Phil Town

Welcome, New Rule #1 Readers

No Question of the Week this week.  If you're new to the Rule #1 Blog and are looking for information to supplement all that you learned in the book, the best place to start is with Phil Town's the very first post-- then click the right-side arrow at the top of the screen to proceed to the next page.  Keep going until you hit the end.

Then go play!

Join Phil on CNBC! (April 17, 2007)

(For new Rule #1 Blog posts, scroll down to the post beneath this one.)

CNBC IS DOING A HUGE SHOW ABOUT RULE #1 (and a few other wealth building secrets!) on April 17 AND YOU are invited to come to NYC to be in a LIVE audience.   

New!!!  CNBC Wealth Summit / "The Millionaire Inside" Trailer:

(QuickTime version. To view the Windows Media Player Version, click "Continue Reading" below.)

For details on how to EMAIL TODAY to become part of the studio audience, click the "Continue Reading..." link below. 

Rule #1 a New Year's Resolution for Blogging Stocks

More news about Rule #1 -- the folks over at AOL Money & Finance's Blogging Stocks included my book in a recent post entitled "New Year's resolution: Read these books".  Thanks to Zac Bissonnette for the mention.

Happy 2007

Happy New Year!  Posting has been light the past two weeks due to the holidays, but you should expect to see some new material up on the Rule #1 Blog soon.

First off, some news & milestones:

• Rule #1 was Amazon's best-selling business book for 2006
• Rule #1 was the # 5 best-selling business book in Canada in 2006 (click here to see who else was on the list)

And for those wondering about my speaking schedule, here are two upcoming dates when I'll be touring with Get Motivated:

• January 17, Tucscon, AZ
• January 25, Atlanta, GA

Thank you all for your continued support of the book and contributions to this blog.  I hope your 2007 is off to a happy and profitable start.  Now go play!

RULE #1 QUESTION OF THE WEEK: IS THERE A RULE #1 STUDY GUIDE?

This week's Rule #1 Question of the Week isn't submitted by any one particular reader.  It's a recap of a commonly asked question:

Q: Is there a Rule #1 Cheat Sheet that gives an overview to calculating the Big Five and doing Sticker Price?

A:  There are a number of helpful resources here on the Rule #1 Blog.

• Justin's Rule #1 Cliff's Notes is a handy study guide and overview for the entire Rule #1 process. 
• The Homework Index in the Rule #1 Blog Archives contains dozens of posts that show the Rule in action, using case studies of actual companies. (Most Homeworks also link through to where to find the Big Five numbers on MSN.) 
• The Three Tools Index covers almost every question you could have about using and reading the MACD, MA and Stochastic.
• And I always recommend that beginners start at the beginning: with the very first Rule #1 blog post.  Keep clicking the forward arrow to the right of the main post to read the entire blog, in order.

Now go play!

THE TOOLS AND VOLUME

Craig has a good question - read on.

Phil Town,

Loved your Rule #1 book!  I  have been utilizing Rule #1 investing for about 3 months now, first on paper than with real money.  I am holding my own during one of the most bearish markets in recent history, so I am very pleased with how well Rule #1 investing works.  You saved me a bundle by motivating me to move out of non-Rule #1 companies, and then wait to buy Rule #1 companies until the indicators say "go".   I lost a fortune in the tech bust of 2001, and those "buy and hold / diversified portfolio" strategies got me nowhere in the past 5 years.   I have identified several solid 4M companies, and track them daily using the tools you suggested on MSN Money web site.

My question is regarding the 3 technical indicators you recommend (Moving Averages, MACD and Stochastics).  You explain in your book that we utilize these indicators to gauge whether the institutional buyers, who control the majority of shares in the market, are moving in or out of a particular stock.  If so, why do none of these indicators utilize trading volume data, which is a key indicator of institutional participation in any market movement?  It seems to me that if you really want to track what the big boys are doing, you need to track volume as well as pricing data.  Any thoughts on this?

Feel free to post this on Phil Town blog, which I read weekly, and really enjoy!

Many thanks,

Craig Behrman

QUESTION OF THE WEEK: INTERPRETING THE STOCHASTIC

This week's question comes from Mike in Baldwinsville, NY.   [Edited for length.]

