Phil Town’s Rule #1 Book

Sunday, March 12th, 2006 | Site News with 18 Comments

Rule 1I received an advance copy of Phil Town’s upcoming book, Rule #1, a few weeks ago.  I just finished reading his stock investing book this week, and I would like to share with you my review of Phil’s book.

First impressions can be everything.  The first thing I noticed about Phil’s book was its subtitle, “The Simple Strategy for Successful Investing in Only 15 Minutes a Week!” A line like that usually makes me run for the hills, but luckily I’ve known Phil Town for a few months through his excellent blog, so I let down my defenses a bit and cracked open the book. What I found was the interesting story of Phil Town’s road to discovering Rule #1 investing and his very practical guide on how to practice Rule #1 investing yourself.  Thankfully, I didn’t judge this book by its cover, since there is a lot of good stuff inside.

Phil starts out the book sharing his fascinating background.  His story starts with his return to the States from military service in Vietnam as a member of the Army Special Forces. Phil had trouble adjusting to civilian life and eventual ends up as a river guide.  A near death experience on the water with a tour group sparked his investing future.  One of the members of this tour group made it their mission to teach Phil how to invest.  From what I’ve read in Rule #1, this grateful tour group member did an excellent job teaching Phil an investment style based on Warren Buffett’s investment philosophy.

Rule #1 comes from Warren Buffett’s first rule of investing, “Don’t lose money.”  Phil refers to his investment philosophy as Rule #1 investing. I must admit that I like the Rule #1 label better than the “value investor” label that I often use for myself.  Rule #1 investing boils down to buying wonderful businesses at attractive prices. I like that! Phil’s process for finding these investment opportunities involves what he calls the Four Ms: Meaning, Moat, Management, and Margin of Safety.

Most of the book details how to go through the Four Ms.  The strength of this book lies in Phil’s detailed directions on how to go through this investment process using common sources of investment information, such as Yahoo! Finance and MSN Money.  There are even detailed screenshots sprinkled throughout the book showing you what to look for on those financial sites.

One of my favorite parts of Rule #1 are the three chapters (Chapters 4 through 6) that discuss identifying wide moat companies.  In particular, I think the “Big Five Numbers” method of taking a quantitative look at a companies competitive advantage using ROIC, equity, EPS, sales, and cash flow growth rates over the past ten years is an excellent compliment to qualitative moat analysis.  Phil makes this analysis rather easy using a slew of examples.

He then makes it even easier by also teaching you the Rule of 72 trick of mentally calculating growth rates.  I don’t think I’ve seen a better explanation of the Rule of 72 anywhere else.  I’ve heard that Warren Buffett always does his valuation estimates in his head, and now I think I can do something similar.  However, since I’m kind of a computer nerd, I still like to do these calculations on a spreadsheet, but I can see how during a negotiation it can be very important to do these kind of growth rate estimates in your head.

Now that you know what I like about this book, let me tell you about a few thing that I’m not fond of in this book.  Phil Town is a motivational speaker, and that style bleeds over a bit into his writing.  I think he oversells how quick and easy Rule #1 investing is by stating that it takes only 15 minutes a week.  Phil does acknowledge that it will probably take most people longer, especially in the beginning and if they are using free information sources.  I just don’t think he needed to emphasize the time involved in Rule #1 investing. 

I’m also not a big fan of the way Phil calculates what he calls “Sticker Price”, which is intrinsic value.  I think Phil’s method relies too heavily on EPS and historical PE values.  I’d rather use Buffett’s “owner’s earnings” technique or a discounted free cash flows model to estimate intrinsic value.  I guess the nice thing about Phil’s method is that it is quick and easy enough that you can even do it in your head.  The saving grace of Phil’s method of calculating a stock’s value is that he uses a 50 percent margin of safety that he notes protects him from any mistakes.

Finally, I really wish Phil would have shared more information about his past performance using his investment techniques.  A lot of what Phil does is similar to what many investors from the Graham-and-Doddsville school of investing do, which is good.  However, there are a few exceptions.  The big one being Phil’s use of technical analysis to determine when institutional investors are starting to buy or sell a stock.  He calls his technical analysis methods the “Three Tools” based on his use of the 8-17-9 MACD, 5-5 stochastics, and 10-day moving average.  When a stock meets the Four Ms and the “three tools” are positive Phil buys a stock.  He then sells when all the “tools” indicate selling is occurring.  I must admit that I’m intrigued by the Tools.  However, since this is not a technique used by Buffett or Graham, I am very leery of using this basic technical analysis without seeing it in action over the long-term.

In general, I think the Rule #1 book is a very practical book that could be very useful for new investors. It is not really a replacement for the classic works, such as the Intelligent Investor, but I think this book is a good at showing you how to put some of the concepts laid out by Graham and Buffett into action. There are also several interesting concepts that seasoned investors might be interested in examining, such as the Tools.  I plan on doing some Rule #1 “homework” shortly and sharing it with Phil Town for his feedback.  Phil has generously reviewed many of his blog readers’ analyses and I encourage you to do the same. 

