3 Common Myths About Investing Busted

There are common myths about investing that can often scare off the individual investor and make them wonder if investing is worth it. Here are 3 common investing myths and their realities with Rule #1 methods, so you can grow your wealth and reach your financial goals.

3-myths-chart

Myth #1: You Have to be an Expert to Manage Money

One of the biggest myths about investing is that it’s hard and should be left to the experts.

You don’t have to be an expert, you just have to be an expert in one small part of the market. We call it being an inch wide and a mile deep. You simply pick a part of the market you’re already interested in by virtue of your hobbies, passions, expertise, work, and shopping preferences.

I might love motorcycles, rebuild them for fun and profit, and thus know quite a lot about companies like Harley Davidson. That intimacy with a product can easily be extended into similar products like 4-wheelers and snowmobiles.

A little knowledge about why I like Chipotle Grill better than McDonalds can, with a bit of reading, give me an expertise in fast food companies like McDonalds, Burger King, Jack In The Box, Sonic, and many more.

Once I get a mile deep in my chosen area, I’ll be able to put a reasonable value on many of the companies in that industry. Then it’s just a matter of waiting patiently until the normal market fluctuations bring me a great company at an attractive price.

You have to be patient.

Even Warren Buffett doesn’t pretend to be an expert in the whole market. His partner, Charlie Munger, said that he and Warren have an edge over most professional fund managers because they know what they know and they stick to it. Almost no other professionals do that.

For example, Warren’s portfolio is mostly invested in just a few companies.

Just focus on what you know, stick to it religiously, and wait for Mr. Market to drop the price.

Myth #2: You Can’t Beat the Market

While it is true that the guys who run your mutual fund or pension fund do not beat the market (96% fail to do so over 5-10 years), little guys armed with basic knowledge of how to value a business can and do smash the market. Some of our Rule #1 students are reporting compounded annual returns over the last 5 years of as much as 47% per year just doing solid long-term investing.

The reason for the discrepancy is size. The Big Guys run big funds and the total dollars makes them quite illiquid. That means it’s hard to get in at one price and impossible to get out at one price.

In fact, the act of a Big Guy exiting a stock is the reason the stock price goes down and the price drop is what causes other illiquid Big Guys to panic and sell and that drops the price even faster. It takes a Big Guy investor something like 8 to 12 weeks to exit a position. This fact is what creates so much emotion in the market and is at the root of why good companies are sometimes on sale; some relatively short-term problem creates panic selling among fund managers and the price drops far below the value.

If you can stay unemotional and you’re knowledgeable about that company and industry, you can buy it at a great price when the Big Guys are in full panic mode. And when you do that, you will crush the market.

Myth #3: The Best Way to Minimize Risk is to Diversify Investments and Hold for the Long Term

This is really good advice for people who are ignorant about investing basics. If you don’t know what a business is worth, you must diversify to protect yourself from your own ignorance. But the truth about real investing is quite different; almost no great investors diversify.

Warren Buffett’s portfolio of over $100 billion is focused on about 10 stocks. Mohnish Pabrai, a hedge fund Rule #1 type guy with a 28% compounded annual return for 12 years and Eddie Lampert at ESL, another Ruler, own less than 10 companies right now.

As Buffett said, diversification is for the ignorant. The right way to invest is to get an inch wide, mile deep, stick to it, and own maybe 5 to 10 great companies.

Risk doesn’t come from not being diversified, it comes from not knowing the value of that business.

The idea of holding long term is a good one, but when things change, the investment has to change too. Holding a bad company long term is a recipe for a disaster and it will convince any ignorant investor that diversification is the answer to the problem.

But the real answer is to only invest in what you understand and only when it’s on sale. If you do that, essentially you’re buying $10 bills for $5. If you can do that, diversification is a waste of time and likely to lower your returns.

The bottom line is, find a great business that you know and that is on sale, and learn how to invest with Rule #1. If you want to learn more about Rule #1, the same style of investing that Warren Buffett uses, click the button below to get my quick start guide to Rule #1.

best-of-guide-bottom-blog-644x200-2

About Phil Town – Phil Town is an investment advisor, hedge fund manager, two-time NY Times best-selling author, ex-Grand Canyon river guide and a 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. You can follow him on google+, facebook, and twitter.

  • Garrett

    Rulers,

    It’s a new month and time to look at our MACRO View …Big Picture…and see if any new trends are developing.

    To Summarize…
    After several years, in September 2015 “The Tools” said “Get Out” and we’ve been sitting in cash in some of our retirement accounts that are limited to 401K Investing in Mutual Funds – Specifically, we invest in the S&P 500.

