Phil Town

[Stockowner]

Who is he?

How is he relevant to investors?

And what is all this Phil Town in connection with Rule number 1? I know Buffett has talked about Rule nr. 1, but why do people talk about Phil Town in connection with Rule nr. 1?

Don't know if it is related (is it?), but... What is all this spreadsheet thing.. Apparently it gets wrong as many times it gets right, so how usefull is it really?

[npg]

These are very good questions indeed.

[Hudman]

Good questions yes..but strange from someone on this site. Go to the bookstore and find Rule #1 by Phil Town. That will explain this site better than I can.

As for the spreadsheet...it is what Justin says it is. An effort to simplify and speed up the process of researching stock fundamentals based on the concepts in Phil's book. I am a Sales Analyst and build spreadsheets all day long. I know that between formula errors, erroneous assumptions, source data issues and so on that most spreadsheets as most software programs are a work in progress. Continuous improvement is the goal here. Every research method has it flaws and human errors. This reality should not be viewed as making the effort worthless.

My thoughts.

[joshuat]

Note that Phil seriously perverts Buffett's meaning. Buffett is referring to permanent loss of capital. Phil will have you trading on 'tools', turning your paper losses into real losses. This is completely against everything Buffett stands for, and what he means by never lose money.

They both use the term, but in diametrically opposed ways.

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Originally Posted by Hudman

Good questions yes..but strange from someone on this site. Go to the bookstore and find Rule #1 by Phil Town. That will explain this site better than I can.

There is nothing wrong with challenging established dogma. Generally, I tend to applaud such behaviour, rather than diss it. It made me truck loads of money.

Originally Posted by Hudman

My thoughts.

I sincerely hope so

[PrivateInvestor]

Originally Posted by joshuat

Note that Phil seriously perverts Buffett's meaning. Buffett is referring to permanent loss of capital. Phil will have you trading on 'tools', turning your paper losses into real losses. This is completely against everything Buffett stands for, and what he means by never lose money.

They both use the term, but in diametrically opposed ways.

They both use the same words to mean somewhat different things, but that is not necessarily bad because it depends on how you look at it. Let's take some scenarios. Let's say a wonderful business is dropping in price. Both Warren and Phil will buy shares when it falls to 50% MOS (although Phil will require three greens from his technical indicators first).

Scenario 1: The stock turns around and heads back to its instrinsic value. Both Warren and Phil will make the same amount of money when they sell it at full sticker price (depending, of course, on how Phil gets whipsawed into and out of the stock on its journey back to instrinsic value).

Scenario 2: After hovering at 50% MOS for a while, the stock continues to drop to 40% MOS. Warren still owns it and has a 20% paper loss. Phil, let's say, gets out at 45% MOS when at least two of his indicators flashed red (or perhaps when his stop-loss order is triggered). At 40% MOS, he only has a 10% actual loss, which means he can now buy more shares than they each bought at 50% MOS if his three indicators should flash green. When the stock heads back to instrinsic value (assuming that happens), Phil will make more money than Warren will when they sell their shares (depending, of course, on how Phil gets whipsawed into and out of the stock on its journey back to instrinsic value).

You can conjure up whatever scenarios you want and compare Warren's and Phil's hypothetical results. In some cases, Warren will come out ahead; in other cases, Phil will come out ahead. By looking at this situation from the vantage point of various possible scenarios, the fact that Phil's losses are "realized" and therefore immediately tax deductible rather than Warren's "paper only" losses that are not tax deductible is a detail you need to consider about how you want to invest. It will be different for each of us.

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Questions of this sort may be best answered looking at who has the best long term track-record. Phil Town or Warren Buffett?

Tough one.

Nevertheless, neither approach may suit somebody. It is conceivable that in the future a person with a different approach might equal or even better the current yardsticks defined by our super-investors.

"Perpetuum mobile" would be the appropriate motto...

One could also add Newtons famous quote about standing on shoulders of giants. Either way, we should gracefully embrace that everything around us evolves.

[PrivateInvestor]

Although Phil Town likes to connect his name with Warren Buffett (which is great for marketing purposes), Phil's approach is not the same as Warren's approach.

Phil's approach only works for stocks bought and sold by institutional investors (who make up 80% of the market for those types of stocks -- ones that are large capitalization). The Three Tools are supposed to tell us what the institutional investors are doing (i.e., buying or selling) so that we can go along for the ride for those large-cap stocks that meet our 4M requirements.

Geoff Gannon (Gannon On Investing), on the other hand, recommends looking at the small cap market (if you listen to his podcasts). These stocks are too small for institutional investors and they don't get analyst coverage on Wall Street. There are also many more small cap stocks than large cap stocks. Because the small cap market is thus less efficient, we are more likely to find mispriced wonderful businesses there. But Phil's Three Tools won't work in the small cap market because there are no institutional investors there to track (along with the fact that small cap stocks are too thinly traded to be able to dart into and out of the market quickly with them). But it's a happy hunting ground for individual investors who are willing to do their homework.

For advanced investors, I recommend reading Trade Your Way to Financial Freedom (second edition) by Van Tharp. Tharp is a trainer and provides good insight into investing and behavioral finance if you are able to get past the vocabulary (e.g., Tharp calls it "value trading" rather than "value investing" and his words make sense once you get into his paradigm).

Tharp, for example, recommends spending 60% of your time working on your psychology, 30% of your time working on your money management rules (Warren's and Phil's rules in this area are "why would you invest in your eighth best idea?" but that rule doesn't necessarily fit the general case), and 10% of your time working on your investment system (whether that be value trading, day trading, trend following trading, seasonal trading, or whatever).

To illustrate the psychology element, let's say Warren buys at 50% MOS, the stock rises to 80% MOS, and then it pulls back to 60% MOS. Do you see this as a 20% paper gain from the initial purchase or a 25% paper loss from the previous peak? When people have real money at risk, most will see the 25% paper loss rather than the 20% paper gain unless they have taken the time to really study their system (i.e., value investing) and how it will perform under various market conditions (i.e., trending versus non-trending, quiet versus choppy).

Without this preparation, most people don't have the confidence to follow the rules of their system and will buy and sell at exactly the wrong times because of the fear and greed emotions. Of course, this behavior is why Mr. Market is as he is and why cool-headed intelligent investors who have taken the time to learn their craft can make money doing value investing (or value trading) or whatever system they are using.

My recommendation is that we can learn from Warren Buffet and Phil Town and adopt ideas from them, but we should then define and test our own system rather than clone someone else's system. Phil says this in so many words when he recommends paper trading first and then starting out with no more than a thousand dollars of real money. It is during this system development and testing phase that we are gaining the confidence in our investing system so that we will stick to our system even when it experiences drawdowns (i.e., losses) from time to time. We will know from our homework (and subsequent experience) that such a system will make money for us over the long term.