In one sentence: Phil explains how he builds a position in tranches (about a quarter at a time, in money not shares), with stories about Burlington Northern and BP, and why he would stay patient while a bear market unfolds.
Key ideas
- Why Buffett's inaction matters. Phil trusts Buffett's cash stance more than value funds that bought in March, because fund managers fear being out of a rising market more than falling with it. Danielle thinks many genuinely liked the prices. [00:00–05:00]
- Protect your emotions. The hardest thing in a rally is fear of missing out. Phil says he dislikes losing more than missing gains. Not finding anything at a price he likes is not a mistake. [05:00–07:00]
- Taking a position means allocating. Decide how much capital belongs to this company, then buy in tranches so you keep money if the price falls. [07:00–08:00]
- Burlington Northern example (Phil's telling). He saw Buffett buying and reportedly selling puts near $80, bought about 35 books on railroads over a month, valued it near $120, sold puts in the $60s and was put the stock. First tranche about $62, overall about $58. Buffett later bought the whole company at about $100. [08:00–18:00]
- Selling puts as a way in. A put is insurance you sell: you collect a premium and agree to buy at a set price. With frightened markets the premiums are rich. Phil says options are not covered in depth here and have details (European vs American style) you must learn first. [10:00–16:00]
- Buffett's S&P put (as described). He sold long-dated index puts, taking premium up front, and expected to earn more than about 6% on it, like insurance float. Phil details may be loose ("numbers are probably wrong"). [09:00–13:00]
- Tranches by dollars, not shares. Four equal dollar tranches of about 25% mean a falling price buys more shares in later tranches. Buying equal share counts forfeits that benefit. [16:00–18:00]
- When it goes the other way (BP, 2010). Phil thought the Macondo spill would not bankrupt BP, bought around $27 and, as it rose to about $32, loaded up before it ran away because the well was being fixed. Judgement about the end of the crisis decides whether to chase. [18:00–25:00]
- Two views of a rising price. Either you're sure the emergency is over and pile in, or you think it is only the first inning and keep dry powder. Phil takes the second view for the current market. [23:00–26:00]
- Wait for the full bear. Phil says a full bear market takes three or four quarters and swings up and down, so do not worry that you missed it. Quarterly pressure on managers means they follow momentum when earnings fall. [26:00–31:00]
How it maps to RuleOne
- The "Rb" in the RuleOne letters is exactly this: buy in tranches by dollar amount, not share count. /holdings/ shows cost basis per lot, so you can see whether later tranches lowered your average.
- Keep a written plan for tranche size and trigger prices per company, since the screen's margin-of-safety price is the first trigger, not the only one.
- Options are outside what the site models. Treat Phil's put-selling as an advanced technique to study, not a feature.
Buffett, Munger and Graham links
- Buffett's Burlington Northern purchase (completed 2010) is described in the 2009 Berkshire letter.
- Selling puts as a way to buy at your price has Buffett precedent (Berkshire's 1990s Coca-Cola put sales, in the 1993 letter); Phil says his own use is smaller.
- Graham's Mr. Market (The Intelligent Investor, ch. 8) is behind "protect your emotions".
Words to know
- Tranche: one instalment of a planned position.
- Put option: contract that gives the buyer the right to sell at a set price. The seller collects a premium and takes on the obligation to buy.
- Dry powder: cash held back to buy at lower prices.
Try this
Choose a company you would buy at your margin-of-safety price. On /stock/TICKER/ note that price, then write a plan: four dollar tranches, and the price or event that triggers each. Check on /holdings/ how a 20% drop after tranche one changes your average cost.
Check yourself
- Why buy by dollar amount, not share count?
Answer
Equal dollars buy more shares as the price falls, lowering average cost, and still participate if the price rises. - What did Phil learn from BP versus Burlington Northern?
Answer
If you are confident the crisis has ended and the price rises a little, you may need to load up quickly; otherwise tranches wait for lower prices. - Why does Phil expect a bear market to take several quarters?
Answer
Earnings losses arrive over several quarters and managers sell on momentum, so the market falls and rallies in waves.
Short quotes
"I hate it if I lose money on a company. It feels like I made a mistake." (Phil, ~06:00, auto-transcribed)