    Here’s what I like to look at:
    S&P 500 – Just under 2000. Up at tad from Feb 1st…but nothing to get excited about. Stochastic and MACD haven’t reversed yet. Still no Green Arrows.
    FRAK – oil…off the Feb lows. But the long-term story is still in place.
    Emerging Markets EEM – bounced off low, but still nothing to get excited about.
    Junk Bonds – HYG – bounced off low, but same ol’ story.
    Silver – SLV – third month in a row where it is trending higher. If it breaks above $15 we might get a break-out to higher highs.
    Gold – GLD – Soaring!!!

    Ok…so why are Gold and Silver skyrocketing? They have been my best investments in my portfolio this year.

    The reason is because Global Central Bankers are failing. Things are so fouled up in our world that the logical use of money has become corrupted by governments.

    In Denmark, Sweden, Switzerland and now the world’s THIRD LARGEST ECONOMY – JAPAN…have instituted Negative Interest Rates.

    This is a TAX on your wealth. And a distortion of everything sane about free markets and capitalism. The Governments know you don’t want to stick your money in a bank that charges you so they can loan out your money!!! This is INSANE. So they figure you will take your money and buy things and invest it in the stock market to stimulate the economy.

    What it will do is cause Gold and Silver to go up as a hedge against failing currencies. This is why we personally started investing larger positions in gold streaming companies last year.

    Here’s another opinion from an article I was reading:
    ——————

    Have you heard of “negative interest rates?”

    It’s become a phenomenon with economists and the media.

    There’s a good chance you’ve read an article about it. We’ve covered it many times in the Dispatch.

    I’m writing to tell you something about negative interest rates you haven’t heard. You certainly won’t hear about it in the mainstream press.

    What’s coming at you is a historic event. It’s something our grandchildren will hear stories about…much like the Great Depression or the Cold War.

    What’s coming could send the price of gold much higher in the coming years…and hand gold stock owners 500%+ gains.

    If you know what’s coming, it could mean the difference between having lots of free cash in retirement or barely getting by.

    To understand the gravity of this moment, let’s cover one of the most bizarre ideas in the world…

    Negative Interest Rates.

    In a normal world, your bank pays you interest on your savings. It takes your money, pools it with other people’s money, and loans it out.

    The bank makes money by paying out less in interest on your deposit than it earns in interest from borrowers.

    For example, it might pay out 3% to depositors while earning 6% from borrowers.

    This is how it has worked for decades.

    Negative interest rates turn your “normal” bank account upside down.

    Negative interest rates could only exist in a crazy world where idiot politicians are in control.

    Unfortunately, that’s just what we’re dealing with right now.

    Politicians all over the world are ordering banks to charge depositors (you) a fee for storing cash.

    It’s a perversion of saving. It’s a perversion of capitalism. It’s a perversion of planning for the future.

    And it’s going to result in disaster.

    Politicians think that by making it unattractive for you to keep money in the bank, you’ll save less money. Instead, you’ll spend more money on things like smartphones and cars. You’ll invest in things like stocks and real estate.

    This would “stimulate” the economy.

    This thinking is very, very wrong. No matter what the government does, it can’t force you to spend money. It can’t force you to make investments if you don’t see good opportunities.

    Forcing people to pay banks to hold their money is a tax. It is wealth confiscation for the digital age.

    The government and the mainstream press won’t dare call it a tax.

    But that’s exactly what it is.

    A negative interest rate policy is a tax.

    Any time you hear a politician, central banker, or news anchor say “negative interest rates,” just think “TAX.”

    Think “TAX ON MY CASH”.

    I’ll say it again: Negative interest rates are going to result in financial disaster.

    The coming disaster will wipe out many people.

    But you don’t have to be one them.

    I’ll explain how you can sidestep this disaster—and even make a lot of money as a result of it—in a moment.

    But let’s quickly cover one more thing about negative interest rates…

    The Ugly Twin Sister of Negative Interest Rates

    If the government makes it unattractive for you to keep cash in the bank, you can pull cash out of the bank. You can simply store it in a safe or under the mattress.

    Politicians know this.

    That’s why they’ve created another dangerous policy that works hand-in-glove with negative interest rates.

    That policy is banning cash.

    You see, if you pull your money out of the banking system and stuff it under the mattress, you aren’t doing what the government wants you to do.

    You’re not spending money or investing in stocks.

    This is a major reason why governments are banning large cash transactions and large denomination bills.

    They are fighting a War on Cash.

    In just the past few years…

    ***Spain banned cash transactions over 2,500 euros

    ***Italy banned cash transactions over 1,000 euros

    ***France banned cash transactions over 1,000 euros, down from the previous limit of 3,000 euros

    And just a few weeks ago, former U.S. Treasury Secretary Larry Summers called for a ban on the $100 bill!

