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Rule One Investing - Opportunities In Coming Recession

TreyAllDay

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I am stuck here with my laptop in a waiting room and I'm wondering how I may be able to provide some value, I thought I'd share a quick summary of a great book I just finished - being that I am a complete rookie in finance - and maybe even get feedback on the method from those who have a ton more experience than I do.

With the coming recession - there will be some great opportunities to buy stocks cheap so I have committed myself to learning as much about finance as possible. Here's the lowdown of Phil Town's Method.

What is RULE 1?

Very simply - never lose money in the stock market, and it's actually a simpler concept than most would think. Rule one investors just do not gamble.

How could you not lose money in the stock market, and in fact nearly guarantee 15% returns?
A majority of mutual fund managers/traders lose money by diversifying into a ton of different investments hoping to mitigate losses and have enough wins to still be on the positive side. There is no need to diversify if you are choosing the right companies. The market is an EMOTIONAL roller-coaster, and often misprices these great companies. You can identify and buy huge opportunities at 50% of their price, wait for the market to adjust their price, and sell/hold.

What Makes A Great Company?
Phil describes choosing great companies that you are passionate about, have strong growth rates, a "moat" (brand/patent/proprietary info), and great leadership. This can all be identified.

How Do I Know When A Great Business Is On Sale?
I will not get too deep into this, other than explaining the overall ideology. Using 10 year historical growth rates of sales, equity, earning per share, and ROIC (all very simple numbers to obtain), you can determine the future growth rates of the company. Using these growth rates you can determine the most likely future stock price and reverse calculate what price TODAY you'd need to buy at to have a 50% margin of safety (buy at half off) AND grow your investment 15% per year.

The Summary
GREAT companies with great track records for growth go on sale for 50% off when the market panics or misprices them. You can purchase them on sale and grow 15%-25% a year with very little risk as long as you are holding out for the right businesses.

I am currently selecting my rule 1 companies and waiting to buy them on sale when the recession hits over the next 2 years.
 

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JustinY

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I'm not super financially savvy, but I'll play devils advocate.

You say investors do not gamble, but playing the market is by definition buying into a company or companies. Unless you have insider information or a very clear understanding of that industry, it's gambling.
1. There's no telling when the price will be back up. It might be one month, it might be one year, it might be five years.
2. There are external factors that can play a large role in a company's health. I am in the paper industry. When China decided that they weren't going to take recycled fiber anymore, it raised costs for the entire industry. You could have stock in the best paper company but it would have done much worse than a company in another industry.

I'm not saying don't invest in a company that you've heavily researched, but I think it all depends on what your financial situation is.
If you have a couple of months from savings, money going to retirement, and you just have extra money to put into a Great Company that you've done extensive research on, then I would say go for it.
If you are living paycheck to paycheck, trying to time the market for a big payoff. I would say that's gambling.

Things like index funds are hugely popularized because they work for the average person to get an average return in the long term without a lot of work.
It's easy to look back and say, "I said these stocks were going to do well, and they did". It's a lot harder to do that over and over for years and years without being wrong.

Before you jump in though, I would play with a stock simulator and see how you do, an example is: Investopedia Stock Simulator
You sign up, they give you virtual money and you can see how your bets really turn out. I think you'll find out that it's not as easy as the book makes it sound.

Looking forward to hearing other people's opinions though.
 
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TreyAllDay

TreyAllDay

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I'm not super financially savvy, but I'll play devils advocate.

You say investors do not gamble, but playing the market is by definition buying into a company or companies. Unless you have insider information or a very clear understanding of that industry, it's gambling.
1. There's no telling when the price will be back up. It might be one month, it might be one year, it might be five years.
2. There are external factors that can play a large role in a company's health. I am in the paper industry. When China decided that they weren't going to take recycled fiber anymore, it raised costs for the entire industry. You could have stock in the best paper company but it would have done much worse than a company in another industry.

I'm not saying don't invest in a company that you've heavily researched, but I think it all depends on what your financial situation is.
If you have a couple of months from savings, money going to retirement, and you just have extra money to put into a Great Company that you've done extensive research on, then I would say go for it.
If you are living paycheck to paycheck, trying to time the market for a big payoff. I would say that's gambling.

Things like index funds are hugely popularized because they work for the average person to get an average return in the long term without a lot of work.
It's easy to look back and say, "I said these stocks were going to do well, and they did". It's a lot harder to do that over and over for years and years without being wrong.

Before you jump in though, I would play with a stock simulator and see how you do, an example is: Investopedia Stock Simulator
You sign up, they give you virtual money and you can see how your bets really turn out. I think you'll find out that it's not as easy as the book makes it sound.

Looking forward to hearing other people's opinions though.
Great points and definite risks. The risk is definitely part of it but this is why he talks about identifying great companies with great leadership, great history, with a VERY specific growth history and ONLY when they are priced at 50% of their ticket price. Even if your calculations are off or the industry fails, if you purchase with enough margin you're mitigating your risk.

Agreed it's not a fastlane starting point - I don't believe I'd advise anyone to invest with their $5000 life savings or late in their financial life.
 

socaldude

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I'm new to investing as well. And ironically I have a BS degree in finance which actually taught me very little about how to make money.

My thoughts are that you have to learn about everything; futures, bonds, options and stocks because if you just focus on stocks and buying low and selling high then you are missing out on other opportunities and clues in the markets.

