In one sentence: After Microsoft announced a deal for Activision that would have paid Phil roughly 50% above the price he was waiting for, he and Danielle ask how close to your target price counts as close enough, and why you need rules set in advance.
Key ideas
- Lou Simpson (1936–2022). The hosts mark his death on January 8. He ran Geico's portfolio for decades with a tiny team, then his own fund; Phil calls him a Rule #1 style investor (understand, moat, management, price). Danielle notes a Bloomberg obituary said Berkshire money was in his fund, so there was no lasting rift with Buffett. Quote Phil attributes to him: they "do a lot of thinking and not a lot of acting". [00:00–04:00]
- The cost of waiting. Phil's team wanted Activision Blizzard at about $55 and watched it stall around $60–63 after the abuse scandal. They did option trades but never bought shares. When Microsoft bid, Phil put the miss at about $4 million. [04:00–08:30]
- Thinking vs. finishing. Phil's own diagnosis: they did the thinking, liked the company and judged the bad news "in", but did not finish. Writing the annual letter took his attention. [08:00–09:00]
- Predefined rules matter most. Danielle asks whether a 10% gap to the target is fine. Phil says rules set in advance are what protect you in either direction. [09:00–11:00]
- The other side of the coin. In another stock, they bought a first tranche at their payback-time trigger, thought the news was in when it rose about 5%, bought the rest, and two months later it was down 40%. They bought more and cut the year's effective loss from about 40% to 25%. Lesson: the news may not be fully in, and there may be another chance. [10:00–13:00]
- Being wrong about timing is not being wrong about value. With BP after the Gulf spill, Phil bought around $27 (down from $60), chased it to the mid-$30s, and sold near $50. His rule of thumb: a $10 bill bought at $5 and $6 is not a mistake if it dips to $3; look for more money to buy at $3. [12:00–14:30]
- Whole Foods and the "ratio ROP" (ratio Rule #1 put). Danielle's first stock was Whole Foods, which never reached the target. Phil bought a big tranche around $35 (he wanted $29–30) and sold two or three options (puts at a $30 strike, about a year and a half out) for each 100 shares, collecting about $5 a share. Adjusted basis fell to $30 at once. If the stock rises, he keeps the gain; if it falls below $30, he buys more at the price he wanted. He sold at about $42 and kept the premium. Illustrative figures from Phil, not a recommendation. [14:00–23:30]
- Margin and collateral. Selling puts near the money ties up cash; with enough capital a broker may allow portfolio margin for strikes about a standard deviation away. Phil says this only works if you truly want to own the stock at the strike. [20:00–23:00]
- Why Activision's option trade paid little. Because the puts were so close to the money, Phil had to hold full cash, and he earned "a dribble" from the options instead of "a river" from the stock. [23:00–24:00]
- Founder-led companies sell differently. Phil and Danielle compare Whole Foods, Activision and Sanderson Farms (acquired at about $203, per Phil; the deal was still under antitrust review when recorded). A founder who is stuck, tired or has no heir may look for a white knight. Phil: they should have considered that a takeover would make the price jump overnight, not rise gradually. [24:00–30:30]
- Rocket trades. A weekly cycle of selling puts near the price, taking the stock if put, selling calls at that price, and repeating, works for companies that go sideways. [28:00–30:00]
- Antitrust aside. The hosts spend the last minutes on consolidation and antitrust as a rare area of political overlap; this is opinion and not investment teaching. [30:00–35:00]
How it maps to RuleOne
- A tranche plan (first buy at one trigger, more at deeper ones) is something the screen's valuation and event watch can support: write the trigger prices down on /stock/TICKER/ before the event.
- The post-event review Phil does is a good use of /holdings/ notes: what the rule said, what you did, what happened.
- The options mechanics are advanced and the site does not support them; treat them as background only.
Buffett, Munger and Graham links
- Margin of safety: Graham, The Intelligent Investor, ch. 20, and Buffett's repeated use of the phrase in the Berkshire letters.
- Buffett's line (mentioned in 001 too) about "laziness bordering on sloth" is the temperament the hosts say they want, but Phil admits it can tip into not acting.
- Munger on waiting and then acting decisively ("sit on your ass" investing) is the counterpart to Phil's lesson about finishing the work.
Words to know
- Tranche: one slice of a planned position, bought at a stated price trigger.
- Adjusted basis: your cost per share after subtracting option premiums you collected.
- White knight: a friendly buyer that rescues a struggling company.
Try this
Pick one name on your watch list from /stocks/. Write the price at which you would buy tranche one, tranche two and the remainder, and what news would make you stop. Check it against /stock/TICKER/ and set your tolerance (for example, "within 5% counts") before the price moves.
Check yourself
- What went wrong in the Activision case, according to Phil?
Answer
The stock stalled just above the target; the team finished the thinking but did not act, and a takeover bid lifted the price about 50%. - Why is a drop after your purchase not necessarily a mistake?
Answer
If the value is unchanged, a lower price is a better deal; the plan should include money to buy more. - What does selling puts at a strike you like achieve in the Whole Foods example?
Answer
It lowers the adjusted basis immediately, and if the stock falls to the strike you buy more at a price you already wanted.
Short quotes
"We like to do a lot of thinking and not a lot of acting." (Phil, quoting Lou Simpson, ~03:30, auto-transcribed)