    Historians aren’t surprised by Summers’ idea. Franklin Delano Roosevelt banned $500 and $1,000 bills in the 1930s.

    You can bet that Big Government types like Hillary Clinton and Donald Trump will do the same thing in a financial emergency.

    By making it so difficult (or illegal) to buy and sell things with cash, the government wants to force people into the banking system. That way it can monitor us and coerce us into whatever it wants…like pay outrageous new taxes.

    It’s all a dream come true for government central planners.

    The governments say these new currency laws are for fighting terrorism, money laundering, and drugs.

    But the ultimate goal is control of society…and to confiscate the wealth of private citizens.

    As congressman Ron Paul said, “The cashless society is the IRS’s dream: total knowledge of, and control over, the finances of every single American.”

    Whether you agree with these regulations or not, the conclusion is obvious:

    By driving us more and more towards trackable digital payments, the government has made it much, much easier to confiscate our wealth.

    We’re like sheep that have been “herded” into a corral, ready for shearing.

    On April 5th, 1933, president Franklin Delano Roosevelt issued one of the most controversial orders in U.S. history.

    It went by the name “Executive Order 6102”

    Not one American in 1,000 knows about this order. But to this day, many experts consider it to be one of the most destructive acts in U.S. history.

    It violated sacred principles held by our founding fathers. It impoverished millions and confiscated the savings of honest, hardworking Americans.

    Executive Order 6102 made it illegal for private citizens to own gold. Citizens were ordered to turn in their gold to the government.

    Why would the government confiscate the wealth of private citizens?

    You can fill a book on the history surrounding Executive Order 6102. But in a nutshell, it was the act of a desperate government in the midst of a financial crisis.

    The government wanted the gold in order to increase the nation’s money supply. It believed an increase in the money supply would revive the struggling economy.

    Please review those last two paragraphs…

    An increase in the money supply…a struggling economy…a desperate government.

    Sound similar to what is happening right now?

    Since the answer to that question is “YES,” we have to ask another question…

    Could such a confiscation happen again?

    As the crisis develops, our deeply indebted government will act like a giant wounded beast, lashing out in all directions. It will grow more desperate for control. It will grow desperate for money.

    And just like FDR did in the 1930s, it will confiscate the wealth of private citizens.

    But Hillary Clinton (or Donald Trump, or whoever wins the election) won’t go after your gold.

    Nowadays, the gold market is very small compared to the overall economy.

    Going after gold would be too much work for the government.

    The government is going to go after YOUR CASH.

    It will regulate your cash. It will tax your cash. It will take your cash.

    This has all kinds of implications for banking and the economy.

    But here’s the most important thing you need to know as an investor:

    Negative interest rates and their partner, the War on Cash, will create a renewed interest in gold. This could cause gold to double or even triple in value.

    Even children know what the government is doing is crazy.

    And people aren’t going to take this lying down.

    Rather than participate in the government’s monetary farce, people will go underground.

    They will pull cash out of banks and hoard it in safe places. And they will seek the safety, anonymity, and reliability of gold and silver.

    Gold and silver have served as money for centuries.

    Gold is the ultimate currency because it doesn’t rot or corrode…it is durable…easily divisible…portable…has intrinsic value…is consistent around the world…and it cannot be created from thin air. It cannot be debased by the government.

    By enforcing negative interest rates and fighting a War on Cash, the government will create a huge underground currency market.

    And the ultimate underground currency will be gold and its sister metal, silver.
    —————

    To Your Wealth!
    Garrett

    • Hey Garrett.
      Hope there is room on this thread for replies.
      As always, you make some great observations.

      As you mentioned, Japan is considering an increase in their negative interest rates and the US is adding negative interest rate scenarios into their stress tests for banks starting this year. The Basel III accords are even considering a change of the counter-cyclical buffer (those extra $$ banks should keep on hand when times are good) to a negative interest rate buffer due to the stagnant growth. There is also the SIFI hit list- A systemically important financial institution (SIFI) is a bank, insurance company, or other financial institution whose failure might trigger a financial crisis.

      Some recent books for those that love to read:

      America’s Bank: The Epic Struggle to Create the Federal Reserve by Roger Lowenstein

      The Only Game in Town: Central Banks, Instability, and Avoiding the Next Collapse by Mohamed A. El-Erian

      No Ordinary Disruption: The Four Global Forces Breaking All the Trends by Richard Dobbs and James Manyika

      Cheers

  • Garrett

    Martin / Rulers,

    I have a computer again! Whew! Typing with thumbs is a bummer!