If you are interested in a different perspective on this book, Chris Welch of InvestorGeeks recently wrote of review of Rule #1.  There is also a recent interview with Phil Town by Jim at Blueprint for Financial Prosperity. Please share you thoughts on this book in the comments section below.

 


Comments

  • This kind of confueses me I went to a “Get Motivated” seminar where he spoke. He told the story of how he worked in the grand canyon and a rich guy he thought was an illegal immigrant told him about investing.

    He then said he became a millionaire through an investools TA approach, and tied Buffett’s two rules into it.

    This did get me started in investing, but there wasn’t any FA or moat analysis involved…

    -Mike

    Mike March 12th, 2006 at 7:27 pm
  • (Edited by George to fix long link.)

    Hey George,

    In response to your thoughts on the “three tools”. If you go to [Phil's site] you will see my discussion on the “three tools” that Phil said was a good description on how to use them. Also, his most recent post sorta continued the discussion, see “PROGRAMMING THE TOOLS”

    For me, assumining you follow the core principles of Graham et al (as a short hand for what is genrically callewd value investing) . than what Phil is saying fits in a general way.

    For example if, collectively mutual funds and insitutions own 30, 40, 60, or even 80 percent of a common stock than they are Mr. Market. And if the gheneral trend is down or up its because they are opening/exiting positions over a multi week period.

    So a “pure” graham (value) guy will say , hey if it is selling for 60 cnets on a dollar its a good deal and what do i care if I buy it at 40 cents, a god deal at 60 cents is a good deal.

    Where I think the tools and indicators from TA come in is on a macro level in this sense:

    if a stocks fair value is 100 and a MOS is adequate at 70 but the stock has gone down from 100 to 70 in 4-6 months, than stay out of the way of the trend. When TA indicates that the trend is moving in a more positive direction is the time to leave.

    So many people think that Graham-value etc dont use TA but they do sorta of.

    I mean lets say you find a great company, its got a killer moat, the finanmcials all check out and your analysis indicates that a fair value price is 100 per common and you want a 50% MOS like Graham says so you say you will buy at 66 (menaing that the stock price will have to increase buy 50%).

    Now when you do your analysis it is selling for 85..not enough of a MOS…but if it gets down ot 66 you will buy it..

    Well to me that is TA. You have set a buy signal of 66 using vlaue metrics as opposed to more common TA indicators but it kinda of the same thing…I mean think about a great stock..lets take BRK for example… we all know its a great company…lets assume you have done analysis and FV is 75000 and 2500.

    if BRK opens tomorrow at 40,000 or the B opens at 1333 would you buy? of course…why cuz you have set a price target…and thats what TA is all about…

    So the difference between TA and Graham for me is actually very small but very important…

    under TA it is the indicators that control the decison to buy/sell…

    Using Graham the decision to buy or sell is made based on analysis of the company…and confirmed by the TA of price as it relates to FV and MOS

    and what I get from Phil is that the indicators just provide some general insight as to roughly what the trend is and how to avoid Mr. Market

    Anyway I am intrigued by the indicators and tools myself…how did you get an advance copy..i wish i could have scored one myself

    Take care

    Steven

    Steven March 13th, 2006 at 1:12 am
  • Dear [George],
    Thank you for taking the time to review Rule #1. I have to tell you that I think you did a good job of writing a fair critique. Clearly the time factor of 15 minuramtes a week is going to be questioned a lot but truly thats about what it takes me averaged out over the year. Granted I spend a lot of time in cash which contributes to zero time per week! And thanks for having an open mind about the indicators. I started using them in 1997 and they really are amazing at predicting the direction of the institutional managers flow of money. Since 85% is in their hands, its pretty important to see what they are doing.

    In any case, I think you run a good, honest, rational blog that readers can trust and I look forward to exchanging ideas about what to invest in in the future.

    Thanks again for taking the time to dig in and give an honest opinion.

    Phil

    phil town March 13th, 2006 at 2:36 am
  • “Finally, I really wish Phil would have shared more information about his past performance using his investment techniques. ”

    I think this is the key. So what if I can make 15% in 15 minutes a day? You can make 15% in 15 minutes a year with a diversified portfolio. Town’s method requires that you hold a few stocks, which is really risky regardless of what he says. It’s much riskier than a small cap value index fund, with no more return.

    When Town publishes 15 years of detailed, verifiable results, then I’ll think this might work in the future. However, no system like this has ever worked in the past (see Graham 1949), so it’s unlikely this one will either. A lot of people are just going to end up losing a lot of their own money.

    Phil V March 14th, 2006 at 11:29 am
  • Phil Town -

    Thank you for stopping by and commenting on my review. We really appreciate it here. Thank you for clarifying the 15 per week on investing item. I understand that it can take you only 15 minutes a week after your years of experience, but I think it is going to take everyone else a bit more type until they have a few years under their belt.

    I appreciate the kind words about my blog and I too look forward to exchanging ideas with you.

