Rule #1 Finance Blog

With Investor Phil Town

HOW TO AVOID BECOMING ONE OF THE BIG GUYS

Rob has a pretty sizeable nest egg to invest on his own and wants to make sure he does it right.  Several Rule #1 readers have written in with similar concerns. Read on:

Hi Phil,

Studied your book and have been using your philosophy and tools for
about 3 months now. I have an IRA with approximately 4 million in it which is being managed by a money managing firm.  I would like to take
over the management myself using your book and tools as a guide.

Do the
same rules apply using this much money?  Would I invest all of the
money in 4 or 5 stocks? Would I have to buy each company in stages (ie.
$100,000 at a time) in order not to affect the price and then trade
these companies according to the three charts you use as tools or could
I buy $800,000 of each stock when all 3 charts cross their lines?

When I go on vacation would I place a stop loss order and sell out
completely if they meet that price and then buy back again when I
return? 

Thanks for your advice.  I have given copies of your book to everyone
in my family and now we are all engaged looking for those few pearls.

Thanks again for my financial education.

Rob

Here's what I told Rob:

Hi Rob,

Congratulations on your financial situation and on deciding to take full responsiblity for this important accumulation of wealth. 

The good news is that $4 million is still small enough to move around with the arrows.  But you must be sure that you are investing in businesses that have enough trading liquidity to let you not be one of the Big Guys. 

It's easy math.  You don't want to be any more than 1% of a day's trading volume with all the money you have in that stock.

Let's say you have $800,000 in one business.  Just make sure that your $800k is less than 1% of the average day's trading.  That means you'll ignore any businesses that trade less than $80 million a day.  For most stocks that means you are looking at over a million shares a day.  That will still leave you lots and lots of wonderful businesses to play with.

As to how many stocks: remember that the key to success is the quality of the business and the price you pay, not the number of businesses you buy. The better you know what you are buying, the more success you will enjoy and the less sleep you will lose.  You must come to KNOW that the business is wonderful and why.  Focus on that, not on the arrow stuff.  Arrows are only there to protect us in case of a meltdown.

And remember that Lou Simpson runs Geico's $2 billion fund, has compounded on average over the last 20 years at 22% and owns 8 stocks.  Eddie Lampert, who runs ESL, has a minimum investment requirement of $20 milllion per client and has compounded on average over the last 19 years at 29% and owns something like 5 or 6 stocks.  The greats focus.  We should follow their lead, don't you think?

And also remember that cash does NOT violate Rule #1!  If you are in doubt, you are NOT ready to invest in that business.  The decision point for the investment happens when you have NO doubt.  The rightness of it just leaps out at you.  There should be NO gray areas in your mind.  If you have doubt, that's God's way of telling you to hold off.

Until the day comes when you KNOW you know, stay in cash (in a t-bill related account), use virtual money to practice with and keep doing your homework.

It helps a lot, by the way, to focus down right away on one industry to start with.  You'll add more later, but at first, narrow down the homework to one area of the market that you already know something about because of your talents, your passions and what you do with your money or where you make it. 

Moving a mountain is an impossible task if you look at it like that.  But moving one shovel full onto a truck isn't that big a deal.  So it is with investing.  It looks like a huge mountain of information, but when we focus down on just one small part of it, the job becomes quite manageable for any of us. 

Your promise to yourself should be to discover which industry you like and then discover which business in this industry is the very best…  And in the process you should also discover if this is even an industry that you want to invest in!  It might not be.  If not, by then you will have real knowledge on how to look at an industry and you can go to the next one you like and do it again. 

Eventually, probably quite quickly, you will find yourself quite the expert on an industry that you do like for the long haul — and you will know which businesses are in that industry that are run by great CEOs who have great goals which you admire, which have huge moats and consistent numbers. 

Then you wait like a panther to pounce on that business when Mr. Market freaks out about something that has nothing whatsoever to do with that business or that industry.  And when you see that, you will have no doubt it's time to pounce.

And don't let anyone tell you you can't do this.  Most of the people who say that wouldn't know a great company from a lottery ticket.

Be a panther.

Now go play!

Phil