    Let’s go into my Dad’s world of being a 75 year old retiree. And let’s see if something he might do could be helpful for us as Rulers. I’ll make up a story here ….

    Dad bought company XYZ. He doesn’t want to sell because he’s living off the dividend. On the other hand, he doesn’t want to see the value of his retirement portfolio drop either. He runs some numbers and notices that when he bought last year at $75.00 per share the dividend yield was 3.75%. Now the price has gone up and the dividend yield is only 2.5% with the price at $85.00. He also notices that when Mr. Market starts to price his company at this particular higher PE, it appears to be overvalued and smart people start to take profits, the dividend yield gets reduced and people start selling.

    There are a couple of ways dad can reduce some of the risk of watching his stock climb up and then go back down without selling his shares. Dad notices that there is a JUNE 2015 CALL that he could sell. He likes the floor he bought at $75 and sees he could probably collect $11.00 per share if he sold that Call. Dad has 1000 shares of XYZ. Initial investment was $75,000. Price today is $85,000. If he sells 10 CALL contracts for $11.00 then he’ll collect 10 x 100 x 11 =’s $11,000 in cash.

    Now dad was paid $11,000 as if someone else just gave him money to insure his investment against a drop while he still collects that dividend till JUNE 2015. I call this (Phil’s never said this…this is what I’ve said to my dad) a “Rule #1 Insurance Policy.”

    In this policy, Dad is “insured” in a sense that his shares could drop in price from $85 to $74 and the VALUE of his portfolio really doesn’t change. If the shares drop in price from $85 to $74, he’ll see an $11,000 loss on his market value of those shares. But he also brought in $11,000 for the CALL he sold. So he breaks even. But in the meantime, Dad is still able to collect the dividend.

    It’s very possible that XYZ rockets up above $85.00 and Dad never gets to participate in that upside because he essentially gave up all his future profit because he sold the CALL contract. So that’s really the worse case scenario. And that is one he has to weigh for his goals.

    On the other hand, if it does drop back to the floor and IF he has more cash, he can certainly buy more.

    There are so many ways to approach this stuff. I just wanted to share one way that Dad has done some things to hedge his possible losses. Dad is more concerned here with his RETURN OF CAPITAL than his RETURN ON CAPITAL. He doesn’t want to lose what he has. He has enough. So this strategy works well for him.

    Sometimes I sell call contracts on stuff I own because I suspect there is good reason that the price will go down. This can help offset or eliminate losses and is a great way to reduce basis on a Rule #1 Company.

    I’m not trying to teach the intricacies of a Covered Call strategy – Way too much to share for that on the blog. However, you should learn how to use these things because they were created to help you reduce your risk in your investing. Again, Jeff Town’s Rule #1 Fundamentals is a great 6 month course to learn like Moncho did.

    To Your Wealth!

    Garrett

    • Martin

      Thanks everyone, those comments are very helpful. I was in the cash flow trade room class with Joey Miller and Dr. Price and Garrett your example helped make some of that info more clear. I think Joey Miller showed a similar strategy with CAT and talked about using the profit to buy more shares. Thanks Moncho and Hanno. It is helpful to think of Phil and BP. Whenever I look at a stock I think of the fact that Buffet thinks the best time to sell a stock is never but I need to be a little more critical in my analysis of the value of the company . I think it is possible either due to market correction and/or commodity prices that LNN can drop down to $70 or below. It was recently at $73 and I was right on the edge of being a buyer but sales from storm damaged equipment and better than normal infrastructure profit from the road zipper system gave them a boost. I was hoping they would have slipped below $70. I’m a little surprised it has climbed back up to $85 but go figure. Even calculating based on if there had been no drop off in EPS this year, using last year’s 5.50 EPS and 12% growth still puts the Sticker at $101 and MOS at $50.67 and 8 year Payback at $75.77. I have some number for Valmont (VMI) which is a similar company that I will post when I get a chance.

      • Mike Mac

        I like VMI more than LNN. I own VMI.

        • Moncho

          Mike,

          I like VMI also. We need to determine if they just had a small EVENT or if the company will have long term issues. I like their Management but Mogens is getting older and am still on the fence on whether the team he is creating will sustain the company in the future.