    Phil V -

    It is not necesarily true that focusing your investment on a few stocks is riskier than holding greater numbers of stocks. The quality of the companies that you hold impacts risk. In addition, focusing your attention on few companies can result in analysis and decisions. Many of the most successful investors have concentrated holdings.

    I agree with you that I too would like to see Phil’s investment record. However, I don’t understand your reference to Graham ’49. Rule #1 investing is not a mechanical system. It is actually based on a lot of the teachings of Graham.

    George March 15th, 2006 at 11:17 pm
  • Maybe I haven’t spent enough time on this, but I have to say that anyone who researches a stock and thinks it has enough upside potential to invest in it makes a mistake by putting in a “buy” order at a price lower than the stock is currently selling for. For example, say you discover a stock you like and it’s market price right now is 69 and your analysis tells you it’s a buy at 66. So are you going to wait for it to go the wrong way before you buy it? I’m not. I would not like the stock at 66 if I didn’t think it’s upside potential was way more than the current 69 and if I think it’s upside is way more than 69 why not put in a market order and buy it now at 69??? As a retired stock broker, I think that trying to predict a stock’s top or bottom is a waste of time. Whether you use fundamental or technical analysis makes no difference…. you may use both, but if I like a stock I won’t wait for it to go lower than it’s current trading range before buying it.
    Bud, the retired broker.

    Bud Hamilton March 25th, 2006 at 10:14 am
  • Perhaps I am unclear on the concept, but I don’t think that the three tools are being used to predict the top and/or bottom. They seem to be more of a gauge to determine institutional committment to entering or exiting a stock position/industry/sector.

    While the diffrence may be fine, it exists.

    New investor March 14th, 2007 at 1:36 pm
  • The problem with Phil Town, and the E*Trades, and Ameritrades of thw world and Suze Orman’s is that they leave the perception that investing is easy. I’m an advisor and it’s not and I see countless folks who fall victim to stuff like this and they tell me they know it all and have E*trade accounts, watch Phil Town, blah, blah. They fall victim to the knowledge is “we got the tools to teach you how to do this on your own” mentality. Then the client comes to me because they blew themselves up and give up doing this stuff on their own. While we are at it, why don’t we let people who lack proper training defend themselves in the court?–all they have to do now is just watch Court TV and boom they are now a lawyer! Why don’t we all watch Doctor 90210 and all become plastic surgeons overnight?

    Town and Orman have books to sell and that’s all that’s going on here. All Town did was read Warren Buffe and Ben Grahm books and repackage the message. Heck I should have done that, except I’m actually a certified professional at this and have the designations. Unlike Town and Orman.

    Good luck folks and don’t fall victim to this garbage.

    mick September 20th, 2007 at 9:23 am
  • Unfortunately people are also blown up by dealing with unqualified, unscrupulous, and unethical advisers.

    The war between mutual funds and stocks will go on and on…..I’m personally going to try to learn Phil’s method, but I’m not ready to give up my mutual funds yet or the advice of my Certified Financial Planner.

    Thank goodness for Phil Town and Suze Orman! If it wasn’t for them us regular folk would be totally in the dark.
    Knowledge is power!

    Melanie January 3rd, 2008 at 3:03 pm
  • Thanks for the website. I just found it, and I am hoping I’ll find more comments and information on value investing as I explore further.

    The real value in Rule 1 is it gives a method for calculating a price for a stock from the stock’s financials. After comparing a few calculations to the stock market’s price, it’s been reasonable close.

    If you believe that the stock’s price will eventually catch up with the earnings, it sure helps to put some numbers on it.

    Rob January 8th, 2008 at 1:16 pm
  • For those interested, I use http://big5roi.com to help screen for rule 1 type companies.

    natebean April 11th, 2009 at 9:29 pm
  • It’s a year and 3/4 late, but thanks natebean! Great site!

    Joseph September 21st, 2009 at 6:51 pm
  • I turned accounts over to advisor in 2004 after years of saving and managing them myself and the dow at the time was little over 12,000. Turned off the thinking about it while we travelled around in our motor home and 6 years later noticed the DOW was back around the 12,000 but our accounts had not grown only paid advisor pretty good amount each year. I took back the management and trying to get back on board.
    Thank goodness the principal was still there but now trying to learn it all over again. I found Phil’s book great help in making decisions. Also the tools available on internet are so much better than I remember.

    Anne Kyle March 30th, 2011 at 7:57 am
  • please understand that Warren Buffett investing style is different than Rule # 1 Investing. Rule # 1 Investing is analysis of Buffett’s company Berkshire and not necessary his investing style. Buffett’s goal for Berkshire was to grow book value at 15%. An old man sitting with a pile of cash, a company’s EPS who is probably the largest in the market, Buffett’s favorite ratio the return on equity and why not include Return on Capital and finally a company with about 137.87B in sales.

    Buffett likes companies he can understand, buffettology is more of Buffett’s investing style. Remember the companies Warren Buffett invests in are different than Berkshire.

    keith June 7th, 2011 at 9:36 am

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