Rule #1 Finance Blog
how to invest
How to Invest: A Basic Overview of Rule #1
Welcome to the Introduction to Rule #1 Investing. I’m Phil Town and this is Tutorial 1: Rule #1 Strategy- The Overview of the Basics.
Phil Town is an investment advisor, hedge fund manager, 3x NY Times Best-Selling Author, ex-Grand Canyon river guide, and former Lieutenant in the US Army Special Forces. He and his wife, Melissa, share a passion for horses, polo, and eventing. Phil’s goal is to help you learn how to invest and achieve financial independence.
WHY STOCKPILE INSTEAD OF LOADING UP ALL AT ONCE
One of our most conscientious commenters, Shuki, has raised some issues around the ideas of Stockpiling and selling puts to enter positions so I thought I’d try to clarify my point of view here for y’all.
Phil Town is an investment advisor, hedge fund manager, 3x NY Times Best-Selling Author, ex-Grand Canyon river guide, and former Lieutenant in the US Army Special Forces. He and his wife, Melissa, share a passion for horses, polo, and eventing. Phil’s goal is to help you learn how to invest and achieve financial independence.
THE SECRET DOCUMENT THAT TRANSFORMED CHINA
My daughter, Danielle, found the following incredible story on the NPR iPhone App: http://www.npr.org/blogs/money/2012/01/20/145360447/the-secret-document-that-transformed-china?sc=17&f=1001 The Secret Document That Transformed China by David Kestenbaum and Jacob Goldstein – January…
Timing When to Buy or Sell Based on Tools
It’s easy to decide if it’s too late to buy or sell based on tools. You have three tools (MACD, Moving Average, Stochastic) and all of them have to say the same thing at about the same time. Say within a couple of weeks or less…
What to Do if You Don’t Have the Money
A few days ago Hanno wrote Phil Town to ask how to stockpile or consume good businesses in this
market if you have $1000 or $3000 to invest. Let’s start by reviewing the difference between trading a stock and stockpiling a business for someone with very little money:
Trading a stock using tools requires very little capital. Read Rule #1, check out my free investing calculators and go to it – . You can certainly do it with $1000, although with that small amount to invest you’ll incur trading costs that chew up a lot of your profits. You move in with the Big Guys, you move out with the Big Guys.
The problem with trading in this market, as some people learned in 2008, is that when you are trading against the trend you keep getting in just as the stock price turns and drops. An unrelenting down trend will cause you to have many slightly losing trades – I call it “the death of a thousand cuts” in Rule #1.
Trading in a market like this can be deadly depending on whether you are correctly determining the overall trend of your target stock. In my next book, PAYBACK TIME (coming out September 2009), I show you how to find the points in time when the trend is changing. It will help you trade better.
And stockpiling stocks? PAYBACK TIME teaches how to stockpile, to consume. We very rarely get an opportunity to simply load up the truck and forget about it. No trading required. We are in one of those opportunities right now. You can pick McDonalds, GE, Burlington Northern and many more, figure out the payback time for your investment, and buy in for the long term hold.
But stockpiling takes some kind of cash flow and that’s the rub for Hanno. What to do if you don’t have any?
Phil Town is an investment advisor, hedge fund manager, 3x NY Times Best-Selling Author, ex-Grand Canyon river guide, and former Lieutenant in the US Army Special Forces. He and his wife, Melissa, share a passion for horses, polo, and eventing. Phil’s goal is to help you learn how to invest and achieve financial independence.
The day after I told Manny (Kiplingers) to get in, the market shot up 500 points. Nice call on the market if I do say so myself. And pure luck. I was thinking it would continue down for a while. But businesses are cheap and that’s what we really care about. And now it’s time to figure out what to buy. You guys asked me about Apple, (AAPL), Altria (MO), Verizon (VZ), AT&T (T), Microsoft (MSFT) & ConocoPhillips (COP). I’ll dig in on these, but only after you tell me what they are worth and why.
As always, I want you to do the homework. You sent me two opinions of value for AAPL – Charpe197 thinks $286 is retail. Lynn suggests the right retail value is $151. Since I didn’t see their work, I can’t say for sure why the difference in value, but I thought I’d add another layer of information for those of you who are looking to buy some businesses right now.
Phil Town is an investment advisor, hedge fund manager, 3x NY Times Best-Selling Author, ex-Grand Canyon river guide, and former Lieutenant in the US Army Special Forces. He and his wife, Melissa, share a passion for horses, polo, and eventing. Phil’s goal is to help you learn how to invest and achieve financial independence.
Question from a Reader: Equity, Accounts Receivable and Surplus Cash
A few days ago I received the following question from a reader. I consider this a good "Intermediate Accounting" question for Rule #1 investors to look over. The basic question: does a growing equity number really mean the company is growing surplus cash?
Greeting from Shanghai! Thanks for your book which inspires me a lot!
I am now reading your RULE #1 book the 2nd time. I am now on Ch9 'Calculate the Sticker Price'. In the highlighted box on P151, you said 'The growth of the Sticker Price – the value of the business – most closely follows the growth of equity because a growing equity comes from growing surplus cash'.
I am confused. In my view, increase in equity does not imply increase in surplus cash at all. For example, a company sold only 1 item of USD10m in a fiscal year and made a profit of USD4m. Its revenue is USD10m and profit is USD4m. But its customer failed to pay. At the year end, the AR increased by USD4m but not the cash. However, the retained earning still increased by USD4m, and thus the equity increased by USD4m as well.
Please help me to understand. Thanks in advance.
David
Here is my response to David:
Phil Town is an investment advisor, hedge fund manager, 3x NY Times Best-Selling Author, ex-Grand Canyon river guide, and former Lieutenant in the US Army Special Forces. He and his wife, Melissa, share a passion for horses, polo, and eventing. Phil’s goal is to help you learn how to invest and achieve financial independence.
This question comes from Tom in Edmond, OK:
Hi Phil Town. I am just beginning this venture and am paper trading at this time. I have ran the numbers 3x for SONC and I think I finally got the correct MOS ($19.50). However, I am not 100% sure how to calculate this stock as it just went thru a 3 for 2 split about 2 weeks ago. What is the correct method to do this?
Thanks for the book.
Here's my response:
Hi Thomas,
Stock splits do not change the size of the pie, as you know. They only slice the pie into more pieces.
When a business splits its stock, all the services that tabulate the data and provide it to websites like MSN Money and Investools recalculate all the old numbers all the way back to reflect the new number of shares.
Phil Town is an investment advisor, hedge fund manager, 3x NY Times Best-Selling Author, ex-Grand Canyon river guide, and former Lieutenant in the US Army Special Forces. He and his wife, Melissa, share a passion for horses, polo, and eventing. Phil’s goal is to help you learn how to invest and achieve financial independence.
Some of you may have noticed this comment from Mark a few days ago: I have been unable to find an answer about how to calculate cash flow.…
Rule #1 Question of the Week: PVH’s ROIC
This week's Question comes from Mitra, who references my mention of PVH on "The Millionaire Inside" on CNBC. Q: Phil Town, Great book! I really enjoyed reading it. …