In one sentence: After visiting Amazon's headquarters, Phil and Danielle use the company to show that a business you love can still be priced far above anything Rule #1 math supports, and Phil argues against buying a "starter tranche" of an overpriced stock as a hedge.
Key ideas
- Show up. Phil credits much of his success to walking through doors that open, even inconvenient ones; the Fishbowl talk drew a room of about 100 and tens of thousands of video views. [00:00–04:00]
- Scuttlebutt. Seeing Amazon Go (the checkout-free store) in person changed how Danielle thought about the company and linked it to the Whole Foods purchase and one-hour delivery. The method is Phil Fisher's: go and look at the business, even the CEO's home town. Phil mentions Li Lu telling a Columbia class the same. [09:00–18:00]
- Own few things. Nobody who owns 50 to 100 stocks can know each business well enough to be investing rather than speculating. [18:00–20:00]
- Rough math, free cash flow. Phil's on-air numbers: about $18.4B operating cash flow minus about $10B net property and equipment gives about $8.4B free cash flow (2017). Eight years of that is about $70B. Even with a hopeful growth rate he reaches only a few hundred billion, against a market value near $1 trillion. The calculation was made up on the fly and he corrects his own arithmetic; treat it as an illustration. [22:00–30:00]
- Owner earnings cross-check. Guessing about $15B of owner earnings and applying the "times 10" price rule gives about $150B, still far below the market price. [29:00–31:00]
- Priced for miracles. Phil compares it with Yahoo in 1999 (a P/E he puts near 29,000) and concludes that at that price the purchase is "not defensible" under Rule #1, however much he likes the company. [31:00–34:00]
- A little bit is not a position. Rule #1 positions are 10% to 20% of the portfolio; token holdings are "practice shares", not investments. [35:00–37:00]
- The tranche hedge question. Danielle asks: buy one tranche now, and more if the price falls? Phil's answer is no. If you do it for one, why not all ten overpriced names? You'd be fully in the market at the top. [37:00–40:00]
- Dead money. His illustration: $250,000 grows to $375,000 in three more up years, then falls 50%; that capital must climb back before it works. The same $250,000 in cash, deployed after the crash at cheap prices, can beat it. It only wins if you can time the exit. [41:00–46:00]
- Be careful at the end of long bull markets. Phil points to record consumer confidence preceding 1929, 1999 and 2007 and a list of fragile emerging markets; he prefers cash for now. This is his view in September 2018, not a forecast. [46:00–49:00]
How it maps to RuleOne
- This is the "wonderful but not on sale" case the screen exists for: compare the price on /stock/TICKER/ with a sticker price before touching a tranche.
- /holdings/ is where tranche buying is tracked; the lesson is that the first tranche still needs a defensible price.
- Scuttlebutt is a candidate task for the Radar agent (customer reviews, store visits), but the visit itself is yours.
Buffett, Munger and Graham links
- Phil Fisher, Common Stocks and Uncommon Profits (scuttlebutt chapter).
- Graham's margin of safety: The Intelligent Investor, chapter 20.
- Concentration: Buffett's 1993 letter and Munger's "wait for the fat pitch" talks.
Words to know
- Scuttlebutt: gathering knowledge about a business from customers, staff and competitors.
- Practice shares: a very small position held to learn, not counted as an investment.
- Dead money: capital sitting in a stock that must recover before it earns.
Try this
Choose a company you admire. On /stock/TICKER/ compute its free cash flow and multiply by 8 (the payback ceiling in the book). Compare it with the market cap and write how many years of growth the current price assumes.
Check yourself
- Why is a small starter position in an overpriced stock a weak hedge?
Answer
It is just a bet that the market keeps rising, and it becomes dead money if the price falls. - What size is a real Rule #1 position?
Answer
About 10% to 20% of the portfolio. - What did Phil conclude about Amazon at that price?
Answer
A wonderful business, but the price was not defensible under Rule #1.
Short quotes
"We buy stuff and load up the truck." (Phil, ~35:30, auto-transcribed)