Rule #1 Finance Blog
stock market basics
Here’s an email from John, who’s been reading the site and teaching himself how to use the Excel spreadsheets to figure out whether a company is at the right price. He still had a few questions. With his permission I’m posting his spreadsheet set up and his questions for the rest of you to reference.
To: Phil
From: John
Date: July 14, 2005
Please look at the attached file and let me know what you think.
| Sticker Price and MOS Calculation | ||
| # of years | 10 | |
| Growth Rate | 22.0% | Lower of Historical or Zach’s |
| EPS | $ 2.32 | |
| Actual Price | $ 90.00 | Looks Great!!!, Check the YUMMMMY before Buying |
| Est Future PE | 44 | Looks Great – under 50!! |
| Future EPS | $16.95 | |
| Value Per Share | $745.66 | |
| Sticker Price | $184.31 | |
| MOS | $92.16 |
I think I’ve got the technicals now. The yellow shaded cells are input and I’ve added some comment if statements to help see the results more clearly. I have a few questions though for understanding why.
1) Is the Estimated future PE really twice the Growth rate used? Why?
2) Why do you use 10 years and not more or less time?
3) Why do you use 15% minimum and not more or less?
These questions are for me to understand the whys of what is being done here, so that I can make a more educated "buy" decision. Any help you can provide is appreciated. BTW — I really was affected by your Boston appearance. It opened my eyes to some opportunities I have available to me. Thanks man!!
Phil Town is an investment advisor, hedge fund manager, 3x NY Times Best-Selling Author, ex-Grand Canyon river guide, and former Lieutenant in the US Army Special Forces. He and his wife, Melissa, share a passion for horses, polo, and eventing. Phil’s goal is to help you learn how to invest and achieve financial independence.
PLAYING TO NOT LOSE: HOW WOMEN INVEST
Phil Town is an investment advisor, hedge fund manager, 3x NY Times Best-Selling Author, ex-Grand Canyon river guide, and former Lieutenant in the US Army Special Forces. He and his wife, Melissa, share a passion for horses, polo, and eventing. Phil’s goal is to help you learn how to invest and achieve financial independence.
MUTUAL FUNDS & DOLLAR COST AVERAGING
Here’s another email exchange some of you might find useful. Joe wanted to know what the difference is, over time, between Rule #1 style investing and the “dollar cost averaging” of investing a set amount per month in mutual funds.
Here’s his question and my response… as well as a follow-up email from him.
Date: June 16, 2005
From: Joe
To: Phil
Hello Phil,
I recently heard your talk at the Get Motivated! seminar in Philly. Your market charts depicting sideways/zero growth for huge chunks of time over the past 100 years really got my attention about my current investment strategy. I’ve been doing a lot of thinking about your investing philosophy vs. simply making systematic investments in an S&P 500 type index mutual fund, and the only plus I can possibly see for the index argument is dollar cost averaging. I’m sure you are familiar with the argument: by investing regularly (e.g., same $ amount every month) in a mutual fund, you are guaranteed to buy fewer shares when the price is high and more shares when the price is low. Thus, in the long run, you are virtually guaranteed to profit regardless of how the market does.
I’d like to see a comparison of the profit generated using the Rule #1 method vs. dollar cost averaging in an S&P500 Index fund during a 0% growth year in the S&P. I’m sure it would vary a lot, depending on how much up and down there is in the market that year, but it seems like a reasonable question (especially since most index mutuals don’t charge a commission for systematic investing).
Your thoughts?
Joe
Phil Town is an investment advisor, hedge fund manager, 3x NY Times Best-Selling Author, ex-Grand Canyon river guide, and former Lieutenant in the US Army Special Forces. He and his wife, Melissa, share a passion for horses, polo, and eventing. Phil’s goal is to help you learn how to invest and achieve financial independence.
Last week, Jonathan Welsh — who’s doing his Homework on Toll Brothers, the luxury home builders — contacted me with the following question about a 2-for-1 split. I figured a lot of people would have the same question: with 2-for-1, do you really get more for your money — double the shares? Here’s his question and my response.
On 6/14/05, jonathan welsh wrote:
The current sticker price you calculated for Toll was 105/share. It is currently selling at 96/share, which is not even close to the 50% requirement. Toll is having a 2-for-1 split on the 21st of June 2005. With a 2-for-1 wouldn’t that get me the same result? I am kind of new to the concept of getting one additional share to each share held, but doesn’t that count as doubling your money?
God bless!
Jon Welsh
Date: Jun 16, 2005
Subject: Re: toll 2 for 1
To: jonathan welsh
Good question, Jonathan. The short answer is no.
Here’s the why not:
Phil Town is an investment advisor, hedge fund manager, 3x NY Times Best-Selling Author, ex-Grand Canyon river guide, and former Lieutenant in the US Army Special Forces. He and his wife, Melissa, share a passion for horses, polo, and eventing. Phil’s goal is to help you learn how to invest and achieve financial independence.
Traveling and speaking at seminars introduces me to a lot of people, many of whom have the same question:
“If I have significant debt, should I pay it off first before getting started in investing?”
Here’s what I’ve been telling them:
Phil Town is an investment advisor, hedge fund manager, 3x NY Times Best-Selling Author, ex-Grand Canyon river guide, and former Lieutenant in the US Army Special Forces. He and his wife, Melissa, share a passion for horses, polo, and eventing. Phil’s goal is to help you learn how to invest and achieve financial independence.