Phil Town

Phil Town on Game Stop (GME)

Take a look at GameStop (GME) with Juergen (see letter below) for the last year.  Assuming he's right about the 4Ms and the price being at or below MOS, how would you do trading it?  The price dropped from $55 to $30, a loss of 46% if you bought and held.  Instead, moving in and out, you would have done pretty okay.  Not great, but a whole lot better than a 46% loss. 

Now go play.

Phil Town

IS RULE #1 INVESTING VALUE INVESTING?

Ever since Rule #1 hit the bookshelves I've been doing TV and radio shows to boost the sales.   I think I've done something like 40 each.  On occasion the interviewer is an investor and has skimmed the book, and has come to the conclusion that I am a Value Investor. 

Here's the logic:  Rule #1 urges people to look for undervalued businesses and buy them when they are cheap -- therefore I am a Value Investor.   Makes a certain sense, but it's wrong.

Value Investing was pioneered by Ben Graham, Warren Buffett's teacher.  Graham thought the best way to make money was to buy businesses when they are undervalued, wait for the market to realize its mistake, and then sell them when they were bid up to retail… and in all fairness to my interviewers, that does sound a lot like my way of doing things.   

However, Graham went on to define what "undervalued" meant to him.

5 Stocks: A Rule #1 Analysis of Jim Jubak's Picks

One way to learn about investing your own money is to do your own analysis on investing advice from the pros.  It's kind of fun to do a Rule #1 analysis on a list of stocks that some professional has just claimed will be high return investments and find that the results of the analysis show you that the stocks are either highly speculative or way overpriced. 

And it's even more fun when you discover an occasional wonderful business that's on sale.

Jim Jubak writes a column on investing on MSN Money called Jubak's Journal.  Today (Dec. 7) he picks five stocks that should do well as the dollar falls in value against other currencies.  Let's take a look at the five and see if any of them is a great business that's on sale.

Checking The Big Five Numbers on a Quarterly Basis

I received an email the other day from Brian, who felt that I could get into more detail on how to redo the sticker price of a company on a quarterly basis.

As Brian pointed out,

"...It completes the entire process of investing in a wonderful company at an attractive price and following the company quarterly until it is no longer a desirable investment.  Without knowing the value of a company on a quarterly basis after doing the initial research, one would be investing blindly.  Essentially, you would only be left with the 3 Tools as your only means of protection against loss until you are able to evaluate the company again.  This evaluation would only come once every fiscal year since it appears that MSN Money only publishes this data on an annual basis.  Will you help us out in determining the quarterly value of a business?"

Thanks, Brian, for staying on me to get this issue clarified.  We DEFINITELY want to keep up on the Big Five Numbers on the businesses we own or are watching on a quarterly basis.  It's just part of the homework of owning a business, gang, so get used to it. 

One of the most important things you can do as an owner is to catch problems before they bite you.  Checking the ROIC and Growth Rates quarterly is the most efficient way to see changes and challenges happening.

WAG Valuation Competition Results

Here are the results for WAG's Value as posted by the four of you who took up the challenge (if I missed anyone, my apologies):

Adolfo        $58
Doug          $42
Benjamin    $61
Frank         $39

The first thing that should jump out at us is a big WOW… that we are now able to kind of figure out the value of a business.  We might not all agree, but we're making progress.

Second, we cannot price a business unless we think it is a predictable business.  Or I should say, we won't price it.  We can price an unpredictable business but not with any kind of certainty because the current value of the business is a prediction about its future, isn’t it? 

If we don’t know what the heck the future might be, we don’t have much of an idea about its value, other than that it is probably worth something.  We don’t want to be guessing like that with our hard earned money.  We want certainty.  Fortunately, WAG has been predictable historically, so it's a good candidate for a fairly accurate valuation.

For starters, let’s set a growth rate for WAG.

War of the Worlds, Part Three - The Price is Not Always The Value

These days, no one will admit that they believe that the price of a stock is always also the value of the stock, but it wasn’t all that long ago that "PRICE = VALUE" was taught as gospel in most business schools.  And even today, in spite of the fact that the stock market drop from 2000 to 2003 proved that stocks are sometimes badly overpriced (and which also produced the implication that stocks must also sometimes be badly underpriced), books continue to be written which explain in great statistical detail why it is impossible for anyone to have better long term returns than the market itself. 

This paradigm is utter and total baloney, which is only sustained by a lot of hot air about "statistical exceptions".  These "statistical exceptions" allow the academic to "prove" that Graham, Buffett, Nygren, Ruane, Lampert and many more great investors only beat the market because in all random systems there are occasionally long streaks that appear to be caused by something when in fact they are caused by nothing.  In other words, it isn’t Buffett’s strategy that is successful – it's just random luck that had to land on somebody.

Buffett’s response to this absolute nonsense is to point out that all of the guys who are "statistical exceptions" invest with pretty much the same strategy.

War of the Worlds, Part Two: Good Biz, Bad Biz

To recap: I got in a battle with a guy from Kiplinger on Maria Bartiromo’s show, Closing Bell. He said that individual investors can only succeed if they diversify (easily done with mutual funds) and hold through the drops in the market because the little guy can’t pick wonderful businesses that are on sale, nor know when to get out.  Maria was also skeptical that the little guy could successfully use technical tools to get in and out when the Big Guys get in and out.  Let’s see if we can convince our doubters, shall we?

The first step of knowing when to buy and when to sell is to know the business that you are buying well enough to be able to put a value on it.  It is absolutely basic to Rule #1 investing that the business is wonderful. 

Wonderful businesses are easily found, but you do have to know what "wonderful" looks like.  I could write a book about it.  Oh, wait.  I did write a book about it.  So read it.  But I’ll cover the main points here for you anyway.  I call the main points "The Four M’s”, the first 3 of which are all about "wonderfulness".

Rule #1 in Softcover: August 28

This is a reminder that Rule #1 comes out in paperback on August 28.

The new edition will include an additional chapter of material on using Rule #1 to manage mutual funds.

Click here to pre-order and to read more. 

Thanks!

The Motley Fool Chooses Rule #1 as a Summer Beach Read

If you're looking for something to read while you're at the beach, Rule #1 may be it, according to the Personal Finance blog over at The Motley Fool, which chose it as one of 7 summer beach reads.  Many thanks to the Fool for the recommendation.

How to Read This Blog

I use this site primarily for Rule #1 investing case studies and to answer reader-submitted questions about companies and businesses that may be on sale.  I also use it to broadcast my latest news and events -- including speaking engagements, seminars, and TV appearances.

TO GET STARTED LEARNING ABOUT RULE #1:

• Go to the very first post.  Read everything in chronological order by clicking on the ">>" arrow at the top of the page.
  
  
• Visit my FAQ.
  
  There are hundreds of free examples that supplement the information found in my book.

TO ACCESS MY FREE FINANCIAL CALCULATORS: 

• Click here.

TO LEARN ABOUT PHIL TOWN'S UPCOMING SEMINARS, TV APPEARANCES AND OTHER EVENTS:

• Click here.