          Moncho

  • Martin

    Wanted to give a quick update on Lindsay (LNN). I have posted about them in the past and wanted to post my valuations for anyone who was interested and who might have some insights that I’m missing. LNN manufactures irrigation equipment for farmers. They have good Rule #1 numbers and their Meaning, Moat, Management, make sense to me. Here is what I’m thinking for valuations.
    To calculate the Sticker Price and Margin of Safety I used a growth rate of 12% which is equal to the 10 years Book Value Per Share (BVPS) growth rate.
    Current EPS: 4.00, PE:24 gives a Sticker of 73.70 and MOS of 36.85 and an 8 year Payback Time of 55.10.
    This is in contrast to a record year of FY 2013 with a EPS of 5.47. When I valued it at that time the Sticker was approximately 120.00 and the MOS 120.00 with an 8 year Payback Time of 78.21.
    I was a buyer of LNN at 76.00 last year and my current basis is roughly 70.00. One of the problems I have with valuing this cyclical type company is that according to the numbers I should be a seller at the current price of $86.39 but at the same time I know that the company in the past has had down years and then rebounds. As I hold this stock I am able to reduce my basis by selling puts when it drops to the $75 dollar range and by collecting the 1.08 yearly dividend.
    Also when I run the retained earnings valuation that Garrett ran on John Deere I have the price that the market was paying in October 2009 be equivalent to 73.46 today.
    This is a hard one for me to call because on one hand given the numbers today I could sell but I like the long term prospects of the company and I recognize that the stock will come back around and recover off the lower earnings in comparison to 2013. At the same time I am aware that things could even get worse in 2015 and a better deal to buy may come around. I wouldn’t be opposed to selling now but only with the hope that the stock will drop again and I can use money to pick up shares again.
    My rough thoughts given the current numbers would be to strongly consider picking up shares at 70.00 or below and work on reducing basis as much as possible and be a seller at 100.00 and above.

    • Moncho

      Martin,

      If you’re not sure, get out. If there is tension inside you with regards to LNN, get out. You, like me on most occasions, are in FOMO (Fear Of Missing Out) mode. While it can be difficult, we need to get out of this mode. Phil likes BP and he gets in and out all the time. If he is uncertain, he gets out until he is certain. I admit that I am not as rational as he but I am working on it. Maybe more digging on our companies is what we need to do to relay this fear/tension. The best part of your situation is you are at a 20% profit.

      You mentioned writing Puts on LNN and are wiling to hold, in what could be a tough 2015 for LNN (guessing, mostly due to corn prices and farming issues), that gives you multiple options (pun intended).

      Based on the fact that you are a long term holder, you have and continue to do your homework, you have your long term story in hand, have taken a look at the macro environment, and you are willing to hold through the possible downturn, you could #1, Sell and wait for a better price, #2 Start selling OTM calls, #3 Sell ITM calls or use other cash flow trades surrounding your company to lower basis. As they say, no one gets in trouble by taking profits. Plus, as Garrett has mentioned, there WILL be other opportunities.

      Great Days!
      Moncho

    • Hanno

      Great statement, Moncho!
      I want to add a technical point of view:
      LNN is moving sideways since January 2013. Floor at about $73 and ceiling at about $94.
      You could wait until break through the floor or ceiling or sell right now, being at the ceiling and wait what it is gonna do in the future: buy back after breaking through ceiling or be happy when it is going through floor. If you wanna go into cash, now it is the best time for it, if you are uncertain about future. Because of the hugh rebound, as you mentioned.
      So, be aware of what you do. Certainty is important. Try to put your emotions byside. IF it is getting emotionally for you, you could slide into critical situations.

      Cheers!

      • Moncho

        Hanno and Martin,

        Good little technical analysis Hanno. I will add a little more to that.

        LNN over the last few years has sold off when the P/E is around to 21, P/B is around 2.8 and the Dividend yield is about .30. Plus make sure you look at THE TOOLS for the 3 Red arrows.

        Along with Hanno’s statement, cash can be a very good thing.

        Moncho

  • Garrett

    Rulers,
    Still posting with my thumbs – drives me nuts.
    Did you all read the scuttle-butt on IBM today on Seeking Alpha?
    IBM had a really bad earnings report and I suspect it would have dropped well below $170 if not for the fact that everyone knows Buffett is in at that price.
    I wouldn’t be surprised if the CEO gets replaced – I don’t think it will happen – but if it did it wouldn’t surprise me. Prior to this earnings report on IBM I thought they were doing pretty good especially with their partnership with Apple. Apparently not.

    Over the last year I was opening and closing cash flow trades on IBM. I stopped in early September as I was moving more into cash positions. I would love to know what Buffett thinks of IBMs earnings report.

    Regarding BP – yeah, just watching.

    I’m going to be content to stay in cash for awhile. The market still hasn’t had that 10% or more correction we’re all waiting to see.

