Rule #1: Phil Town on Investing

Researching Mutual Funds' Historical Performance Online

I'm writing a new chapter for the paperback version of Rule #1.  I get asked all the time how to manage mutual funds in a 401K, so I thought I'd add a chapter to show you how to use the free tools out there to do get a solid 15% return in your mutual funds no matter what the market is doing. 

At least that was the idea before I tried to do research into the track record of mutual funds.  That's when I ran into what may be an intentionally obtuse screening process on MSN, Yahoo and Morningstar Premium. 

The first two are free sites, as you know, but the mutual fund screening process is so convoluted and horrible that I paid $245 for a premium membership at Morningstar -- thinking that surely the home of all mutual fund research will have an easy search screening process that will get me the info I want.  I was wrong.  Morningstar was as bad as the other two. 

Consider my search question:  All I want to know is how many broad market stock mutual funds produced a consistent 15% return over the last ten years.

IF YOU CAN'T GET TO CASH

Here's a question that came in from a Rule #1 reader a few days ago:

Hi Phil,

I'm 35 and have 5 young kids, my wife stays at home, and I just finished your book. Thanks for making it so simple -- you've given me some confidence that I can actually put my kids through college and still save for our retirement.

I have about $150k in IRAs and a 401k and I'm wondering what to do with that money right now.   In one of your previous blog posts you recommended moving into money markets (or some cash equivalent) until you've built up some confidence paper-trading.   I asked my broker to sell and he said that I'm invested in 'B' shares which have a CDSC (contingent deferred sales charge) which could be anywhere from 4.5 to 5%.  That seems like a lot to give up, yet I don't want to lose money if the bottom drops out.

Should I take the hit and get to cash, or leave it in where it is until I'm ready to start Rule #1 investing?   I really want to get this Rule #1 thing right, so I don't want to rush the paper-trading – but in the meantime, I don't want to watch my retirement savings take a nosedive.

I would really appreciate any guidance you can provide.  Thanks,

Ryan

SLOWING DOWN THE TOOLS FOR MUTUAL FUNDS

For those of you managing your funds with long-term tools:

Hi Phil,

I'm using Rule #1 charting on our Mutual Funds because we are not allowed to transfer our 401k to a self-directed IRA unless we quit our jobs. My question is, what do you do when the indicators still say buy but you are watching the markets falling? This is very confusing and has happened several times over the last 2 months. Please help me understand.

Thank you,
Tom T.

My response:

Hi Tom,

I'd say you are using the wrong indicators if the markets are falling and what you are seeing for your mutual fund says to buy it.  To use the indicators properly for mutual funds you have to slow down the data input to mutual fund speed. 

TAKE YOUR TIME

Many of you write in asking how to roll over your retirement plans. Here's a question from Kay:

Hi Phil,

I am a nurse at a local hospital with a 401K and a 403B plan.  I have a 14% payroll deduction every two weeks.  The funds are managed by Fidelity. I have yet to see a 10% return.  I have given myself 6mo to become a real rule #1 investor.

I have a paper account at MSN and am making money!  When I get the guts to jump in what is the best strategy to get my $130,000.00 out of Fidelity and into the stocks I pick.

USING THE TOOLS TO MANAGE YOUR MUTUAL FUNDS

Several readers (among them, Yolanda from California) have written in with the following question:

Could you suggest a book or website to find mutual fund tools like you have taught us for stocks i.e. MACD, Stochastics, Moving Average, etc. Or do these tools work the same for mutual funds?

I mentioned this briefly in the back of the book, and I'll try and talk about it some more at some later date (when I'm not racing around the country talking to people about Rule #1!).

For the present, here's how you can keep an eye on your mutual funds using the tools mentioned in the book:

1. Create a portfolio of all the mutual funds in your 401K.
2. Create charts that are using weekly data input instead of daily data input so that the 8-17-9 MACD is using an 8 week, 17 week and 9 week data input.  That will slow the arrows down a whole bunch.
3. Apply that sort of chart to each fund. 

One way to do this is to just go with Index funds or broad market funds or ETF's like DIA, QQQQ or SPY and get in on three greens and out on three reds.  In an up market you won't do as well as the market, but in a down market you'll be out in cash. 

I did this as an example with Janus 20 from 2000-2005.  The fund lost something like 15% over that time if I'd stayed in.  But with the tools set like I just showed you, the same fund gave a 100% return (about 15% per year compounded over 5 years).  Pretty significant difference when the market crashes!

Now go play.

CAN FOCUS FUNDS GET YOU RULE #1 RESULTS?

Courtesy of the Carnival of the Capitalists and The Real Returns, I saw this post about focus funds.

The site owner did some great research. Many of these fund managers are icons of Rule #1 investing - investors who first make sure they are not going to lose money.  This imperative rule came all the way down the decades from Ben Graham to Warren Buffett to Bill Ruane at Sequoia and Bill Nygren at Oakmark Select and it's great to see the torch being carried so well by Heebner, Gopson, Berkowitz, Schoelzel, Hagstrom Miller, Hawkins, Mulholland and Goldfarb.  With results ranging from 11% to 20%, including the last several years, these funds are far and away in better shape than all but a handful of funds - and the important point is that they will continue to be in better shape no matter what the market is doing - something that can not be said for the flavor of the month funds that lead the rate of return rankings at any given moment. 

One thing, though -- these rates of return, as great as they are, speak to a crucial issue no matter who is running the fund:

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

WHEN DO YOU SELL YOUR SHARES?

First, everything I say from now on is predicated on owning a YUMMMMY stock.

A business that I own as a business that will, over time, provide me with an earnings yield that will exceed 100% per year.

A business that is highly predictable based on its past consistently high 5 numbers: ROIC and the 4 growth numbers: Gross Profit, Earnings Per Share, Equity and Free Cash Flow. The GEEC numbers. Oh, and it has a big moat - best of its class- and great management. Our YUMMMMY stock has gone up and up. How do we know when it has gone too far and it's time to sell it?