Phil Town

Phil Town Explains Payback Time and Stockpiling

The other day I received a comment from Doug, about a discussion he had with his wife.  (Click here to read his question.)  The topic: the differences between Rule #1 investing, Payback Time, and value investing.  Here's what I told him.

Hi Doug (and Ms. Doug),

I love your post.  Thank you.  First, we're not 'value' investors if by that we mean guys who buy cigar butts.  But we could be in the future if cigar butts are the way to go.  It's just that right now we still have a pretty solid economy and there aren't many cigar butts lying around, so it's too tough to make any money doing that sort of Ben Graham thing. 

We still want wonderful businesses.  So I still don't know what to call us.  Maybe "Valuation" investors.  Basically, we try to do the same thing Graham did - find the value of the thing you want to buy.  In our case (and Warren Buffett's as well) we're not just considering the net equity of the business if it dies when we look at value.  We are also looking at a business as a living thing that produces cash and will do so for a long time into the future.  That kind of business is, by definition, "wonderful" and has a much higher value alive than dead because of all that cash it may earn in the future. 

Phil Town Interviewed by ABC

Phil Town Interviewed by Maria Bartiromo

Stockpile Google?

Stockpiling anything is about knowing you have a long term durable business with a big protective moat.  The 'knowing' part of the equation is what slips by many wanna-be investors. 

In Rule #1 I suggested trading a stock with technical signals to avoid the problem, essentially, of 'knowing'.  Or rather, not knowing is more accurate.  You give away some of the profit and sometimes all of the profit when you use technical signals in exchange for not violating Rule #1 - 'Don't lose money'.  You get in with the Big Guys.  You get out with the Big Guys.  You screw up the 'knowing' and the tools get you clear of the plane wreck.  Pretty nice trade off so you can sleep at night. 

The problem is, you get cranking on tools in a down market like this one and you get the 'death of a thousand cuts'.  You go in on green and right away, mostly because you bought in, the stock price goes down.  You get out on red.  You wait.  It goes up. You get in on Green and it goes down because you bought it again (as you dang well knew it would.  "See honey, I told you it would do that.") 

In THIS market there is a better way.  In fact, if you don't like investing, in all markets there is a better way:  Stockpiling.

Payback Time, my new book, is coming out on March 2.  Go over to PaybackTime.com and order and I'll hook you up with some cool freebies.  What it's about is how to load up the truck, or stockpile, a bigger and bigger bunch of ownership in a few businesses you truly believe in.

And that is the key.  You've got to know what you can know and what you can't.  So let's get back to Google.  What can you know?  Lots of stuff.  What's more important is what you can't know.  You, unless you have a real insight into technology, can't know where this business will be in 20 years.  It has a new business model that is just crushing competition everywhere, but is it sustainable?  How fast will they grow?  Is this Microsoft in 1985?  Is this Yahoo in 1999?  You've got to know if you're going to load up on Google every time you get a chance.  You have to know that this business will be around to support your family in 20 years.  And you've got to know what it's worth.  And you've got to know if you don't know, or can't know, those things.

I love Google.  What an amazing business.  But I don't know how to know those things I have to know to stockpile Google.  Of course, I can buy it in my risky biz account.  Take 10% of your portfolio and have some fun with it on potential awesome long term winners that you just can't know what you have to know about.  But I can't see putting 20% to 50% of my net worth in a business that could be gone in ten years because of some new technology revolution. 

Yes, it could be a forever huge moat gigantic wonderful business.  But personally I can't get enough of a grip on it to say I know it.  I'm just not certain.  So it (and companies like Garmin, which I also really like) are relegated to the risky side of investing, no matter how good they look today.

Now go play,

Phil Town

Buying Above the MOS- Part 2

I really appreciate John's email (read Part 1) discussing his analysis of Gamestop (GME) and Walgreens (WAG).  I did a bit on GME in the last post. Let's talk about WAG here.  John is getting whipsawed by using tech tools to buy and sell WAG.  What he's missing is this:  He has to figure out the value of the business before he buys anything and then he has to buy with a big Margin of Safety, MOS.  

I get a value for WAG of about $44 and a MOS for WAG at about $22 a share.  Here's my starting point for figuring that out: Book value per share growth rate of about 15% average (figuring back in dividends). Analysts put growth at 14%.  I'll use that instead because its lower.  WAGs been doing a high PE of about 18 lately but I'll use a bit higher than that since we're not selling until the market gets good.  Let's say lower than the Rule #1 PE of 28 but higher than 18.  Split the diff?  Sure.  23.  Start with the TTM EPS of $2.10 and grow it at 14% a year and we end up with the current Sticker Price or Value of $44.

