I popped into Whole Foods last February at 90. And as a Rule #1 investor getting into WFMI meant that I thought it was YUMMMMY. Turned out it was! Since then WFMI ran up to 104 and I bailed at 102. Then again in at 97 and now its at 120. That is some serious up. About 40% in 5 months. Good. But here is where it gets real good. That investment represented about 40% of my portfolio. That means that my entire portfolio went up 16% in 5 months even if the rest of it was under my mattress. That is just nuts! And it’s all about focus. If you think you can do that by diversifying, think again. Remember this: Diversification is for the ignorant.
But now what. A stock moves up about 33% should you stay with it or bail and go somewhere else. Here is where Rule #1 takes the mystery out of investing: The bail out for real point is in a range of Sticker Prices. You remember Sticker Price? That’s the intrinsic value, the actual current value, the retail value, the price its worth…. The sticker on the car window, okay? We don’t want to pay that because when you pay Sticker everything has to go right to make our minimum 15%. Hey, I’m an ex green beret guy. I didn’t survive by assuming everything is going to go right. Even when I jumped out of a plane in broad daylight I carried a reserve chute, right? So why in the world would we ever invest assuming that everything is going to go right? No way. We invest with certainty. But to get certainty we have to stay below Sticker. As long as we’re below Sticker, we have what I call ‘head room’…room to move up before it hits retail. Hey, its great if a business is selling for MORE than its worth, but Rule #1 investors are happy to make our money between our Margin of Safety Price and Sticker Price. Here’s why: Institutional investors control the price of all stocks. They can do the math, too. After 2002, having been burned by buying overpriced stocks, they are not too happy about buying something above retail. That makes Sticker Price the cap. When it gets above that its bail time.
Having said that, let’s look at WFMI today. The price that our partner, Mr. Market, is offering up WFMI for is $120. Where does that sit regarding Sticker? Here’s how I get to the answer (and its so easy!). Go see the February posts and look up the Whole Foods post for details:
1. What is the last 12 months EPS for Whole Foods? $2.32 (from MSN or Yahoo)
2. What is the estimated growth rate? 22%
3. What is the future EPS in 2015? (do excel =fv(): $17
4. What is future value if the PE is 34? $576
5. What is the current Sticker Price if I want a 15% ROI? (do excel =pv() = $142
6. Is the current price above or below the Sticker? At $120 its below
So we have head room still. Watch the arrows (if you know from the investools class what I mean) but otherwise, let her run!
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.