Rule #1 Blog: Phil Town on Investing

Phil Town on BB&T

2009-11-16T06:59:41-08:00

Raphi wrote in a good question. Here's his email:

"Hi Phil Town I really like your Work. One thing i don't understand: if BB&T is the deal, why we don't see this in the stock price?? regards raphi"

I'm not sure from your email if you think the BB&T price is too high or too low. You could mean either one. So let's see what it looks like to me:

Without doing a lot of analysis on the industry or the business, just using the analysts view of this business, let's grow it at 7%, use a 14 PE (the historical average of 10 is just too low for a buyout price so we'll use 2X the growth rate) and 15% MARR. But what shall we use for current earnings? We're in a massive recession and banking meltdown. Earnings are way down. Way way down. BB&T TTM earnings are $1.42. But earnings in 2007 were $3.17 and those earnings reflect a consistent growth from 1999 of 8% per year, right about what we're projecting right now. If we ignore the intervening two years of down market and run the earnings projections out from 2007 we'd be at about $6 ten years from right now. I can believe that and so will anyone who is going to try to buy all of BB&T. That puts today's value at about $25 a share. And its selling for about that.

However, BB&T was on sale for $12 back in March when I said to load up the truck.

I hope you meant that the price was too high to buy. If so, you just have to get used to it, Raphi. Great businesses are usually only available at full retail or more. The Big Guys aren't stupid. But they have moments of irrationality and fear borne of the fact that they are paid to be right in the short term and get very afraid when the short term looks bad. BB&T was a great business in a horrible industry meltdown and its price went through the floor along with Bank of America and Citi. That's when we have to be ready to strike and load up the truck.

Now go play.

Phil Town

We Learned that in Kindergarten

2009-11-12T07:19:54-08:00

Jonathan Grubs wrote on my FACEBOOK Page: "I was with Bank of America for many years, but when the Supreme Court announced their ruling on the Kilo case that allowed companies to seize private property for business use and BB&T responded with a press release announcing that they would refuse financing to any company involved in seizing of private property. I sent an email to the president of BB&T letting him know I would switch from Bank of America to BB&T if they ever opened a branch near me in Central Florida. When I saw the BB&T coming soon sign down the road from my office, I was literally the first person in line to open an account at that branch. BB&T is a great bank, they take care of their customers!" _______________________________________________________________________________

Phil Town's response: "YOU ROCK!!!! I love people who make decisions by basing the decision on a specific set of values. Frankly, the Golden Rule is not a bad start for a value system. For example, if you follow the Golden Rule and you think it is wrong for someone to take what is yours then you wouldn't take someone else's stuff. Come on you guys. You learn this in kindergarden. So that should be a bedrock value, right? Don't take other people's stuff. Simple.

Well, then, apply it to all the decisions you are making in your life, just like Jonathan Grubs does. BB&T follows that value. Bank of America follows the value of 'mo money mo money'. Which one do you like better? Well, some of you like the mo money thing right up until its your stuff they are expropriating and then you don't like it at all. But I believe that in this world and the next, what goes 'round comes 'round. You go for mo money by taking what isn't yours, you'll pay it back somehow because their is no free lunch.

You learned that in kindergarden, too.

Now go play.

Phil Town

BNI at $100 So SELL

2009-11-05T12:17:46-08:00

Wow. That was fast. Back in March, I urged you to get into BNI at anything in the $60’s and below and I hope you did because Warren Buffett just bought the whole thing for $100 (assuming the deal goes through.) The stock shot up 20% two days ago to $97. If you bought it when I said to buy it, you should sell it now. Your return on investment from March to November (7 months) is anywhere from 50% to 80%. Time to take the money. I hardly ever urge people to invest in a particular stock at a particular price but Burlington Northern Santa Fe Railroad (BNI) was a special case of a monopoly going on sale. It doesn’t happen often. Usually monopolies are pretty obvious to the Big Guys and they bid them up. This is what accounts for the difficulty of buying a utility like Southern on sale, for instance. When it does happen, good investors pull the trigger and invest. So how did this rare event transpire? BNI revenues are dependent on asian manufactured goods shipping into LA and the demand for Wyoming coal. The asian goods are predominantly retail. The retail market hit the skids so less shipping for BNI. The Big Guys, the fund managers, (short term thinkers all driven by fear of your withdrawals) bailed. Simultaneously, oil prices dropped like a stone and the demand for coal decreased. This decreased BNI shipping out of Wyoming and the Big Guys bailed some more. The double whammy of retail and commodities dropping resulted in the Big Guys bailing so hard that BNI dropped to well below 50% off its retail value. Monopoly on sale. Time to load up the truck. By the way, the reason you should sell now is that today the upside potential for BNI is the difference between the price Buffet will buy it at, $100, and the price its at today, $97. That’s $3. About 3% potential increase. And if the deal doesn’t go for some strange reason, the stock will likely return to its pre-offer price in the mid-70’s, down $20 or about 20% lower than today. So look at the risk/reward ratio. If the investment goes good, you make 3%. If it goes bad, you lose 20%. Why would you risk 20% to make 3%? I have no idea. So we use a bit of short-term thinking and apply it to this situation and make a simple decision to sell. This is investing with Rule #1 in mind: Don’t lose money.

Now go play.

Phil Town

Phil Town on Bank of America

2009-10-28T03:59:00-07:00

Bank of America sucks

Melissa has had an account at Bank of America since 2002. She deposits a check every month and for every month since she opened the account 8 years ago, she could write checks immediately against the check she deposited and the bank would cash them. For 8 years. Then last month the bank told her they would no longer do that. They were going to hold the check for about a week until it ‘cleared’.

What happened? Bank of America has ordered its branch managers to gather in the ‘float’ at the cost of losing some accounts to more customer friendly banks. (‘Float’ is cash the bank has in its accounts that it doesn’t own. Melissa’s money belongs to her, Bank of America cashes the check immediately and then sits on that money for several days during which time it can lend it out short term. Any money, even a very small amount which makes them interest with no cost is pure profit.)

So do Rule #1 investors want to own this business?

No. Hell, no. I don’t want to own businesses that screw the little guy, I don’t care how much money they make. Screw them. We're moving all our accounts to BB&T. I love their attitude. They walk their talk. And they like Ayn Rand.

Now go play.

Phil Town

Phil Town Gives MSNBC Studio Tour

2009-10-23T10:47:26-07:00