I 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.