Rule #1 Finance Blog
stock market basics
I received this note from Matt the other day, regarding the MA (Moving Average):
Hi Mr. Phil Town,
I am still baffled by using the 35 day MA (35, not 30, b/c
you can only put in 5 for the “period” if you’re using weekly
intervals) vs the 10 day MA. In my practice investments, I get
completely different signals. For example, for CAKE, back in your book
example of the Connoley’s, if I use the 35 day MA, it tells me to NOT
sell on 3/26/03 when the other 2 tell me to sell. If I use the 10 day
MA, it tells me to sell on date 3/26/03 ( i went back in time using
your book’s example to 2/2003 to 4/2003). Also, if you are using “weekly” intervals, how does the “10 day
MA” sync. This exact issue wasn’t addressed previousy, but rather, we
taked about the other tools being synced. I’m specifically asking
about the MA sync. thanks.Matt
Hi Matt,
Using the weekly intervals is going to give you totally
different results. The way these tools all work is off of specific
periods based on whatever the chart is that you are using.
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.
Think of the Tools as Insurance
Heath wrote in the other day, in response to my NTRI post:
I guess out of ignorance, I did not consider the volatility of the stock. I was concerned more about meaning, moat, big 5 numbers, debt and MOS. My next focus was an entry point into the stock. I waited for a strong move up according to the indicators. That’s when I bought in. I had been watching several stocks for a while and none of them had moved 12% in one day. It just caught me off guard. I have to work. I can’t watch my stocks every minute of the day. I’ll take your advice and use stop limits moving forward. I am a beginner investor in every sense of the word. I don’t know anything outside what I read in Phil’s book.
This quote is what I needed to hear:
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.
How to Tell When a REIT is On Sale
The other day, Donna asked me how to figure out when a REIT is on sale. Here's the Phil Town response:
REITs are very different from regular stocks. They don't grow their earnings by increasing their share of market. In fact, they don't even keep their cash flow usually. They send it out in the form of a dividend to the REIT shareholders. Therefore we can't value the business as a business based on future increasing surplus cash flow, which is what we do with regular businesses.
Instead we determine the value of the REIT by the value of the real estate the REIT owns.
A simple and fast way to get a handle on the value of the REIT real estate is to look at the book value per share. Theoretically that number is the value of the real estate minus the loans.
Of course, it might not be accurate because the actual value of the real estate is what it would sell for, not what an accountant appraises it at. Still, it's as good as we can get without going deeper into this than I want to go.
A rough rule of thumb of the retail or Sticker Price of a REIT is its book value per share.
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.
Here’s a question that came in after the CNBC program, from Ben:
Hi Phil Town,
Great showing on the CNBC special Millionaire Inside! I have some questions based on the stocks you mentioned on the show. Maybe I am reading Rule #1 wrong and would love to have your feedback and clarification.
I did a quick scan of the selections using Investools:
GGP – The 2/9 phase one, Big 5, and current price vs. sticker – do not make this a Rule #1 pick.
TCO – The 4/5 phase one, Big 5, and current price vs. sticker – do not make this a Rule #1 pick.
COH – Meets Rule #1 criteria.
GRMN – Meets Rule #1 criteria.
PVH – This one is a bit mixed, The 7/1 phase one is great, Big 5 are great for 4 out of the 5, but it is not selling at a discount – do not make this a Rule #1 pick.
Nike and Ralph Lauren you already mentioned were not on sale.
So my real question is, do you value and use different criteria for REITs to be a Rule #1 candidate?
Your insight is always appreciated!
Thanks,
Ben
My response:
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.
Rule #1 and the Movie Industry
I recently corresponded with an acquaintance who works in the film industry and who is just getting started looking for a wonderful company. This is what I told her:
Let’s go through finding a good stock in a good industry that we know something about: movies.
Go on Yahoo, click Finance, click Investing, click Stocks, then clickSector/Industry Analysis (under Analyst Research). You’ll get a list of 9 sectors. All stocks are in one of these. Under Sector, click Services. You’ll get a list of Industries in the Services Sector.
