Phil Town workshop
January 18th, 2010
Retirement Funds off limits
November 16th, 2009People who are retired or semi-retired are always asking Phil Town if they should dip into their retirement to try Rule #1 investing. They want more to live off and what they have isn’t quite enough. Here’s what Phil Town has been telling them:
Never withdraw from the money you want to retire on until you can do so — retire on it — for the rest of your life. I’ve made every mistake in the book and that is one of the worst. It’s like eating your seed corn back in the old days – gets you through the winter and then you are screwed. So unless you aren’t going to starve somehow, don’t touch that hard earned money.
But what to do? First, realize that you are going to need to get a job. Which sucks because you are probably going to hate the job.Second, since you are going to hate the job, you better learn how to invest your money from it so you can build your pile and then quit.
Here’s the good news: With, say, $600,000 in retirement money earning 15% a year, you’ll have $90,000 pretax to live on. Not bad. But if you can keep the belt tight and live on the money your new job gives you, assuming you can do all this in a retirement account, you will have $1.2 million in 5 years. That will give you $180,000 a year pre tax.
Five years. You’ll know The Rule #1 well by then and be totally confident that you can start to eat the crop because you never have to touch the seed corn. And you can play golf wherever you want says Phil Town.
People who are retired or semi-retired are always asking me if they should dip into their retirement to try Rule #1 style investing. They want more to live off and what they have isn’t quite enough. Here’s what I’ve been telling them:
Never withdraw from the money you want to retire on until you can do so — retire on it — for the rest of your life. I’ve made every mistake in the book and that is one of the worst. It’s like eating your seed corn back in the old days – gets you through the winter and then you are screwed. So unless you aren’t going to starve somehow, don’t touch that hard earned money.
But what to do? First, realize that you are going to need to get a job. Which sucks because you are probably going to hate the job.
Second, since you are going to hate the job, you better learn how to invest your money from it so you can build your pile and then quit.
Here’s the good news: With, say, $600,000 in retirement money earning 15% a year, you’ll have $90,000 pretax to live on. Not bad. But if you can keep the belt tight and live on the money your new job gives you, assuming you can do all this in a retirement account, you will have $1.2 million in 5 years. That will give you $180,000 a year pre tax.
Five years. You’ll know The Rule well by then and be totally confident that you can start to eat the crop because you never have to touch the seed corn. And you can play golf wherever you w
Phil Town on SHORTING STOCKS
November 15th, 2009
Always do the RULE #1 4M’s to look at a business before you consider shorting (or doing Put options) to see if it has:
- Meaning to you (i.e., you understand the business)
- Moat (durable protection against competitors, and the Big Five numbers – ROIC, Equity Growth Rate, EPS Growth Rate, Sales Growth Rate, & Cash — are good)
- Great Management (level five leadership with a Big Audacious Goal)
- A big Margin of Safety (50% off the Sticker – the real value)
You must understand the business or you have no business shorting it. As a RULE #1 investor what you must understand is why it has to fail. You must know that this investment has no moat and that the ROIC sucks and the growth rates for Sales, EPS, Equity and Cash are below 10% for a long time. You must know the management is incapable of fixing whatever is wrong and are in it for all the wrong reasons. And finally, you must know that it, like LLY, is selling well above the Sticker Price. Like double the sticker. And then, before I short it, I would want to see that institutional money is pulling out and that the technical tools I use show me nothing but red. Then, and only then, would I feel okay about a short or a put. In other words, you reverse the usual process and find a business that you understand well enough to know that it can’t go up — and it must go down. Phil Town warns to be very careful. Shorts are weird. Even if you are right, you can get burned. If there are lots of people shorting and the price goes up, they are losing money — so many of them will have to go into the market and buy the stock to get out of their short position. And what will that do to the price? Make it go up even more… even though it shouldn’t… which causes more pain for short sellers, who then cover by buying — and against all reason it goes up more, which causes more pain … You get the point. Shorting is an advanced Phil Town investing game. Make sure you know what you are doing.
No Recommending Stocks
November 9th, 2009Phil Town often gets asked to recommend stocks. I’ll be posting about things that I buy or sell, or don’t, so you can see how it all works, but I won’t be recommending stocks here or anywhere else simply because recommending stocks goes against my Rule #1 philosophy.
Rule #1 is about owning a business, not investing in stocks. Owning a business is an intimate expression of individual values, knowledge and understanding. It is a very personal reflection of who you are as a person. When you own a business, the management of that business represents you to the rest of us. So do all of your employees, including how your business treats your employees. So do all of your products including how your business treats your customers and the world we live in.
You can pretend that there is a wall that protects you from what your business does in and to the world, but there isn’t. What goes round comes round. Karma. Do unto others…. Reap what you sow. However you want to say it, you can not avoid the responsibility of ownership. If you are the owner of a company which is damaging the earth in a short-sighted attempt to rake in the money with the objective of leaving the clean-up to the next generation, then what does that say about you as a person? If your business hires a manufacturing facility that employs slave labor, do you really think you can escape the karma? If your business sells irresponsible products to irresponsible people, you own the results of that just as if you owned the entire business. You don’t get to escape just because you own a few shares. And by the same logic, if your business is doing great things for all the stakeholders – customers, management, owners, employees and vendors – that accrues to you as well.
By the way, if you own bad stuff, don’t blame Capitalism. Capitalism has its flaws but one of the most ignorant criticisms of Capitalism is that Capitalists hold the dollar to be the ultimate value. That may be true but only in the sense of a dollar earned. If you choose to own a business run by amoral managers who see no harm in fleecing the customers, abusing their employees and contracting with immoral and unethical suppliers then your dollars are not earned, they are stolen and that is on you, not on Capitalism. Chances are that same management team that figured out how to rip off the customer is finding a way to rip you, the owner, off as well. You do a deal with the devil, don’t be surprised if you get burned.
All of this just to tell you that you must decide for yourself. I can’t do it for you. And you can’t copy what I do. I’m not you. I don’t know what you know and what you value. Look at how different my choices are from Warren Buffett’s. I bought businesses that do managment software, internet search engines, bioscience, natural foods, beer and wine and ethical drugs because I understand them and I’m proud of my teams and products. I like what these businesses are doing to and for the world. I don’t necessarily buy the same businesses as Warren Buffett. He owns or has owned (among others) soft drinks, burgers, tobacco, beer, furniture, diamonds, jets, mobile homes, advertising and a newspaper. But he feels the same way about his companies and products and the folks that work there as I do – in a word -proud.
I’m not going to give you recommendations because buying based on someone else’s recommendation is stock picking. I don’t do stock picking and neither should you. I own businesses that I am proud of. And so should you. To be proud of your business, you must understand it. Only you know what you understand. And therein lies the strength of Rule #1. Buy what I understand and you are gambling. Buy what Phil Town wants you to understand is to buy it at a good price. And you are certain to make money.