Rule #1 Finance Blog

With Investor Phil Town


I don't usually discuss investments I'm making, but Whole Foods just went for an amazing ride from $47 to $65 to $45 in about 6 weeks, and it's worth talking about.   

If you have Whole Foods on your list of great businesses, and if you watch the Tools, you just cleaned up.  You got arrowed into WFMI at $50 on the 10 day MA, out at $54, back in at $53, and then rode it for a month to a peak of $65 and got tooled out at $64 on Oct 24th.   That's about $15 on a $50 investment.  30% from Aug 14th to Oct 24th.  A great year's return in a bit over two months (and now you know why it's okay to sit in cash and wait.)

But that isn't the reason I'm writing this post.

I'm writing because today the stock dropped an amazing 20% of its value
and I didn't get burned.  Believe me, I never saw it coming.   

I love
this business and want to be an owner for all the 4M reasons.  But I
watch the Tools and the Tools said that the Big Guys were sneaking out
the door starting a couple of weeks ago.  

At the time, I didn't think
much of it.  Big Guys who run up a stock from $47 to $65 are going to
want to take some profits off the table, and so they start to sell. 
And when a few Big Guys start to sell, it scares the other Big Guys –
even the ones who would like to be in WFMI forever without ever
selling.  And, getting scared, they lose confidence, don't want to have
to tell their friends they gave back all that big gain they were so
happy about… and they join the mob and start sneaking for the exit,
too.   At least that's what I thought was going on.

Not that it matters.   When I see them sneaking, I'm outta there
because them's the rules and rules keep me from guessing and hoping and
wishing and wondering "what if"… and all that other emotional craziness
that exists around stock investing on your own. 

This, by the way, is
one of the big reasons more people don't do it on their own.   They
hate the emotional roller coaster.  Me, too.  Which is why Rule #1 is so
important.   It gives us boundaries and a way to understand Mr. Market,
our bi-polar friend. 

Point being – I was outta there because the Tools
told me to get the heck out.   The explanation of why the Tools were
saying to get out is just something I conjured up on my own.  Could
have been right.  But I wasn't.

In fact, the biggest reason to use Tools on a great business that you
think is at a great price is precisely because once in a while the Big
Guys are not getting out just to take profits.   Once in a while they
are getting out because they smell smoke in the theater.

Understand that there are HUGE differences between us little guys and
the Big Guys.   They are smarter than we are for starters.  Hey, I
admit it.  Jim Cramer is a genius.   Warren Buffett is a genius.  And
the guys who run the funds have always been the smartest guys in the

Come on, did you graduate at the top of your class at Harvard
Business School and get snapped up by Goldman Sachs and paid $250,000 a
year to start?  Not a single recruiter from Goldman Sachs came to the
put-in on the Colorado River and to recruit me to join them in New
York.  So these guys are smarter than us.  Let's agree on that. 

they work really hard.  They do.  Lots harder than I ever did.  Dude,
I'd rather be snowboarding.  And because they work hard and have big
research departments, they get to know these businesses better than we
will – at least from the numbers point of view.   And they get to know
people at the business. 

It's not like John Mackey is going to take my
phone call, but he's going to take a call from some key analysts who
advise people who have billions invested in his company.   He's going
to take the call and he's going to go have dinner with them from time
to time.   

And what comes from all of this extra stuff that we don't
have is a very refined sense of smell.   If this theater is on fire,
the Big Guys will smell the smoke a whole lot sooner than we will.  And
when they smell it, they are going to start sneaking for the exits. 
They aren't going to get up and shout "Fire!" and run like crazy – at
least not until there is obviously a fire going on.  They are going to
act nonchalant and casually walk out of the building so as to not cause
a whole bunch of other Big Guys to get up and run for the doors ahead
of them because then, none of them are going to get out in one piece.

And that's what happened back in late October.  Some Big Guys smelled
smoke at Whole Foods and it wasn't from shrimp on the Barbie.  It was
the smell of Whole Foods getting worried about their rate of growth in
the future.   It was the smell of a fire that John Mackey was just
starting to light up. 

Somehow some of them got wind of his pending
announcement and they started sneaking out, selling stock.   And they
just steadily sold for a couple of weeks or so (and the price held at
about $64) and then the day of the announcement (but before he'd said
anything) the stock opened at $63 and dropped hard down to $60.  And
that night John told the world that WFMI wasn't going to grow as fast
as he'd been projecting because competitors were taking a piece of his
market.   And today the stock opened trading at $47 and ended at $46.

Oh Lord, thank you for great Tools and for making us small and
insignificant so that we can get out in a big hurry before the theater
burns to the ground.