If John was buying in recently he was buying pretty close to the retail value of the business and then hoping it would go up.  It often will not, simply because the Big Guys can do the math, too, and can come to the same conclusion we do - the stock is at full price.  When that happens, they either hold or sell, neither of which will make the price go up and the latter of which will give John ulcers because their selling or holding is causing the price to drop.  So you guys have to do the work and get to a decent and conservative Sticker Price - or Value and then discount it.  By the way, at the current price of $33, its going to take nearly nine years to get our money back.  That's on the edge of not buyable for me.  I recommend thinking about it at 10 year or less but only if the MOS is there and I like 8 years or less with an MOS.  So if we don't have a good payback time and we don't have a good MOS so we don't buy.  John had neither and got cut up by tech signals.  No mas' amigo!  MOS, PBT, wonderful business.  

Now go play,

Phil Town

Buying Above the MOS- Part 1

John is having a wild ride on Gamestop (GME) and is asking for a bit of help:

"Hello Phil Town, I WANT to believe in this system and as someone with not a financial bone in my body, I am beginning to worry about retirement now in my early 40’s with little (~$20,000) in the way of retirement savings. I read Rule #1, some sections repeatedly, to insure that I’m following all of the criteria. I did the research and came up with about 8 businesses out of the 80+ that I researched, that fit the guidelines for a wonderful business. I did a few simulated buys, none of which returned much of anything, but at least they didn’t go completely awry. Currently, although this may be premature (perhaps it will still turn around although I’ve got Sell signals on two of the tools), I am now ‘taking a bath’ with Gamestop (GME) waiting for it to give me the third Sell signal (see attached). It appears to be doing the same thing that a simulated buy did with Walgreen’s (WAG). If I had bought in on that one after getting a Buy signal from all three tools, I would have lost money by the time the Sell signals came in (see attached). It headed down the day following the Buy signals and GME appears to be doing the same.

I’m using the tools from two different sites (Trade King & Yahoo Finance), looking at them over 1, 3, and 6 month periods (in case the period length makes a difference), and watching the Buy and Sell signals but I don’t seem to be getting consistent results in terms of keeping me safe from losses. I’m using your recommended numbers (14,5 for SS; 8, 17, 9 for MACD; 10 for MA) for the tools. I’ve looked at the history of most of my “wonderful businesses” and looked at how they did with respect to the tools, but I often see the Sell signals come in too late to avoid losses. I would really appreciate any feedback/examples you can provide on using the tools because I see some positive comments about this system, which makes me wonder what I’m doing wrong. I want to believe I can make this work but I’m quickly losing confidence in my ability to execute this system with positive results. I realize that it’s not your responsibility if people are unable to execute properly but I feel like I’m following all of the guidelines/criteria “to a T” and I’m at a loss as to why this isn’t working"

Phil Town's Response: 

The issue seems to be that as soon as it gets three green arrows and he gets in, it goes down like a brick. The problem is obvious: The problem is that whenever John buys a stock it goes down. The solution for the rest of us is to short everything John buys.  (John may be posting his future trades on this site for a fee.  Stay tuned.)

Or John is making a mistake.

Study. Learn. Read.

This comment came in from Renato:  "Hi Phil Town,  I heard you speak at a motivation seminar this weekend in AZ.  I liked the way you presented yourself.  I just wanted to know if you had any words of wisdom or any advice to guide me in the right direction.  I am happily married with 3 beautiful children and one on the way.  I am currently renting but in the market to getting my first home. I am 32 years old and wanting to secure my future for me and my family.  I have a good job making 60+ a year but I need to make sure I have more avenues of income.  I never gave it much thought before but now with my family getting bigger I want to make sure that I have enough to put them through college. I know you had many sacrifices to get where you are at, I have made many sacrifices too and now I would like to see if there is any investing advice that you could provide a hard working family man......Thanks for your time."

Here is Phil's response to Renato:

Study.  Learn.  Read.  Get my new book, Payback Time.  If you decide to invest get the best tools.  Study the best investors: Warren Buffett, Eddie Lampert, Joel Greenblatt, Ben Graham, Bill Nygren, Bill Ruane, John Templeton.  Buy wonderful businesses when on sale.  All else follows.

Now go play,

Phil Town

That 70’s Show (continued)

In my last post I wrote about how there is a parallel between government policies in the late 1960’s and early 1970’s and now.  And that I believe there will be a similar stock market reaction to those policies. And since money to pay for these entitlement and international programs doesn’t come out of thin air, the way politicians try to have their cake and eat it too is predictable: Tax the rich and print the money.  In the last post I tried to show you how taxing the ‘rich’ predictably reduces jobs and stops the stock market in its tracks.  No new jobs and no stock market movement is a bad thing for getting re-elected so politicians will try to reduce the impact of taxation in a time-honored bit of incredible stupidity.  They will go for Door #2 - Print money.