Q:  Mr. Town, what enjoyable reading this book has been. Finally, after all the books and money spent, you have provided a very concise road map to get from point A to point B. I read the book five times, and picked up new, valuable bits of information each time I read it. If only I could have had this book years ago. I'm sure I would be financially independent by now.

My question is relative to the Stochastic indicator. If the buy line is above the sell line, but fairly close to the 80% line, would that still be considered a buy or will it always start heading down when it closes in on 80%?

A:  Thanks, Mike!  If that thing is tipping down, that is not good news.  It's still a buy, but better be confirmed by a strong upward MACD and MA.  It certainly doesn't always go on down through the sell signal, but it means that support is waning -- so watch out.

Now go play!

ALL ABOUT ROIC

In response to some common questions about calculating and finding ROIC:

Q:  Where's the ROIC Calculator?

A:  We should have the ROIC Calculator ready soon.  In the meantime, here's a short cut that isn't perfect but will work:  Look at MSN Money.  Click on Financial Results.  Click on Key Ratios.  Click on Ten Year Summary.

You will be on a page that has a bunch of ten year financial results including these two: Return on Equity and Return on Assets.  (Here's a link to an earlier post definining the difference between ROIC and ROE.)

Although neither of these is the same as ROIC, they tend to bracket ROIC -- ROE usually being higher than ROIC (because debt is not included in the denominator) and ROA being lower than ROIC (because Assets as a denominator are often larger than equity plus debt.)

These numbers are annual, so you don't get an average return -- you'll have to look at the annual numbers and see if they are dropping or rising and if they are over 10%.  And you'll also have to look at the ROIC numbers for 1 and 5 years to see if your extrapolation is in the ball park.  Quite often, it will be pretty close to what you'd get with a calculator.  Admittedly this is a short term fix but it will get the job done for you until we complete the calculator.

Q:  Is ROIC the same thing as ROC and ROI?

A:  Yes.

Return on Investment (ROI), Return on Capital (ROC) and Return on Invested Capital (ROIC) are used interchangeably.

If the numbers are close or the same when you compare between sites, then you're probably okay. If there's a big discrepancy between the numbers on one site (say, MSN) and the numbers on another (e.g., Morningstar), then it's worth investigating to make sure that sites are calculating ROIC correctly.

Q:  How is ROIC Calculated?

A:  Remember page 106 of Rule #1:

ROIC = NOPAT (Net Operating Profit After Tax) divided by (Equity + Debt)

Q:  Is NOPAT the same as EBITA?

A: NOPAT is not the same as EBITA (Earnings Before Interest, Taxes, and Amortization & Depreciation... often called EBITDA).  The biggest difference is taxes.  NOPAT is after tax.  EBITA is before tax.  If you use EBITA you'll get a nicer ROIC number than what's really going on.

THE TOOLS: EMA vs. MA

Here's a reader-submitted question about The Tools:

Phil,

Just read your book and appreciate the no-nonsense rational approach you present.  I have done a lot of reading on stock market investing, and was looking for a balanced approach that takes into account the long-term fundamentals of the underlying businesses while also accounting for short-term market dynamics by signaling good buy and sell points.  I am eager to implement your parameters in the tools, but am experiencing some uncertainty and confusion regarding the settings.

QUESTION OF THE WEEK: HOW IMPORTANT ARE THE FIRST 3M'S, REALLY?

This week's Question of the Week comes to me from Brad and his dad in Dallas. In a nutshell, they want to know if they can postpone doing the Big 5 Numbers. Read on.

Phil,

My father and I are having a discussion, which by the way, is great that you turned us on to something that we can work together on.

Pop writes:

The success of the Rule #1 method in calculating the present intrinsic value (Sticker) of a stock depends entirely upon its ability to predict the stock's future price per share. Really, only two numbers are needed to do that analytically: (1) future EPS growth and (2) future PE.

Evidently, Mr. Town doesn't trust our ability to accurately predict future EPS growth (else why does he use the analysts' prediction over his own if the analysts' number is lower?) but he has great confidence in predicting future PE (else why does he typically ignore analysts' future PE predictions?).