Rule #1 Finance Blog

With Investor Phil Town

SHIELDING YOUR $$ WITH MOS

Ben is a SWAT officer.  I really like this guy.  He deserves to do
what he wants with his life when he's done protecting us.  I'm going to
help him make that happen. 

This post is also a great starting place for all beginners.

On 11/3/05, Ben S. wrote:

Mr. Town, Ben S. here from Apollo. I wanted to see
about getting started? I know ur very busy any suggestions on were to
begin   Thanx Ben

From:  Phil Town
To:  Ben S.
Date: Thu, 3 Nov 2005

Hi Ben!

Great.  Let's get started.  First read my blog.  Find the Archives and click on February this year – start there and just go
through the posts to get a feel for what's going on.  If you see the
post on Garmin, the guy who found that one is a cop in Kansas and he
just rocked it.  About 50% gain in 4 months.  So read through, then let
me know when you're done and we'll go through one business together:
Harley Davidson.  And see if we want to own it these days.

Phil Town

On 11/3/05, Ben S. wrote:

Thanx Phil, I have been reading the categories on the side. I
think thats what u wanted me to do. There r a lot of articles and
learning to do. I realize its all about rule #1. Seems to be the main
theme of the training. I also understand the 4m. That makes very good
sense to me.

I must tell u , I am very slow with internet stuff, I didnt know what a blogg was until this point.

I have dedicated most of my work life to SWAT, I guess I am a  true
swat dog thru and thru, thats what I do for a living. I know u know what
I am talking about with ur SF background. Its all about my teams safety
and completion of a mission, never about myself and the glory. I
believe in people that lead by example and that r willing only to ask
of those things that I am willing to do myself.  Before every dynamic
entry, as team leader, i always have a very detailed plan of attack
with all of the bases covered. So preperation to me is nothing new! I
say this because it seems u emphasise knowledge and preperation.

I thank u again for responding, I have been introduced to many
people at get motivated that have said they wanted to help me, they
never do what they say. Thanks for getting back to me so soon as u did.

I will keep reading and  learning. One quick question. what should
i do with my 401 stock. I currently have 25% going into VP asset
allocation, 25 going into VP broad market index and 50% going into VP
aggressive opportunity. I have no idea what they r, I just picked them.
weak uh! $____ [edited out for privacy] big nest egg! not. 

Thanx Ben

Here's what Phil Town said:

Dear Ben,

I love your training and how you train your guys.  Its all about Rule #1 for SWAT:  Don't get your ass shot off!!!  Right?  That's what it was for us in the teams.  I think that investing your hard earned money has to follow the same rule.  Don't get your money's ass shot off.

What you have saved up is a BIG deal, my brother in arms.  Big!  You have done well.  With that for a starter, and adding $5000 a year, in 10 years you can kick back on $5000 a month to go along with whatever else is coming in.  I'm thinking that should do it pretty good.

So here's your next assignment: Look up HDI on Investools.  Just plug those letters into the little box in the left corner and click Go

On the left side of the page you'll see a heading for Fundamentals.  Under that is Valuation.  Click on that. 

Find the EPS Growth Rate box.  It says 11%.  And the PE box says 27%.  What's going on is that the computer is starting with the latest earnings of the business (the last 12 months of profit but in a per share number) and growing the earnings for ten years into the future. Then it's multiplying that number, whatever it is, by some mulitplier – we call it the PE – to get a future stock price, since no stock sells for just one year's worth of earnings. 

Then the computer asks this question:  If I want a 15% per year rate of return (the minimum I'll accept) and if the stock is selling for this much in ten years, how much do I have to pay today to get that 15% per year for the next ten years?

In HDI's case, the computer estimates the earnings will grow to $10 a share by 2015.  And, assuming HDI gets a PE of 27 in that future year (notice that it only has a PE of 14.85 today), and assuming that we need to get 15% per year on our money, we should pay $74 or less for HDI now. That is what they call the Target Price. 

I call it the Sticker Price – like the sticker on a car window.  If everything works as planned, if we buy for Sticker we'll get a 15% return.

Of course, as we know from running real world missions, almost nothing ever goes as planned, so we plan for that, right?  As an investor that means we need a Margin of Safety – the three most important words in investing and SWAT.  That's why you guys toss in flash bangs and go in well prepared and fast. 

In investing, our margin of safety comes from waiting patiently until we get a big discount on the Sticker.  If the Sticker on HDI is $74, I want to buy it at $37 a share. 50% off.  It's selling for $50.  I have some margin, but not as big as I like.  That makes this a bit risky for me.  And for you.

Do one of these on your own. Here's the rules:

  1. You can't even begin to put a value on something unless you understand the business.  Meaning.
  2. It has to have a Moat and you have to know what it is.  Not only that. Also the numbers have to increase consistently and linear.  They go up every year:  EPS, Sales, Cash and most important, Equity.  Those numbers are lines on the various statements listed under Fundamentals.  Dig around.  It'll do you good.
  3. The growth number you use is the less of the equity growth rate or the analysts.  Investools uses the analysts automatically.
  4. The PE is the lesser of 2X the growth rate or the historical PE or 50.

Okay, my friend.  Go see what you can do with this on WFMI.

Now go play!

Phil Town