    Phil has an expression he picked up – “Pay attention to the tension”

    I know right now I’m not stressing out about being in a cash position – i.e. I have very little tension right now. Worse case is I miss out on some opportunities. I’ve been doing this enough years to know that there is always another opportunity and you can recover from past mistakes.

    To Your Wealth!
    Garrett

    I put Costco on my watch list. Unfortunately it jumped 3% today.

    To Your Wealth!
    Garrett

    • Moncho

      Hey Garrett,

      You mentioned COST and I wanted to make sure you saw the special on CNBC. It is from April of 2012 so somethings have changed. You probably already found it but I figured I would mentioned it if there are any other Rulers out here with an interest in COST.

      Moncho

  • AngelaW

    From 10/17/14 Seeking Alpha Wall Street Breakfast… To read the entire article, one will need subscritpion access to WSJ.
    http://online.wsj.com/articles/lower-oil-price-could-help-refiners-1413287279?KEYWORDS=bp

    Although weaker oil prices mean energy companies and investors can expect lower profits in the coming months, big integrated oil majors may find their unloved oil refining businesses will soften the blow, the WSJ reports. For the likes of BP (NYSE:BP) and Shell (RDS.A, RDS.B), their refining operations become more profitable when the oil they use is cheaper. Exxon (NYSE:XOM) and Chevron (NYSE:CVX) also stand to benefit, but may not see quite as big an improvement in refining margins.

    • Ross

      Gentlmen,

      Some great posts as usual. I need to bounce something off of you. I must admit it is very difficult to sit on the sidelines when you see some of your Rule # 1 companies go on sale and don’t buy because the signals aren’t telling me to get it yet. I have about 3 companies right now that I would be very comfortable buying at current prices given they have had a significant correction, but of course they could still go lower. I have evaluated what I belieive are their “bottom prices” and all of them have since bounced off of their bottom, however, I do believe Mr. Market is not done yet and more gyrations in the market will prevail for the next little while. Do any of you every break your rule # 1 approach and buy when you know you have an excellent price being offered, even though there is certainly a chance it could still go lower. It’s kind of a “heads I win, tails I don’t lose much” scenario.
      Thanks.

      • Mike Mac

        You sound like you want to time the market. Don’t. If you have a great company that you think is on sale, then buy your first traunche. Ignore the noise and focus on the value. If you are unsure of your value calculation, then post it and see what others think. There is no right or wrong answer. If the price declines due to this crazy market then you should be prepared to add to your position.

        • Ross

          Thanks Mike. I don’t really want to time the market its more about buying a great company at a really good price, but what you’re saying is don’t wait for the 3 signals to indicate “buy” (at which point obviously the prices will be higher) but to get in at the wonderful price. I would buy more if it falls in price, but then shouldn’t you also buy more once you’re getting your 3 signals indicating to buy. What I’m trying to do is not time the maket and best way to do that is to just focus on value, but in the short run this can also result in short-term losses and doesn’t really follow Rule # 1 as the price could continue to decline like 2008/2009. Interested in your thoughts.

          • Moncho

            Ross,

            What are your R#1 companies that you are talking about? Maybe we can help you with your current scenario.

            Also, as I look at the TOOL’s, I do make a judgment call sometimes. If I have one or two green arrows, I may not wait for the third if I know the company well enough and what I believe is going on in the short term. If the R#1 company is an oil/commodity based product, I would wait for all three greens. If it is a retailer, I may not wait for the third. I would definitely wait for at least the MACD or STOCH though. Maybe using a R#1 put this time would make better sense.

            Moncho

          • Garrett

            Ross,
            What companies are you looking at that are on Sale? Heck, don’t be embarrassed to post them because nobody knows who you are! Maybe you’re a Rule #1 Genius and we can learn from you.

            Companies that I’ve sold recently and would like to buy again at better values are Cf Industries, BP, John Deere, DeVita Health Care and I followed Pabrai into ZINC (coatailing as Phil calls it)

            I’ve traded cash flow strategies several times on IBM, Panera, BP and CF.

            I owned Bed Bath and Beyond for a few months and sold out in September to get to cash.

            To Your Wealth!
            Garrett

          • Joe R

            Garrett,
            In terms of PABRAI and cotailing, I looked at ZINC and didn’t really see the consistent value in it. Is it a zombie value type of play or what? PKX on the other hand looks really cash from a DCF perspective. Downside is it’s not a U.S. company I’m familiar with

  • Garrett

    Joe R,
    I’m typing with my thumbs because my computer is still busted – so I’m being brief.
    You asked me what I thought was BP’s MOAT. Here’s how I see it:

    Simply stated it is their ability to negotiate complex exploration and drilling contracts with foreign countries all over the world and their ability to do enormously challenging deep off-shore drilling better than any other oil company.

