard it all before. That we know that already. That it’s trivial. In Dr. Salk’s terms – he is in Phase Two.

 

The truth is – we haven’t heard it all before really. Most people I talk to are shocked at the idea that one should buy a stock and then hope the price goes down. They can’t believe they’ve heard me correctly. It is a completely counterintuitive concept and Mr. Brown shrugs it off like it’s the heart and soul of value investing. But in fact, it’s everything. If you can’t do it… If you have done the appropriate analysis and valuation of a company you have determined to be “wonderful” and then can’t buy a piece of it and be ecstatic that the price continues to drop, then you really don’t know what you are doing when it comes to investing.

 

This simple but fundamental gut-check can tell you more about whether you are doing your homework and investing or just gambling by investing in stocks than anything else I can think of. Yet, really now, who does it?  A handful of great investors. I imagine that everyone else, and I mean almost every single mutual fund manager and pension fund manager, experience the exact opposite emotion when their stock picks drop in price. The press rush to judge the manager as having lost his touch. His investors scream and then bail. And if his stock picks keep dropping, the last thing he will feel is ecstatic. He may feel like vomiting maybe, or jumping off a ledge, but ecstatic?  Not so much.

 

Don’t believe the Phase Two critics who try to trivialize the central core of my approach to great long-term investing. There is nothing Phase Two about it.. Learn it, consider doing it. And if and when you start making money, watch the critics move on to Phase Three and tell you they knew it all the time.

 

Now go play!

 

- Phil Town

FINALLY – HERE’S WHAT HAPPENED TO OUR ECONOMY

As a Payback Time investor you should always be aware of what is happening in the market so that you can try to foresee when the market is being set up for a potential crisis. A while back I wrote that the blame for the credit crisis and the subsequent affect it had on the stock market should land on the shoulders of the people who didn’t repay their loans and the lenders who lent them the money. Everything else followed from those two sets of players. Many of you objected that I was letting Wall Street off easy. You were right. I was right. We were both right. Read on because here’s what happened. And if you want to know more, read a great book called The Big Short, by Michael Lewis.

 

1. The Federal Reserve lowered the cost of borrowing to prevent a recession. These cheap loans made real estate payments go down and real estate prices to go up because for the same money per month borrowers could afford bigger, more expensive houses. Real estate prices shot up and made real estate speculation seem like investing as people borrowed and bought houses to sell them and make profits.
2. At the same time, the Feds encouraged banks and mortgage companies to lend to marginal borrowers by threatening to sue banks for discrimination and by pushing Fannie Mae to buy more marginal loans.
3. Investment banks discovered they could bundle these loans and sell the cash flows from them as different mortgage securities with different risk and return levels. With the help of the rating agencies and the supposed subordination of the bonds some of these cash flows were even rated AAA. These bonds were a big hit with investors because they had a high rate of return and the (supposed) low level risk of a government bond. The big demand for these mortgage bonds encouraged lenders to do even more lending to even less qualified borrowers because they weren’t holding the mortgage — they were selling it to investment banks or the federal government and then using the cash to make more loans.
4. The worst of the pool of mortgages - the subprime mortgages - were harder to sell. The investment banks solved that problem by pooling all of the worst mortgages together into a mortgage bond and got it rated AAA as well. As Lewis puts it, “This was financial alchemy, turning lead into gold.” It was accomplished by the use of a mathematical formula that had worked for many years. The formula ‘proved’ that if you combine a lot of unrelated high risk loans into one big bond, the risk of the bond as a whole was quite low. The rating agencies and investment banks didn’t realize that subprime loans in California were, in fact, related to subprime loans in Florida by the fact that both were owed by speculators and the moment real estate started to level off, the borrowers would stop paying their mortgages. Formula in hand, the investment bankers convinced the rating agencies these bonds were AAA and then convinced AIG to insure them. The demand for these types of mortgage bonds worsened the problem as now there was a great deal of money earmarked to lend to just about anyone. (If you want to know more, Lewis really lays out the details on how the investment banks turned low quality loans into high quality mortgage backed securities.)
5. Still, there was no real problem yet because if these bonds failed, the investors would lose and then there would be less money to lend, which would shut down the machine. Not a good situation, but not a crisis.
6. Here comes the problem: Some very smart insiders saw the writing on the wall and knew that these risky bonds would default as soon as the real estate bubble burst. These investors wanted a way to profit if these bonds failed completely. But… at the time there was no good way to do that.
7. Several clever investment banks created an insurance policy against the default of the bonds and got AIG to write it for a small premium. AIG didn’t understand the risk these bonds represented, because they are in the business of insuring investments that rarely go bad. By buying insurance against the bonds defaulting, these investors would make a fortune when the bonds defaulted. Because they knew they were going to default.
8. Then these investment banks realized the insurance policy was just like the original bond. If the bond was good, then the insurance wouldn’t pay off. So they created a derivative of the bond insurance policy (which was already a kind of derivative of the mortgage bond, which was already a derivative of the original mortgages). This derivative acted just like the bond except with massive leverage. If the bond goes down, you lose beyond huge. This derivative was taking the other side of the smart guy’s short. In other words, they were betting that the bonds would stay solvent.
9. Just as they securitized the original mortgages, investment banks sold securities on these derivatives of derivatives of derivatives and got a portion of them rated AAA, too. The bond sales guys sold these things everywhere because they were AAA low risk and had a high return. They ate their own cooking and bought billions of dollars of these things for their own firms.
10. Then real estate did the inevitable and stopped going up. Subprime mortgage borrowers did what they had to do and started defaulting almost immediately, surprising almost everyone except the guys who saw it coming and had insured against it (went short). And the bonds started failing.
11. Investment banks lost billions and suddenly had no money to pay off their daily investing trades, which threatened to boil into a worldwide credit freeze. The situation became worse because the bonds that had been guaranteed by AIG weren’t so guaranteed after all because AIG didn’t have the money to pay up on the insurance policies.
12. Nearly every single major financial company threatened to go bankrupt, either because it made investments in securities that went bad, or because they could not get paid on their investments held by institutions becoming insolvent.
13. Our federal government decided to save all these firms and we now owe trillions.