Click on Movie Production. You’ll get a list of all the movie production companies that sell their stock to the public. Now look at the matrix of numbers to the right of all those company names. See the heading ROE%? Only bother with businesses that have at least a 10% in that column.
The rest of them are basically crap. The list gets short quickly. DreamWorks, Lions Gate, Marvel, New Frontier, Regal, Rentrak, Valcom. Seven businesses that might not be horrible to own.
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.
4M’S: CHICO’S (CHS) AND GARMIN (GRMN)
In a comment under yesterday's post, Larry asked me to take a look at Chico's and Garmin (CHS and GRMN), which also dropped suddenly a couple of days ago, to see if there were indications that would have gotten him out of there before taking the hit.
Larry, if you were my buddy and we were talking about this over dinner, the first thing I'd ask you is why you are investing in CHS and GRMN — and I'd expect a good answer.
We're both Rule #1 investors so we both know that we NEVER invest in businesses we don't understand, that don't have a good Moat or that don't have good Management. And we never invest at retail prices. So I have to think, if you are telling me you got burned, that you think all 4Ms are good to go on both businesses.
So are you saying that, my friend? Is Chico's still a great business that's on sale? Is Garmin? So let's take a peek, shall we?
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.
Here's a question that came in from a Rule #1 reader a few days ago:
Hi Phil,
I'm 35 and have 5 young kids, my wife stays at home, and I just finished your book. Thanks for making it so simple — you've given me some confidence that I can actually put my kids through college and still save for our retirement.
I have about $150k in IRAs and a 401k and I'm wondering what to do with that money right now. In one of your previous blog posts you recommended moving into money markets (or some cash equivalent) until you've built up some confidence paper-trading. I asked my broker to sell and he said that I'm invested in 'B' shares which have a CDSC (contingent deferred sales charge) which could be anywhere from 4.5 to 5%. That seems like a lot to give up, yet I don't want to lose money if the bottom drops out.
Should I take the hit and get to cash, or leave it in where it is until I'm ready to start Rule #1 investing? I really want to get this Rule #1 thing right, so I don't want to rush the paper-trading – but in the meantime, I don't want to watch my retirement savings take a nosedive.
I would really appreciate any guidance you can provide. Thanks,
Ryan
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.
Here’s a bit closer view of the navigation on that chart (see previous post): Phil TownPhil Town is an investment advisor, hedge fund manager, 3x NY Times Best-Selling…
THE NYSE’S HYBRID ELECTRONIC TRADING SYSTEM
Here’s a great question from Scott in Kirkland, WA:
Hi Phil.
I just read everything you have written that I can get my hands on (book, blogs, etc.) in less than 10 days. That’s a bug deal for me since the last book I read took me almost a year to finish. I’m loving the learning curve and have suddenly "awakened" to everything around me that could be a potential investment, and am noticing things that have Meaning to me that I never gave a second thought to before. I made my first paper buy today and am excited to see how I do.
I saw something on the news yesterday and I was wondering what your thoughts were:
I hear that on Friday (06 Oct 2006) the NYSE is going to a hybrid electronic trading system, supposedly meaning that it will be able to handle larger volumes faster. Does this mean the institutional money will be able to move in and out faster, giving us less time to react to The Tools? If so, what does that mean for us newbie Rule #1 guys – should we use faster tools? Or should we use slower tools to shield us from wilder fluctuations?
Thanks for everything,
-Scott
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.
Here’s a question about shorting that came in a few days ago:
Phil,
I was looking at Nutrisystems (NTRI) last week which appeared to be a very good Rule #1 stock. It met all the requirements.
On Tuesday, 9/5, the price shot up over both the 10 and 30 MAs and the Stoch and MACD were both showing “buy” signals. I was about to buy in at about $53 per share, still well below the $60 MOS.
But then I came upon a posting showing that NTRI was one of the most heavily shorted stocks with almost 40% of the float shorted. This was an indication that a lot of people, with a lot more knowledge and experience than I have, believed that the stock was about to go down big-time. So I didn’t buy.
Yesterday the stock closed at $59.35 which represents almost a 12% gain in 10 days which I missed because of my fear of the “short” situation.
How would you have handled this?
Thanks
Hal Whitney
My response:
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.