    BP has some serious challenges facing them right now. Earnings come out Oct 28th. It will be very interesting to listen to the conference call.

    To Your Wealth!
    Garrett

    • Joe R

      Good point Garrett. Warren Buffett is an owner in XOM at around 100 per share and it’s only at 90 now. What makes BP a better opportunity? More “fear” already baked in (Russia/oil spill) plus more yield vs a safe bet on a WB company. Einkorn is a more recent buyer of BP which is interesting.

  • Joe R

    Have also been looking at BP at these levels been trying to do more research on it. Garrett what makes it’s MOAT and why do you believe in its management?
    I think it’s a “heads I win tails I don’t lose much” opportunity at around $40. With a dividend yield of 5.6% and after a massive correction in BP and oil prices, a further drop to BP at 35 or even 30 would mean yields of about 6.5% and 7.5%. Even more serious support.

    • Garrett

      … Forgot to mention, I like the Pabrai quote in your post!

      To Your Wealth!
      Garrett

  • Garrett

    Erik,

    Yes, BP bounced on that $40 floor. I’m watching it every day too. I continue to read 100% of BP’s Seeking Alpha articles that get written on a daily basis. I sold out of BP at $45 because it looked like it was heading to $40.00. Now there might be some good Jan 2016 LEAPS out there that could offer some great entry points for 1st tranche positions or to lower basis should $40 be the new floor.

    Now that we’ve seen some support, I’m still on the side-lines. For me, BP isn’t quite at the “load up the truck” price.

    I’m watching oil too. The price of oil is a huge factor in this. If oil breaks to $70 that could drop XOM and BP’s share price significantly. And if we go into a deep recession, then picking up BP at $35.00 a share might be a pretty exciting entry.

    We saw oil recover to that $80 floor. Commodities are all taking a hit right now. I realize Friday was a nice big recovery in the stock market, but I think things will get worse before they get better. We’ll see.

    In the meantime, I’m patiently waiting for some opportunities.

    To Your Wealth!
    Garrett

    • Erick

      I totally agree with you Garrett. My fear as I think you stated is I think the temporary upside on friday was only a trick or tease to the regular people out there trying to grasp at anything that goes up. My opinion is the mkt will go dwn a lot more thats y I didn’t get into BP at $40.. I think too it will at least go dwn to $35 or so. Me personally keep lower my cost basis on TGA another oil and gas exploration stk and this one is way below zombie value. Going to buy and hold on this one.. Any thoughts Garrett if you have a free moment to take a look would be awesome!!!!

  • Garrett

    Hello Rulers!

    In case you don’t know, “Moncho” is a really dedicated Rule #1 Investor. He graduated from Jeff Town’s Rule #1 Course and I finally had the chance to meet him a few years ago (has it been that long?) at one of Phil’s Transformational Investing Seminars.

    Along the way, I’ve introduced Moncho to some friends of mine. Moncho certainly knows more about Complex Option strategies than I do. Backed with his solid understanding of Rule #1 Fundamentals, Moncho has really taken his investing seriously and is doing his best to secure his finanical security.

    What makes Moncho such a good student is that he really has a passion for learning and taking responsibiblity. If you suggest he learn something – he does it. I encouraged Moncho to find like minded Rulers that he could encourage and learn from. I call those small groups “Rule #1 Wealth Buddies” Now Moncho has a small group of friends that he keeps in touch with on an almost daily basis…or more!

    It’s important that you stay in the investing game for life…this isn’t a part time thing. Moncho does that by consisently contributing to his small group of “Rule #1 Wealth Buddies” by sharing his knowledge, successes, failures and cash flow trades.

    I don’t believe in the idea of a “self-made millionare” – I believe it takes a Team. And what better way to build wealth than to help others build their wealth.

    So take heart to this little unsolicited advice – be like Moncho and find or form your own small group of “Rule #1 Wealth Buddies” where you can share your passion for Rule #1 Investing.

    Some of the guys in my small group I’ve never met. Yet, we’ve been emailing each other for… gosh…at least 5 years or more now?

    One of the advantages of having Rule #1 Wealth Buddies is that you can share the cost of some of the subscription based investing services. Some of the guys in my group have Value Line, Gurufocus and Real Money Pro. That’s a ton of information to share amongst each other and offers plenty of opportunities to explore companies that may have MEANING to you.

    Now, I personally don’t invest in a lot of companies. 1 to 7 is really about my max (and now I’m about 95% cash) But I do enjoy reading and seeing what may be on sale.

