Rule #1 Finance Blog

how to invest

YOUR HOMEWORK: TTI AND GROWTH RATE

Phil Town

4 comments.

Posted in how to invest

Here’s the start of a homework involving TTI. Read on.

Dear Phil,

I am a recent Investools investor after seeing you at a motivation seminar in Ft Lauderdale.  I just finished “reading” your book (by listening to it on CD) and loved it.  I’ve never owned stock, but I’m very excited about the prospect!

Investools valuation analysis shows the following sticker prices:

TTI – $1508.25 but selling for $28.69
WHQ – $110.06 but selling for $48.28
UNT – $1202.26 but selling for $57.18

I wanted to know if my eyes were seeing the right thing, especially TTI and UNT; talk about a huge MOS if it’s right.

I’d LOVE your opinion!!

Thanks,
cvogt

FISCAL YEARS

Phil Town

0 comments.

Posted in how to invest

Q:  I’m looking at the numbers for a company’s 2005 Annual Report, and the EPS from the report doesn’t match the EPS reported on MSN Money.  Why is…

YOUR HOMEWORK: STARBUCKS (SBUX)

Phil Town

18 comments.

Posted in how to invest

I've thoroughly enjoyed your book and I'm anxious to get started.  I've been a buy and hold/diversify guy for years, and I have paid a big price for that.  But I'm now ready to take more control.

Anyway,  I currently own Starbucks which, in spite of the market ups and downs, has ultimately been very good to me.  I purchased it in '95 and it has been far and above the best performing individual stock I own. 

As a way of getting some practice with the numbers and to determine the current sticker price (when I see a Starbucks right across the street from another one, I wonder how much more can they grow?), I came up with the following. (All from MSN/Money as you direct in your book.)

QUESTION OF THE WEEK: FDP HOMEWORK

Phil Town

4 comments.

Posted in how to invest

Here’s a letter from Lynn.  [Names changed to protect the innocent! Letter edited for length.]

Hi Phil,

I have a problem of  a different sort.  I have been studying my butt off with all of this stock research.  I feel like I am understanding more and more but not comfortable yet as I haven’t really paper traded anything and haven’t really spent any money but I know in time that will come and that’s okay.  Like you said, the market isn’t going anywhere.  And, for once in my life I feel I have actually been quite patient and okay with it as that is how you teach it and it makes sense to me.  Plus, I also have not lost any money.  The Rule #1 investing book rocks.

Some guy calls Jerry (my husband) on the phone from S_____ (broker),  telling him he can’t lose any money or at least not much, talks to him for probably 10 – 15 minutes and has Jerry spending $20,000 on FDP (Fresh Del Monte produce).  When I found this out I could have killed him.  I asked him why he felt the need to do that.  He said to make a lot of money.  I’m thinking if it sounds to good to be true, more than likely it is.

HOW IMPORTANT IS THE INDUSTRY GROUP TREND?

Phil Town

7 comments.

Posted in how to invest

Read on:

Phil,

I heard you speak in Birmingham and saw this as an opportunity to learn about making money in the stock market.  My father dabbled in it for years but always seemed to lose money so I stayed away until reaching the age of 52.  Thanks for the help on your Blog.  They are helpful and interesting too.

Now my question.  How much does the industry the company is in play a part on whether you purchase it.  I’ve been doing some research on Infosys Tech and noticed it scored in the lowest industry of the InvestTool system.  According to their seminar that would eliminated them from consideration.

Thanks in advance for your help.

Schwaaz

YOUR HOMEWORK: HELX

Phil Town

13 comments.

Posted in how to invest

This letter is from Cathy in New Hampshire, who’s proven her ability to accomplish amazing things when she puts her mind to it.  Rule #1 investing is next on her list.

[Note: this letter was originally submitted on May 16. Use Cathy’s numbers as an example only.]

Phil,

On Wednesday April 26, I went to the GET MOTIVATED in Manchester NH. I signed up for this workshop, something to do with investools.  After the seminar I went home all i could think about was this guy who was a ex-Green Beret and former river guide. His name was Phil Town he was a self-made millionaire.  He had lived in a teepee and “drove around in a really loud black Harley Davidson.”

