PHIL TOWN

Phil Town on BB&T

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

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

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

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

Where is This Market Going?

WHERE IS THIS MARKET GOING?

When Phil Town was on The Millionaire Inside show with Erin Burnette, he 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 an investment 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

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

Payback Time vs. Trading

I love a thoughtful email and this is a good one (see below).  John has been doing some thinking and digging and wants to know why we shouldn't buy and hold a wonderful business we buy on sale instead of trading it.  Its such a good Rule #1 question, John, that I wrote a whole new book about it.  The book is called Payback Time and comes out in March 2010 from Random House.

The short answer is that you are right.  Its better to hold a wonderful business that you bought on sale than to trade it.  Trading has a transaction cost, can be inaccurate in the short run and will certainly cost you some of your profit.  It also has the advantage of getting you out of a stock that is about to take a huge nose-dive.  Trading is insurance against screwing up.  Its not perfect but it is pretty good insurance and it reduces the amount of effort you have to put into determining whether the business is a good one and whether you got the price/value thing right.

Payback Time presents the buy and hold strategy in a whole new light with step by step instructions for implementation.  It starts with the same requirement to get a wonderful business at a great price.  But since we're holding, we're not trading, we HAVE to get the price right.  So I bring in the concept of pricing from Private Equity that I call the Payback Time Price.  Its the price of the business that will be repaid in a very short number of years out of earnings.  The Payback Time Price keeps you from screwing up badly.

Imagine you were going to buy a private business for $1 million.  The business earns $200,000 a year after tax.  It isn't growing.  Therefore, in 5 years you have your money back (assuming you don't need any additional working capital to keep it going).  Notice that from that point on, you don't have any money in this deal.  You are playing with house money.  Your money is off the table.  Now, if the business goes south, you can't lose money.  Once you've got your money out, you are golden.  

Phil Town sees Inflation on the horizon

WHERE ARE WE HEADED? 

President Obama is spending quite a lot of money we don’t have.  To pretend we can handle the extra debt, he (and all the Presidents before him) is keeping the debt obligations of Fannie Mae, Social Security, Medicaid and Medicare off the federal books.  The GAO – the Feds auditor- argues the US is on an ‘unsustainable path’.  According to the GAO, the Congressional Budget Office and the Office of Management and Budget, within 20-30 years the mandatory spending for these entitlement programs will exceed tax revenues.  This means that the entire budget of the United States will have to be borrowed. And it gets worse because the entitlements continue to grow, according to the GAO, to over 6 times the total tax revenue of the country by 2080.  If we were to set aside enough money to cover the entitlement programs and current national debt until 2080, we’d have to park $53 trillion in an account someplace today.   To give you some idea of how deep we’re in it, if we sold China all of the businesses in the US today, we’d get about $11 trillion right now.  In other words, there is no possible way we can pay all of this without some kind of massive austerity program or a phenomenal wave of investment capital.   And neither is even remotely on the horizon. 

There is one other way, however.  We can inflate our way out of the problem.  And inflation, my friends, is a future we investors can count on.

Inflation is the rise in prices and wages created by adding paper money to the economy.  Inflation can not be created by private people.  It can only be created by a government printing press.  To create inflation, the Fed lends money to banks who then lend it to borrowers.  To get the money, the Fed simply prints it. 

More in a day or so about what investments will do well in an inflationary economy.  Get it right and you’ll get rich.

Now go play,

Phil Town

Phil Town-Confidence

After takeoff, as we climbed into the clouds, the pilot transitioned from looking outside the cockpit to see where he was going, to flying entirely by using the instruments on the dashboard. And I? I leaned back my seat and stuck my feet up on the seat facing me and proceeded to take a nap. 

Does it seem odd in any way that I'd easily drift to sleep about the time we were tearing through the clouds at 400 mph with absolutely no way to see where we were going? No. You didn't think anything of it. Nor did I. Because I expected the pilot of the aircraft to be competent and it wasn't a big surprise to me that he did his job without a problem. 

That's also what we should expect from the CEO of any company we invest in. Remember, if we buy one share of something, its no different than if we own the whole thing. Therefore, the CEO is our employee and we should expect ... no, demand, the CEO be as certain to do the right thing as my pilot. 

I don't expect my pilot to wreck the jet. And I don't expect my CEO to crash my company. Pilots go through a certification process and constant re-certification to make sure they are competent. CEO's do the same thing even more often than pilots. The exams are called quarterly and annual reports. The pilot has an FAA examiner who grades him. I am my own examiner and I do the grading. If the pilot fails, he doesn't fly. If the CEO fails, I don't buy. I sell. 

There is on old saying in venture capital (to switch metaphors): Bet the jockey, not the horse. 

Because its all about how they ride the horse, fly the jet, run the business. Its all about competence.

Now go play

Phil Town