    For me, it’s all about being in the game. I do that by reading, writing and listening. I read my Seeking Alpha articles, emails, Wall Street Journal and whatever Phil posts. I write to my Rule #1 Wealth Buddies and on Phil’s blog and I listen to Phil’s weekly webinars.

    Doing all that even if I’m in cash keeps my head in the game and my focus on my long-term goals – Financial security and independence when I leave Southwest Airlines.

    To Your Wealth!
    Garrett

    • Moncho

      Yep, Its been that long already. Time files.

      Thanks for the Kudos G! :-)

      Moncho.

  • Moncho

    Rulers,

    We Rulers need to read a lot of material to remain an inch wide and mile deep and this comes at the expense of mainly the TV. I admit, I like the escape of reality and watch more than a few hours a week but I’ve decided to limit my viewing to only a few fictional shows and move more towards educational (some investment based and some science based) material.

    I stay away from the talking investment heads on Fast Money and the Closing Bell because they love to tell you what to do AFTER the fact, not before. From Garrett’s prior post, NFLX is a PERFECT example. If anything, I will watch them for entertainment value.

    My main two shows have become “The Profit” and “Shark Tank.” I highly recommend these two as they have Rule #1 fundamentals at their core. Garrett got me to start watching Shark Tank two years ago and I have not stopped since. Plus repeats are on now so I have been watching previous years. I have heard numerous times, the Shark’s mention, “I don’t know enough about this business so I am OUT!,” or “You have placed an enormous valuation and it is not there or in the future, so I am OUT!” They have even admitted on a few occasions how they missed an opportunity that another Shark made but realized that its OK because there is always another opportunity.

    As for The Profit, Marcus has his three pillars he lives by and they are People, Process and Product. Along with his three pillars, he constantly reiterates to the people in each business he invests in and the audience, Know your numbers!.

    I read an Forbes Interview with Marcus Lemonis, and I found this passage to be interesting. “I understood early on the importance of knowing my numbers and surrounding myself with the best people. I also learned to invest in things that have staying power; this is why I am in the RV business today. I like trends and fads as a consumer, but not as an investor.” This passage has more than a few R#1 fundamentals in it alone, like digging deep to get the numbers and thinking long term.

    Keep on Rule1’ing On!
    Moncho

  • Hanno

    Hi Phil! Hi Garett!

    Can you tell me where to find the historical numbers now after MSN money changed their website?
    I read, that you made a comment about it. But did not found it yet.
    Beside your site, is there a possibility to have something similar or equal to MSN money?
    Looking for fundamental data only.
    I don’t know how to put a value on a business without information about their financial status on anual basis for the last 10 years.

    What I am also very interested of is, how did you manage all that in the 1980’s? There was no MSN money and no internet at that time. How did you find a great business and put a value on it? Just by reading the quaterly reports?

    Cheers!
    Hanno

    • Moncho

      Hanno,

      Check out gurufocus.com. Without signing up, you should still be able to get 10 years of financial data along with yearly growth rate numbers. Combine that with finance.yahoo.com and you should be good to go.

      Moncho

      • Hanno

        Thank you, Moncho!

  • Garrett

    Rulers,

    Hard lessons were learned the other day for investors…or speculators who bought NetFlix (NFLX)

    It tanked over 26% after signing up about 3 million subscribers when the street was looking for up to 4 million subscribers. Then HBO said they’re going to compete directly with NFLX with their own streaming content AND original programing.

    If you bought into the NFLX story, you probably believed that NFLX was somehow going to keep growing at 33%, that a PE Multiple of 70 based on their future earnings was somehow justified and that the Trailing 12 Month PE of 135 made sense too.

    This is just so contray to Rule #1 Investing. Many times we Rulers will end up sitting on sidelines watching the stock go up, up, up and have to be content to say, “We don’t play that game as Rulers.”

    And where were the “experts” to warn investors that NFLX was getting bid up to ridiculous valuations? What mutual fund manager used your money to buy those shares?

    Now of course the “experts” revise their estimates. This is all such B.S. that it should be illegal.

    I hope nobody reading Phil’s blog bought into NFLX recently and got killed by that earnings report.

    It’s called the “greater fool”…until finally a little bit of bad news gets reported and everyone dumps the shares.

    Be careful out there. Just because something is going up in price doesn’t make it a great company and just because something drops 26% doesn’t mean that it is now “on sale.”

    To Your Wealth!
    Garrett

    • Erick Lindley

      To Garrett.. Bp got around $40 then bounced again.. been looking into the company since you mentioned it. Watching investor presentations and such.. Looks like a great buy and hold. Will wait till next buying opportunity :)..
      Thanks for all your knowledge that you share… :)

  • Hanno

    Yeah!
    Great comment! This is it!