A day of riding with Phil Town
December 10th, 2009
Undervalued explained
November 30th, 2009As a Rule #1 investor, it all boils down to this: Phil Town invests in stocks as businesses. You have to understand the business that you are investing in so that you can know what the business is worth. Then, you just wait for fluctuations in the market and to get your price that has a big margin of safety(MOS). RULE #1 investing has been in existence for 100 years and it will likely be the basis of investing for the next one 100 as well.
Let me add a explanation regarding ‘undervalued’ for RULE #1 investors. My view of undervalued is formed from buying private businesses and doing venture capital investing. Phil Town doesn’t see it the way Wall Street sees it at all. Undervalued, to Phil, means the following:
First that the business is predictable enough to have a solid valuation – this first requirement eliminates a lot of businesses simply because we can only know few industries well enough to be comfortable. It eliminates a bunch more that I do understand but which do not have historical numbers solid enough to base anything on. Phil Town passes up a lot of investing opportunities that are getting turned around and may be on their way up. But then if they really are, in a few years I will have another investment opportunity. And also, yes, it means that I am sometimes investing in a business that could crash without notice. Thank God for good RULE #1 indicators. They save me from my own ignorance.
Second, based on an estimated growth rate, the current market price should be about half of its value if I want a 15% return. Buying with that big of a margin of safety also saves me from the darkness I wander into.
Opportunities by Phil Town
November 17th, 2009
Phil Town sees investing through the lens of Rule # 1 – which is ‘Don’t Lose Money’ via ‘Buying a wonderful business at an attractive price’. This holds true whether the business being analyzed is real estate, a private business, a venture capital deal, or a public business.
Rule #1 investing is all about finding a good deal on a wonderful business that you understand. Phil Town has been encouraged over the years to see that really great Rule # 1 investors like Warren Buffett, and more recently Eddie Lampert, don’t seem to make much of a distinction between these groups either. Over the last few years, Mr. Buffett has continued buying private businesses and Mr. Lampert may be building the next Berkshire Hathaway on the back of Sears/Kmart.
If you want to be a successful investor, do what the best investors do: Look for a business you understand and one you can get at a bargain price. Mr. Buffett and Mr. Lampert work very hard to allocate billions of dollars for their clients/shareholders. According to Phil, making 20% plus on anything over $10,000,000 is hard enough. On $30 billion, it’s a miracle.
First allocation choice for a Rule # 1 investor is to sit in cash. Cash never seems to violate Rule # 1. Town would prefer to leave the first choice only when it can’t be helped – that is, when the deal is so good that you simply know you are going to make money. Never be in a hurry. Cash is king so take your time.
Following that simple Rule (or failing to follow it in my impatient pursuit of riches), from time to time Phil has been deep in real estate, venture capital, private business, or public businesses. In years past, all four areas of investing required a lot of work to keep up. Now, because of the internet and changes in the laws, the public markets are easier to navigate for a small investors.
If you stick to public businesses, the information is so available and the people running the best businesses are so good that the only real work you have to do is know when to sell. That point is when a great business you own gets ahead of itself in price as Mr. Market’s manic euphoria for anything going up kicks in. That’s the kind of problem most speculating traders would love to have.
The final answer: According to Phil Town, stick to public businesses simply because it’s so much easier to let the best business minds in the world work their butts off to make you money than to get involved in private stuff or real estate that you have to manage yourself. Don’t be afraid of putting the vast majority of what you are investing into a few great businesses and then watch them closely. If the big guys bail, bail with them and get to King Cash.
By that I mean that investing success is all about finding some wonderful business that you understand and how good the deal is. I’ve been encouraged over the years to see that really great Rule # 1 investors like Warren Buffett and more recently Eddie Lampert don’t seem to make much of a distinction between these groups either. Over the last few years Mr. Buffett has continued buying private businesses and Mr. Lampert may be building the next Berkshire Hathaway on the back of Sears/Kmart. (Look up his track record for a view of another 28%-for-20 years guy who follows Buffett).
If you want to be a successful investor do what the best investors do: Look for a business you understand and that you can get at a bargain price. From that point you can depart depending on how hard you want to work. Mr. Buffett and Mr. Lampert work very hard to allocate billions of dollars for their clients/shareholders. Trust me, making 20% plus on anything over $10,000,000 is hard enough, on $30 billion it’s a miracle.
Because you and I are little guys we don’t have to work that hard. Yeah!
First allocation choice for a lazy Rule # 1 investor is to sit in cash. Cash never seems to violate Rule # 1. I prefer to leave the first choice only when I can’t help it — that is when the deal is so good that I simply know I’m going to make money and on that basis continue to not violate Rule # 1. Never be in a hurry. Take your time. Cash is king.
Following that simple Rule (or failing to follow it in my impatient pursuit of riches), from time to time I’ve been deep in real estate, venture capital, private business, or public businesses. In years past, all four areas of investing required a lot of work to keep up. Today, only the first three do. Now, because of the internet and changes in the laws, the public markets take very little time for a small investor, so that’s where I am these days with most of my bucks.
If you stick to public businesses the information is so available and the people running the best businesses are so good that the only real work you have to do is know when to sell: when a great business you own gets ahead of itself in price as Mr. Market’s manic euphoria for anything going up kicks in. That’s the kind of problem most speculating traders would love to have, but then they like to work and are trying to make a bazillion.
Me, I’d much rather see the price hang below the Sticker and just keep working steadily upwards along with increases in EPS and Equity. It’s sad when I have to say goodbye to a great business just because it got too pricey. You can see me hanging on to WFMI for just that reason. If I decide it’s overpriced I’ve got to go to work and find something else that I like better. That sort of thing interferes with my snowboarding.
By the way, on that point: I’m afraid that when I blab about them here on the blog I may be contributing to Mr. Market’s craziness, and so lately I’ve been trying to keep my enthusiasm for what I’m buying out of the public eye. Otherwise I just might start to think 60% returns are normal and what I deserve, and then I’d get turned into a trader, heaven forbid, instead of a snowboarding, fly fishing goof off who keeps up on things for 15 minutes a week. After last year’s success I have to keep repeating the mantra “15%, 15%, 15%.” to keep my feet on the ground.
So final answer: For my money stick to public businesses simply because it’s so much easier to let the best business minds in the world work their butts off to make you money than to get all involved in private stuff or real estate that you have to manage yourself. Don’t be afraid of putting the vast majority of what you are investing into a few great businesses and then watch them closely. If the big guys bail, bail with them and get to King Cash. It’s the best low risk high return strategy I know.
Now go play