Because remember you can also make money going short. Shorting stocks, Shorting option prices etc. Short means you sell first then buy it back.

I would suggest opening a paper trading account with TD Ameritrade and getting a backtesting software.

The problem I have with "buying the dip" is that the market can go even lower. And went it goes lower it means investors expectations of the earnings of that company are low. And a lot of market participants are not schmucks.
 

Champion

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Yep, deffinetly invest in the next stock market crash!

My prediction: Gonna happen in a relatively short period of time after Trump gets (probably) re-elected next year.
 

James Fend

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waiting to buy them on sale when the recession hits over the next 2 years.
I'll play devil's advocate..

Rule #1: Do the opposite of what most people do. I will be honest with you here... the valet guy, the shoe shiner, the cashier at Walmart... "they" are all talking and thinking about a recession and what to do with it. Especially Millennials like me who got a real bad taste from the ~2009 Great Recession...

Repeat Rule #1..

The smartest person to hit the news lines this week was good ol' Warren Buffet who increased his Amazon holdings among other things..

Repeat Rule #1..

There's a reason a significant portion of big super successful investors are naturally Contrarians..

Repeat Rule #1..
 

James Fend

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I'd like to further clarify..

Almost every person with a minor ounce of entrepreneurism in their blood (and now as 'inversion curve' is main headlines, it's your common folks) are all getting greedy thinking how to monetize this upcoming recession... Greed is the #1 signal to me to do the opposite.

No offense; but this whole thread smells of Greed.

Repeat Rule #1 lol..
 

socaldude

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My prediction: Gonna happen in a relatively short period of time after Trump gets (probably) re-elected next year.
Based on what happened after his election in 2016 and the 3 years after that, Trump was good for the stock market and the economy. Doesn't matter if you are for or against him the data speaks for itself.
 
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TreyAllDay

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No offense; but this whole thread smells of Greed.
I don't know if I agree. The whole point of going fastlane is seperating yourself from the rat-race and being able to determine your own luck. If I left the rat-race and can afford to purchase a company I love at a discount because the market mispriced it, or even short ones I dislike or think are overpriced, that doesn't seem greedy to me.
 

James Fend

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I don't know if I agree. The whole point of going fastlane is seperating yourself from the rat-race and being able to determine your own luck. If I left the rat-race and can afford to purchase a company I love at a discount because the market mispriced it, or even short ones I dislike or think are overpriced, that doesn't seem greedy to me.
Sure, I get what you are saying. I also re-read your thread and see you're fairly new to financial asset investing/trading, so will try to break down my perspective. So you clearly define what moves markets from the quote below:

The market is an EMOTIONAL roller-coaster
Here's the thing about trading/investing that books don't tell you: In order to have any truly effective skill at reading emotions/sentiment of a market is if you can conquer your own. The first step to conquer your own emotions is to identify them through extremely high self-awareness.

With that said; I'll ask you these questions:

1. Why are you getting into investing/trading now? You had lots of years, even during an entire long expansion bull market these past years... Why now (or shortly within the next years)?

2. Do you agree or disagree with the following statements:

- Millennials (expands to other gens but mostly mill) do not buy homes.

- Most millennials got a very bad experience from the previous recession.

- Most millennials recognized during the last recession that house prices super-tanked and were on 70-90% sale.

- Most millennials that lived through the past 4 years saw those same houses that were 90% off increase in value by 3+ fold.

- A large majority of millennials are holding out in order to buy during the next recession sale so they can eventually sell it for 3+ fold.

- Is trying to make Easy Money a direct form of greed at it's absolute root level? Remember; Easy Money is not the same as Quick Money.

- Therefore a large majority of millennials are essentially trying to time the market out of greed?

3. Now combine both answers from the previous two questions and I think it'll be clearer to see which side of the fence you're actually on.
 

Rawseed

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Phil describes choosing great companies that you are passionate about, have strong growth rates, a "moat" (brand/patent/proprietary info), and great leadership. This can all be identified.
If this can be identified, it's already baked into the current stock price.

The people who live and breath the stock market can't seem to beat the S&P 500 consistently. Unless they are activist investors.

Consider taking Phil's advice and create your own company.

Create a company that you're passionate about, has a strong growth rate, and a moat.

Be a good leader.

Here's a list of great companies started during recessions:

 

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TreyAllDay

TreyAllDay

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If this can be identified, it's already baked into the current stock price.
The people who live and breath the stock market can't seem to beat the S&P 500 consistently. Unless they are activist investors.
Again I am just learning so do love the feedback, but it seems from the research I have done the market misprices companies very often, giving opportunities to purchase or even short them before the market levels out and prices them correctly - these don't come along very often but they do come along.

A good example is Harley Davidson in 1999/2000s, 30% revenue cash and equity growth rate, good brand moat, and was priced between $20-$30 when it was calculated to be closer to $70 - it eventually got there in the trailing years after the market adjusted (although, crashed in last years of 2000's).

GM would be a good example as well - was way overpriced in the early 2000's despite stagnant growth rates and vanity metrics. Market adjusted it down.

Again I'm kind of talking out of my a** as I haven't even traded before but based on what I've seen not everything is baked into the price at all times.


100% agree with you though that the 2400% returns I get in my business is a better bet currently.
 

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