The moral of the story? Depends on who you talk to, but as an investor I think we can conclude that the mere fact that everyone is doing something is a huge sign to not do it. Watch for signs. Is there a stampeding crowd? Think before you follow it. There’s a good chance it doesn’t know where it is going. When strippers in Las Vegas are paying mortgages on 5 houses (see the book), you might want to short real estate.

Just remember what we’ve learned over and over from history: Where there is massive greed, run the opposite way.

Now go play!

- Phil Town

Tax Time is a Good Time to Consider a Berky

Tax time means time to wake up and consider any available strategies that can help you reduce your tax liability. In my book, Payback Time, I spend a whole chapter talking about Berkies. A Berky is any investment that YOU load up with cash, invest it, and then keep loading it up with cash. The key words that turn a normal investment account into a Berky are “recurring cash.” Now is great time to consider investing in a Berky account that will give you tax-free or tax-deferred investment returns.

For example, a self-directed IRA makes a good Berky. The federal government lets you put up to $5,000 – tax-deferred – into your IRA each year. That money will directly reduce your tax liability for the year. The idea is that eventually you will pay the taxes on that money when you retire, but for most people those taxes will be at a much lower tax bracket. If you don’t have a self-directed IRA, then you should consider opening one, because it’s like giving yourself free money. Without this type of Berky, you could end up paying a lot of unnecessary tax.

You say you didn’t put in $5,000 last year? Well, then you may have paid $1,000 to $2,000 to the Feds that you could have squirreled away in a tax-deferred investment vehicle. That is a huge missed opportunity. Do that every year for 40 years and you’ve pretty much kissed off thousands of dollars.

Some Berkies can create instant investment capital. For example, instead of paying for health insurance, consider opening a Health Savings Account (HSA). With this tax-deferred investment vehicle, you could save a significant amount of money. Here’s how this Berky works: Your insurance company will give you much lower monthly premiums if you carry a big deductible because you are paying a big chunk up front before the insurance kicks in and you are heavily incentivized to not use your insurance. By increasing your deductible, your premiums go down. The difference in premium is the money you use to fund your HSA.

And here’s the monster upside: If you can stay healthy, then you get to keep the money in the HSA, invest it and use it later when you retire. And you can do that every year. Imagine staying healthy and stashing away $400 a month out of your monthly insurance premium payments into an HSA for the next 40 years. Even invested at just 8% average, you’d have almost $1.5 million when you retire – free. Hey, you can give the money to the Feds and the insurance companies or you can be fortunate enough to stay healthy and make yourself a small fortune. Your call.

A well-managed Berky that’s filled up regularly with pre-tax money – money you were otherwise going to give the Feds – can earn you to a great retirement – if you make the effort. This tax year make it a point to keep some money for yourself for next year and well beyond.

Now go play!

Phil

TV and More TV

Wow, everyone, the whirlwind continues. Just wanted to catch you up on some recent TV appearances.

 

 

MSNBC’s “Your Business”

Sunday, March 28

I’ve been on this show about 30 times and love the fact that it’s geared for small business owners.  Yesterday I sat with the show host, JJ Ramberg, and Mike Michalowicz, the founder of Obsidian Launch and author of The Toilet Paper Entrepreneur. We had a pretty lively discussion about health care reform and small business franchising and the fine art of choosing a business partner.

Watch it here:

Health Care Reform

Small Business Franchises

 

Yahoo! Finance — Tech Ticker

Thursday, March 25

In New York last week I met with Aaron Task, host of Tech Ticker of Yahoo! Finance, to talk about Payback Time. Aaron is a seasoned Wall Street correspondent; he covered Wall Street for a decade at TheStreet.com. We chatted up the fact that while the economy is down, the market is currently pretty bullish. It reminds me of the 70s. That market was ripe for finding undervalued companies and, guess what, I think today’s market is, too.

See it here.

