Rule One Transformational Investing Webinar #13ruleonesession.cloudapp.net/documents/Webinar13notesReview.pdf · Webinar #13 –Review The Process •Finding a Wonderful Company –WFM

Rule One Transformational Investing – Webinar #13

Webinar #13 – Review The Process

• Finding a Wonderful Company – WFM is a company that I use, a company that reflects my values, that will be bigger and better than ever 20 years from now, has a great MOAT, looks like it is going through an “event.”

• Check out the WFM “wonderfulness” through the 3Ms.

• Get to a rational FGR for the company. Use history, research the future, use analysts to get FGR.

• Find the “fair value” or sticker price for WFM and then the “on sale” price of MOS, PBT or 10 Cap Rate – know your “buy price.”

Rule #1 Investing Review Continued

• Have a plan for Money Management on a long term investment. How much of your money will you use on one business?

• Use the Tranching strategy to lower Cost Basis. Good psychology.

• Using charting tools on TOS to help time the tranches at Floors.

• Carefully lower Cost Basis for as long as you own the company. Dividends payouts and buy backs are up to the company Board of Directors. Derivatives are up to us.

• If you are reducing how much you have invested by extracting your capital out of the company without selling your shares, then even if the stock does not go up much, your rate of return is getting better and better over time.

Event Creating Fear In Investors

Whole Foods – Event?

Whole Foods Analysis

From The Last Earnings Call

Short Term Problem?

Use The Tools At Rule One To Dig Down

MOAT – What’s Their Advantage?

Gurus – Any Rulers Buying Yet?

Read Seeking Alpha Articles

www.youtube.com

Insider Trading?

Search The CEO

Articles About The CEO

CEO Search – youtube.com

Competition - Who’s Best?

Inversion – Risk Factors

WFM – “Pretend” Buy Price of $25

ROP on Jan 17 at $28 Strike = $2.80/share

$28 – $2.80 = $25.20 cost basis

Money Management

• We would like to spread our long term investment money among several Wonderful Companies in different industries.

• Each investment in each company should be tranched into at different prices and different times to attempt to lower Cost Basis (CB) while getting fully invested.

• Have $20,000 to invest in a “just one” company? Use four tranches of $5000 each.

• To be fully invested in WFM, assuming a “buy price” of $25, we can sell PUT contracts now and will assume that will be our first tranche.

• If the stock comes down to our “buy price,” we will buy a second tranche of shares so that we know we at least have that.

• If WFM keeps dropping into the high $20’s, we may sell another PUT. We may or may not get PUT the stock. If we do, it is Tranche #3.

• If we don’t get put the shares, we have lowered our CB on what we own.• If the stock drops into the lower $20s, then we start looking for that last

unbelievably great tranche price by selling more PUTS even lower.

Rule #1 Trade Ideas On WFM

• Finding the best Rule One Trade is a matter of looking at different option months, strike prices and strategies. Do the simple math.

o Rule One Put

o Rule One Call (once you own shares)

o ROSS – Rule One Short Strangle or Straddle

o Rule One Ratio ROP

What Is Cost Basis?

• After purchasing a tranche of shares in a Wonderful, Rule One business, we start to look for ways to lower our Cost Basis.

• Cost Basis is just an accounting of the average price you have paid for all of the shares you have in a stock.

• Our goal is to get our Cost Basis to $0.

• It is possible to own shares in a company and have none of your own money invested.

• If we own the stock for many years and continue to work at extracting money out of our investment, we can get to investing nirvana!

How Do We Lower Cost Basis?

There are five ways to lower Cost Basis:

1) Tranche into the investment with four or five different purchases at ever lower prices.

2) Use derivatives: ROP, Credit Spreads, ROC

3) Receive dividends from the company

4) The company buys back shares, which increases the value of each of your shares.

5) Sell some shares when the stock has significantly risen and count the profit as Return of Capital.

How Long To Hold A Company?

• Wait to sell until at least the stock is twice as much as what you paid plus another 20%. Then you can decide whether to hold ‘em or fold ‘em based on the fundamentals.

• Sometimes we sell out of a Wonderful Company when Mr. Market gets manic and overprices the stock.

• Sometimes we sell because we see the whole stock market is going to go way down and give us the opportunity to buy the shares back much lower.

• If we are going to exit the stock, we often use a ROC.

• Sometimes we keep the company forever and eventually the company will pay dividends that you can live on – it becomes an Equity Bond. High yield cash flow for retirement.

Risk Management

• RISK MANAGEMENT is what we do!

• Long Term = certainty about the long term prospects of the company and a true value/sticker you feel is conservative.

• You can “load up the truck” with shares when you have certainty about a wonderful company that you are buying on sale.

• Short Term = know the reason for making the trade, know the profit goal and limit the downside risk with stops orders.

• Don’t risk too much money on any one short term trade.

Inch Wide and a Mile Deep

• Search using Meaning Industries and Sectors• Search using Rule One style Gurus• Wait for Events to drive the price down out of fear• Read, read, read• 10 Year Future Growth Rate (FGR) – be conservative• Identify with certainty, patience, pounce• Lower Cost Basis with Dividends, Derivatives, Buy Backs• Be a business owner (not a stock trader)• Know when to sell ROPs and ROCs• Manage your portfolio like a hedge fund manager• Feed the Berky – your investment account• Keep learning!