In my spare time I checked this guy Phil out on the internet. I was inspired by all the info I read about him. I just recently went to the 2 day workshop. I only went the first day, because if I went the second day they wanted $$$$. I have never in my life even thought about stocks (businesses), never mind buy and sell them to make money.

I went home and checked to see if the investools had shut me off yet from the temporary internet access. I was excited they didn’t yet. So i have been playing all weekend trying to figure this out.

I will eventually buy investools, because i trully believe that you need the right tools to do the job right.  So for know i bought your book and a few others you recommended.  I will read and play until they shut me off.

3 years ago we lost our home.

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

Phil Town

1 comments.

Posted in how to invest

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?).

THE LITTLE BOOK THAT BEATS THE MARKET

Phil Town

7 comments.

Posted in how to invest

People are curious about my take on Joel Greenblatt’s book.  Read on to find out what I think.

Phil,

Saw you at a “Get Motivated” seminar in Cleveland, want through InvesTOOLS training – lost $1,000 on options – and THEN read your book.  Now ready for Rule #1 – never lose money.  I also just read The Little Book That Beats the Market by Joel Greenblatt (Columbia Business School Professor and hedge fund manager)  – he also talks about finding good companies at bargain prices and calls it “magic formula investing”.

He talks about Benjamin Graham, the Margin of Safety, EPS and Return on Capital.  However, he adds in Earnings Yield – the bargain price is determined by a higher earnings yield.  Is he just computing Value by a different means?  Also he sets Return on Assets (ROA) at a minimnum of 25%, talks about being committed to holding the stock for a minimum of 3 to 5 years, and says this approach works best with companies with a market capitalization above $50 or $100 million.

How is this different from Rule 1 Investing – is it?  Are these just personalized embellishments?  Why is ROA important   (I’m obviously asking for your opinion on this)?  Thanks.

Carol

Here’s my response:

I like Joel Greenblatt’s approach to investing.  He uses a lot of the same key things we look for in Rule #1 investing.  But I thought I’d talk about what he calls the “magic formula” – the Earnings Yield.  Here’s how Earnings Yield works:

NAILING THE GROWTH RATE

Phil Town

0 comments.

Posted in how to invest

Quick post about growth rates and moat. Edited for length.

Question:

Hi Phil Town,

First of all – Great book! The most entertaining and “real” book on investing I’ve read.

In your eval of EBAY, you take a projected EPS value between the analysts and the CEO’s projections. But with DELL, you stick with the CEO’s. Please explain.

Thanks in advance for answering me.

Al F.

Answer:

Nailing the growth rate is not all science.  There is a bit of art.

Warren Buffett suggests that if the growth rate doesn’t jump right out at you, it’s too close to call — but then again, he’s a genius with a lifetime of experience.  Me, I’m a river guide with half a lifetime of experience, and although growth rates don’t just jump out at me most of the time, on the businesses I like, I feel competent enough to call the growth rate.

Here’s the deal with Dell and Ebay:

QUESTION OF THE WEEK: DISCOVERING THE HISTORICAL PE

Phil Town

31 comments.

Posted in how to invest

Determining the historical PE ratio for a business is a bit of an art.  Several of you have written in about it, but this email is getting right to a solution to the problem:

Question:

"Hi Phil Town, when calculating the average PE over a number of years, is it better to calculate using the standard Average calculation, or is it better to use a Mean calculation instead? I ask this because of the overinflated past PE numbers that resulted from the internet boom. These overinflated numbers sometimes occured once or twice over the past 10 year history. So does it really matter to include them in the overall calculation since they might overinflate the Average PE? I think the Mean calculation will smooth the Average out to a more reliable PE." 

— Dennis and Lisa

Answer:

You know, these guys are already way better at this than I am.  What I usually do on MSN Money is just look at the PE bars year by year and make a reasonable assumption about what the future might hold based on that.