The Federal Reserve Bank can do this legally.  This new money will have a brief positive impact as it rolls through the economy.  It makes people believe for a time that things are okay.   I give it 3-5 years max before the positive impact evaporates and prices begin to rise on commodities like gas and food.  Higher prices in commodities come from less production due to less investment and higher demand due to increased cash in the economy.  So they will print more money to ‘help’ people deal with price increases and that will cause prices to increase even faster.  In Zimbabwe, it only took a couple of years to inflate prices so much it now costs 15,000,000,000 Zimbabwe dollars to buy a loaf of bread because the government policy unintentionally discouraged the producers of wheat while increasing the production of paper money.

But wait!  There’s more! Inflation makes lending on a long term basis very risky.  You lend $1 million of buying power today but are paid back in five years with $500,000 of buying power plus some interest.  That doesn’t work for lenders so they either stop lending or they charge more to make a business loan.  We are seeing the effect now of massive government borrowing essentially mopping up all the bank liquidity and driving up rates to business borrowers.  In five years, it is possible to see  20% or 30% or 100% interest per year. Lending stops.  Businesses can’t borrow so they can’t grow.  If they can’t grow, their stock prices go down.

Income taxes and printing money.  What we should do is stop taxing productivity (income and capital gains taxes) and begin taxing consumption (national sales tax – see fairtax.org).  We won’t, but we should. Instead we’ll keep electing people who are all about getting us entitlements and we’ll be stuck in stagflation land until we get so sick of it we elect people who have an economic brain.

Next:  How to profit from the stupidity of our fellow Americans

Now go play.

Phil Town

That 70's Show

The stock market is well on its way to potentially repeating the market from 1965 to 1983 – 18 years of an indexed 0% market return.  We have all the ingredients.  Here was the situation by the early 70’s:

-       We were ending an expensive war

-       We were spending massive federal money to create a ‘great society’

-       We were massively intervening in financial markets

-       The stock market was flat after the end of a long bull market

-       Inflation was on the way

These things have a big effect on stock prices.  When the American people forget that the government has no money, we vote for federal government to solve all sorts of problems.  The problem we create when we do that is the problem of finding the money.  The money has to come from somewhere.  There are only two choices of where to get the money: 1) higher taxes and/or 2) print the money.  Both choices are bad for stocks. 

Higher taxes take the money from upper middle class and rich citizens.  These are the people who have enough extra cash after personal expenses to have big bank accounts, big bond accounts and big investing accounts.  Higher taxes mean the money in those accounts goes down to pay the higher taxes. That means some stocks get sold, bonds get sold and cash is withdrawn from banks.

In addition, cash for starting new businesses and investing in growing businesses has to come from the upper middle and rich classes of investors because those investments are riskier than investing in businesses that are established.  Many startups and early stage businesses fail and all of the investor capital is lost.  The cash to invest in those businesses is only available from investors who have plenty of money to burn.  As taxes go up on those citizens, this is the first money that dries up.  Since these are the businesses that can create new jobs, job creation stalls and consumer spending shrinks.  And stock prices go down.

And then what happens?  Well, the politicians react predictably and make it worse.  I’ll tell you about that in the next post. 

Now go play 

Phil Town

Phil Town recommends website

As you guys know, I almost never blog about someone else’s blog, but you know the old saying about the apple falling not so far from the tree?  Well, this person’s writing is phenomenal.  Really.  The fact that the blog is written by my daughter, Danielle, has nothing to do with praising her work.  Nah. I can’t be bought for love or money….. Well, make that, I can’t be bought for money.  Love is another story altogether.  I love my daughter and I do whatever I can to help her go forward in her life, including subjecting you guys to a brief blog on her new website, BrownButterandBourbon.com . 

First, the name of the website itself is compelling, isn’t it?  Brown Butter & Bourbon?  Doesn’t the title pull on you to find out what it’s all about?  Well, a quick trip to the site will get you to the answer but I’ll spare you the trip.  It’s about Danielle’s unique style developed from her life in Jackson Hole and Wellesley, Mass and Oxford, England and New York, applied to her home dinner parties.  

I mean, seriously, you’ve got to be coming from a different place when you can make something really cool and really beautiful out of an image of a dead salmon lying on an iceberg.  That’s not the first thing that comes to my mind when I’m thinking about having a dinner party.  Of course, the first thing that comes to my mind in that situation is which caterer I should call to take this thing off my hands.  

And maybe that’s the point of her blog – giving us some pretty (if strange and different) ideas of how a little get-together can be easily put together without the caterer.  And maybe that would actually be cool to do.  You know, actually do the dinner ourselves. 

But you guys do that already – do it yourself, I mean.  So for you, her blog will just be another set of cool and unusual ideas for doing it yourself.  Not a bad thing at all.  And her writing style is pretty good reading, if I do say so myself. Perhaps, in spite of her reluctance to admit it, the apple really doesn’t fall far from the tree.

Now go play.

Phil Town