Arrows Investing For 401K Accounts

• If you have money stuck in a tax advantaged account that you can not self-direct.

• The advice you will get is to diversify with mutual funds and bonds and hold for the long term.

• That is acceptable advice if you make a lot of money, are satisfied with a 6% growth rate over a long period of time and find it acceptable to give up 20% or more of your profits to the financial services industry.

• If you want to do better than that, use the Rule One indicators to help you miss big drops in the market and save on fees by using a low cost index like the SPY.

Rules For Arrows Investing

• Watch the Dow Jones Industrial Average on Charts –Prophet on TOS ($INDU).

• Put the chart on a time period of 10 years/Monthly.

• Set up the three indicators (Moving Average, MACD, Slow Stochastic) the way we have taught you.

• When all three indicators have a red arrow, this is a sign that a lot of money managers (the big guys) are trying to sneak out of the market.

• Read the stock market news to help you determine if there is a serious event taking place that could have a major bearish impact on the market.

Three Red Arrows Sept. 1, 2015

Take Into Account The Macro

• There are three other criteria we consider when getting into or out of the market with non-self directed accounts (i.e., 401K).

• These indicators may influence your decision to get in or out of the market based on the arrows.

1) Shiller P/E above 23 (red) or below 15 (green).

2) Wilshire 5000 GDP is above 100% (red) or below 60% (green).

3) Our Macro view (jobs, inflation, GDP) agrees with the Arrows/Shiller/Wilshire point of view.

Fibonacci Charting

• The Fibonacci sequence is named after Italian mathematician Leonardo of Pisa, known as Fibonacci. His 1202 book introduced the sequence to European mathematics, although the sequence had been described earlier as Virahanka numbers in Indian mathematics.

• It is found that Fibonacci ratios help explain the structure of the universe.

• Fibonacci lines help us predict the future movement of a security – where it may reverse direction.

The Universe Has Mathematical Structure

Are Fibonacci Lines Predictive?

• Fibonacci retracement is created by taking two extreme points on a chart and dividing the vertical distance by the key Fibonacci ratios. 0.0% is considered to be the start of the retracement, while 100.0% is a complete reversal to the original part of the move.

• Once these levels are identified, horizontal lines are drawn and used to identify possible support and resistance levels.

• The most popular Fibonacci Retracements are 61.8% and 38.2%.

• For reasons that are unclear, these ratios seem to play an important role in the stock market, just as they do in nature, and can be used to determine critical points that cause an asset's price to reverse.

Fibonacci Retracement Tool

Rule One Short Term Trading

• We use Credit Spreads to make money short term.

• We can do a BPS or BCS on any stock or index – as long as we can see that our credit spread has very good odds of being successful (>90%).

• Credit spreads offer a trade that has Iimited capital needs, limited risk and limited profits. Our trade is clearly defined and simple to manage.

• Follow the simple rules for exiting a trade when it is going bad so that you can avoid a big loss.

• Keep the amount at risk in any one trade to 5%-10% of your Short Term Trading Capital.

Steps for a Short Term Trade

• Step One – Determine Fundamental Strength • Step Two – Determine Broad Market Trend• Step Three – Determine Individual Trend of Stock • Step Four – Identify Floors and Ceilings • Step Five – Know the News• Step Six – Identify the Entry Point – Breakouts and Pullbacks• Use a Bull Put Spread or Bear Call Spread• Use the guidelines of:-- ARORC (48%), Probability OTM (89-95), Delta (.4-.10)-- Short strike is Adjusted % OTM of 11% or more from the Underlying Security Price (The Money)-- Short strike is 3% from a good floor or ceiling-- Use an option contract with 20-60 Days to Expiration (DTE)

Use your Investing Journal

• Research your few Wonderful companies until you have certainty about their long term future.

• Use your research to determine a fair price for the company and then wait until you can buy at half price.

• Practice the short term trading strategies, systems and the mechanics on Paper Trading platforms first.

• Write down in a trade journal what you are doing, the reasons you are doing it, and the results.

• Admit your mistakes and learn from them.

• Start making real money short term trades with one contract at first – as a way to tip toe into using real $.

Following This Final Webinar

• The next 13 weeks of class will be the Faculty Office Hour taught by Jeff Town. The class will be at a new time – Tuesday at 6pm Eastern.

• To use your remaining 1:1 sessions with me over the next three months, send me an email at: andyb@ruleoneinvesting.com

• If you have signed up for an advanced class and you asked Michelle to start it at the end of the 13 Webinars, then the link for Phil’s class will be found in the EDUCATION tab on our web site and you can start listening to Archived classes as well as live classes.

• Join the conversation on the Rule One Blog at our homepage. We don’t discuss options but we get lots good discussion about stocks.

• Listen to Phil’s free ITunes Podcasts – find them on our Home Page.• Keep digging for Wonderful Companies and wait to buy on sale.• When you have learned your lessons in your Paper Money account,

start using real money with a one contract credit spread. Slowly increase the number of contracts as you gain experience and success.

• Repeat until rich!