What is Rule #1, “don’t lose money.” The second rule is, “refer to Rule #1.”
How do people make money? Here’s the old adage: There are 4 types of people in life; Employers, Employees, Business Owners, & Investors
With Rule #1, it doesn’t matter which type of person you are. What’s important to you & yours is to get and keep the lifestyle you deserve and enjoy it.
Personally, I enjoyed the book quite a
lot, and I think you will too if individual stock investing is of
interest to you. If not, contact us And together we can explore what investments for you & yours are in your
best interest.
How do you use Rule #1 to do that? By being properly invested in stocks using the following criteria:
How do you use Rule #1 to do that? By being properly invested in stocks using the following criteria:
Here are some fundamentals from the books, Rule #1 & PayBack Time by Phil Town which I have found to be most valuable :
If you are new to investing, use a Paper Trading account. Practice using real stocks and “paper” or not real money. Many brokerages will set one up for you-any questions contact us.
Invest
money only into Qualified Rule #1 stocks and use trailing stop-loss
orders to lock in at least a 15% gain on profits per stock after
expenses.
1. The
company you are ready to own should have at minimum 500,000 shares/day
trading activity. If under $1/share, then use 1,000,000 shares/day.
Otherwise it will be very difficult to sell at a profit.
2. Always set a Limit Order
when buying a stock. Set the limit at or below a set price (preferably
your MOS price). Also check the length of time before it cancels (you
can use GTC-good till canceled or Market-if you don’t get your price
by the close of business, the order is canceled). This gives you more
buying power as the stock price fluctuates.
3. Use a Trailing Stop or Stop Loss Order
to protect your gains. Set it at 5% after your 20% gain. Now, you
have locked in a 15% minimum return and the stock will be automatically
sold when it drops more than 5% during any trading day.
RULE # 1 Requirements
The Four M’s
1. Meaning.
Is the business interesting and does this business have meaning to
you? Take an inventory of your passions, talents & money.
2. Moat.
A competitive barrier that is hard to cross. All wonderful businesses
will have a durable competitive advantage that protects their earnings
from attack. There are various types; branding (trustworthy,
familiar), secret (a patent or trade secret that makes competition very
difficult or illegal), toll (exclusive control), switching (integral
part of your life so switching is a lot of trouble), price (low price
leader means hard to compete).
3. Management.
The business is run by competent owner oriented management teams that
have a vested interest in the success of the business above their own.
4. Margin of Safety. The stock price of the business is at a minimum 50% discount to its retail value.
After our businesses have passed the four M’s, we turn to our next metric:
The Big Five
1. ROIC (Return On Investment Capital)
2. Sales growth rate
3. BVPS (Book Value Per Share) or Equity growth rate
4. EPS (Earnings Per Share) growth rate
5. FCF (Free Cash Flow) or Cash growth rate
Each of these numbers should be above the 10% margin over the past year and average over 10% during the past ten years.
Why are these numbers important?
Together, they indicate the health of a company. Is the investment of
capital returning anything? Are the sales growing? Is it earning more
per share? Is the company building up equity and cash? All of these
questions should be answered with a clear “yes” if your company is doing
well.
Then, we look at the company’s long term debt.
As a general rule, if a company can pay off their long term debt
within three years it is good debt (divide long term debt by current
free cash flow).
It’s
important to note that these numbers really only serve to ensure that
the company is in fact stable, not answer whether or not the company is
a good investment. Phil’s philosophy is that you should always
invest in stable companies that you like, not chase after the pot at the
end of the rainbow just because the numbers look sweet.
Implementing the Rule
First,
take it slow. Don’t bet the farm on the first stock you find that
seems like a good deal under this system. Keep your portfolio diverse
and don’t bet everything on the first thing you see.
Use the three tools for identifying when to get into or out of a stock.
1. MACD
or moving average convergence divergence. It identifies money coming
into or out of a stock. If there’s money going in, then go in. If
there’s money coming out, then go out. I use these settings (1st, 2nd ,3rd) 8, 17, 9-Ask us or check the book for explanations.
2. Stochastic,
which seeks to indicate major spikes in a stocks activity, which
usually indicates great news or a major problem. You should follow the
direction of these spikes. I use these settings (Length, 1st MA, 2nd MA) 14, 5, 0-Ask us or check the book for explanations.
3. MA or moving average,
which simply indicates whether the stock is currently moving in a
healthy direction. If the current price is leading the moving average by
quite a bit, it’s a good time to buy; if the current price is lagging
the moving average by quite a bit, it might be time to get out. I use these settings (Length) 30-Ask us or check the book for explanations.
Now you know what to buy. The question is, at what price to buy?
Calculating the sticker price and Margin Of Safety (MOS)
1. Use the current EPS-TTM (Trailing 12 Months)
2. Select a growth rate (analysts, historical BVPS, or your own)
3. Obtain Future EPS by Growing EPS for 10 years (use rule #1 calculator or rule of 72)
4. Determine future P/E (Price/Earnings) multiple (2x the growth rate from #2 or double historical P/E-conservative) Maximum of 50
5. Multiply future EPS and future P/E to get future sticker price
6. Default MARR (Minimal Accepted Rate of Return) is 15%
7. Discount future sticker price by MARR. Then divide by 4 =sticker price
8. MOS is 50%
9. Multiply the sticker price by 50% (MOS) = MOS price
10. Determine current market price
11. Is stock available under MOS price?
12. If yes, consider purchasing
Reference Websites:
