Rule #1 Blog: Phil Town on Investing

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

Where is This Market Going?

2009-10-09T10:45:41-07:00

WHERE IS THIS MARKET GOING?

When I was on The Millionaire Inside show with Erin Burnette, I was totally impressed with her. Obviously, so was CNBC. They have her fast-tracked and doing the cool stuff. She’s been traveling lately – Dubai, London. Checking out where its all going. Are we in a recession headed for a depression or did the stimulus package work magic without ever getting any money into the economy? She interviewed a money manager who thinks we’re off to the races. There is an old saying in India – “Your world is as you are.”

And isn’t that just the way stock markets work? The price of a business is all about the buyer and seller’s joint agreement on the near term future. If it looks rosy to both, the price will be high. If not, not so much.

Apparently, the mere fact that governments world wide have shown an unlimited willingness to write checks to keep things going has done wonders for buyer-seller perception of the future. Like – there’s going to be one. And since there’s going to be one, businesses are going to be able to sell stuff, have revenues and pay employees who will, in turn, go buy stuff from other businesses who will have revenues and pay employees who will…. Well, you get the idea.

However, value, as I’ve said ad nauseum, is not the same as price. Coke has a long term value. It also has a short term price. They are not the same. Its price is dependent quite a lot on perception, right now, of what’s going to happen in the near term. If the sky is not going to fall, well then, price is likely to go up from where it was when the sky seemed likely to land on us.

So where is this market going? On March 10^th at 6600 I said its about value. The market was going to go up because price is not value and the value was quite a lot higher than the price. At 9800, the price is up so now its about price and price is about ‘as you are’. The fearful are starting to turn greedy and that means they are becoming buyers. So where’s it going? Up. For a while. This is now a trader’s market. Be nimble, kids. We want to be selling to greed and buying from fear. Fear is going away. For a while. Don’t be caught getting greedy. If you followed me in March, you’re investments are up 50% in six months. That is considered good.

Remember: Pigs get fat. Hogs get butchered. This market is now about price, not value. Be nimble. And be ready.

Now go play.

Phil Town

Phil Town's Inflation Strategy Part Dos

2009-09-28T16:29:38-07:00

INFLATION STRATEGY PART DOS

In 1929 we had less than $1 Billion in circulation in the US because we were tied to the gold standard. This meant we could not print dollar bills and pretend it was money. Each $20 of US paper money was backed by an ounce of gold from 1833 when the standard was set and that relationship was unchanged until 1930. From 1930 until 1970 our government gradually weaned us from the gold standard by increasing the exchange rate to $35 an ounce and thereby artificially increased the number of dollars in the economy to about $10 billion. In 1971, after years of over-spending on the Vietnam War and The Great Society, Nixon took us off the gold standard. By 2000, in just 30 years, the government added $990 billion to the money supply. By 2008, after the 9/11 shock, a severe stock market drop and the recession of 2001-2003, the money supply dropped and then rebounded to $1000 billion. Since then, in one year, the Bush and Obama governments have doubled the money supply to $2000 billion. In one year they added more dollars to the economy than in the previous 30 years of inflationary spending.

This money was printed. It wasn’t earned by inventions that save labor and materials. It was printed and tossed into the economy. The impact hasn’t hit yet but it will. As lending opens up, there will be more demand for products and more demand for higher wages. You can not have a free lunch. If all you had to do to become a wealthier nation was to print money, Zimbabwe would rule the earth. They printed billion dollar bills. And now it takes $30 billion to buy a loaf of bread. That is the impact of inflating the currency. Eventually the money becomes worthless.

So what do you invest in when that happens? You invest in things that are necessities and things that can raise price as their costs of labor and materials rise. For example, food is a necessity. The cost to grow food depends on the price of oil because farmers use oil-based fertilizers and drive big tractors that burn a lot of diesel. Oil is being consumed at a rate that is depleting the remaining reserves at 7% per year. Without a big oil field discovery, in ten years there will be half the oil there is now. Can you imagine where oil prices will be and thus food prices?

Oil. Food. Farmland. Mining operations. Railroads. Coal. Anything that can raise its prices as its costs go up. For example, Burlington Northern railroad has a near monopoly on moving coal from the west to the east. It will raise its shipping rates as union wages and diesel fuel costs rise and the shippers will pay it because they have to have electricity and coal is the fuel for energy plants. Farmland will rise in price as commodity prices rise.

And what about gold? I’ll write more about that next. And how to find the right investments for these categories. Oh, and whether you should be buying companies in the US or in China while all this is going on.

Now go play.

Phil Town