 

 

CNBC’s “Closing Bell”

Thursday, March 25

I also headed over to CNBC to tape a segment on the exchange floor after Fed chief Bernanke stated that rates will stay low to aid the ailing economy.  In this clip, I dig in with Alan Gayle, Senior Investment Strategist and Director of Asset Allocation for Ridgeworth Capital Management and David Mann Regional Head of Research, Americas, from Standard Chartered Bank, talking about the current momentum in the market.

Take a look here.

 

 

Also, I’ve shared with you that I’ve been preparing a cool new financial cable TV show called “Payback Time TV.” A couple of focus groups are watching the pilot this week and they are going to tell us what they think. Can’t wait to hear the results! Lots of effort went into the show; it really brings the Payback Time strategy to life.  Announcements coming soon about that.

 

 

P.S. Don’t forget that the Payback Time Teleseminar series starts Wednesday, APRIL 7th at 6:00 p.m. ET. I’ll be doing four calls – every Wednesday starting April 7th – and I’ll be covering two chapters of Payback Time per call, which means we’ll have covered the entire book by the end of April. Thousands have registered! Have you? If you haven’t, just order a copy of Payback Time from my website,

www.PaybackTime.com.

 

Now go play!

 

- Phil Town

Phil Town on Green Mountain Coffee Roasters

A few days ago, I received the following email from Sean, who likes Green Mountain Coffee Roasters as a possible investment.  He wants to know, how does GMCR fit in with what you learned in Rule #1 and Payback Time?  Read his note below, followed by my comments at the end of the post.

Hi Phil,

I just finished reading Payback Time! Thanks for all that you are doing to help the little guy take back control. After reading both of your books I feel a sense of financial freedom and control over my retirement.

I was hoping to get your thoughts on Green Mountain Coffee Rosters (GMCR). This stock has been on an absolute roll over the last several years. It has gained over 200% in the past 52 weeks alone!

#1 on the New York Times Bestseller List – Two Weeks Running!

Wow! More good news… Payback Time hit #1 on the New York Times bestseller list for the second week in a row! I appreciate the interest being generated out there and even more, I sincerely hope that the information presented in this book can help you financially as you face these tough economic times.

 

When I wrote this book, I estimated my market place to be around 50 million people. My ideal reader ranges from the average investor who shops at Walmart to the more sophisticated investor who regularly talks to his broker. The range is enormous and I love that because all of us share one common concern – we care about our financial health. 

 

And that’s where I believe my book can help you no matter what type of investor you are, because Payback Time teaches you how to think for yourself – how to choose those “wonderful businesses” that are not only meaningful to you but have the potential to bring good returns to your table... How to take those really important steps that motivate you to become an educated investor and not an ignorant one... How it’s possible to make some special things happen for you and your family.

 

Investment knowledge is a powerful thing. I want you to have it. I want you to understand what you are facing as you prepare for the years ahead. I want you to understand that you have it within yourself to take charge of your financial condition and do some things right now that can potentially create a turning point.

 

And I’m willing to help you get to that place in your life. Remember there is still time to sign up for my Payback Time Teleseminar Series. Those complimentary calls start April. 7^th. Click here if you have not yet purchased a copy of Payback Time… Buy one and you are automatically registered for these educational outreaches.

 

It’s been a good couple of weeks… but there’s more good stuff ahead.

 

Phil Town

Master Your Workday Now

Wow, what a fabulous few weeks it’s been! Such a whirlwind with the phenomenal launch of Payback Time and all of the TV interviews I’ve been doing. It’s exciting but there is so much to do! Fortunately, I’ve come across a great tool in a new best-selling book called Master Your Workday Now! by my colleague Michael Linenberger. His program is all about getting your workday under control, including how to slay the e-mail beast that I know you guys have been experiencing firsthand!

Here is one great tip from him:

Learn how to use your to-do list correctly by creating a “Critical Now” category. The problem with most to-do lists is that they quickly end up with way too many items marked top priority, and the list becomes useless.  Instead, write a maximum of 5 high-priority items, reserved only for things that are absolutely due today.  To help with that, use this “going home test.” Is this item so critical that I would work all evening to make sure it was completed?” If not, don’t put it in the top priority. 

Michael says:

"You are never going to get it all done - you just won't. Rather, you will find order and peace in your workday if you accept it, and then do one more thing. Implement a system that consistently shows you what's most critical at any moment, what to do after the critical, and where to find everything else when you need to. That system is not hard - it's quite simple to set up."

Check out his brilliant new book:  Go to www.MasterYourWorkday.com

You’ll be glad you did.

Phil Town

Phil Town Comments on Under Armour

I got this question from Mark recently, about UA (Under Armour).  Nice work. I'm going to talk about this on my new TV show.  Here's your homework:  justify a long term strategy in UA by finding a similar business that sustained 15 year growth at 20%.

Hi Phil,

First, I want to thank you for all of the knowledge you have shared with me in Rule #1 and now in Payback Time.  I have taken control of my investments for the first time and really feel empowered.  I saw you speak at the Get Motivated seminar in Denver a few months back and was immediately intrigued to learn more.  Since then, I've become the owner of a couple good companies and it has already begun to pay off.

I'm starting to gain a little confidence now and wondered what your thoughts were on Under Armour (UA).