Rule #1 Investor – Will it Make Me Money?

I have been reading the book, Rule #1 by Phil town and am overall pretty impressed by it.

At first I was very skeptical – as I leafed through the book I saw a number of references to his website which I thought was totally going to be a sell job for some other products. Turns out this was not true. His site is really just a marketing vehicle to ensure his name is out there, but I did not see any other products to purchase.

The premise of the book is based on Warren Buffet’s two rules of investing:

1. Don’t lose money
2. Don’t forget about rule #1

He teaches some basic fundamental analysis of a stock and tries to give investors a recipe to analysis a company. He sums up his approach as follows:

1. Find a wonderful business you understand
2. Know what it’s worth – exactly what it’s worth – by predicting its future stock price
3. Buy it at 50% off… and sell at full price when the market corrects its value
4. Repeat until very rich

I know what you are thinking. Duh – isn’t that what everyone is doing. If it were only that easy. I agree – I believe that he presents his methods as pie in the sky thinking that is super easy to do.

That being said, I did like his approach to selecting companies to purchase. The core of his approach is looking at 4 growth rates that indicate how well a company ahs been performing over the past 10 years. What he looks for is:

1. Return on Invested Capital – growth in book value / share – greater than 10%
2. EPS – growth greater than 10% over the past 10 years
3. Sales – growth greater than 10% over the past 10 years
4. Cash – growth greater than 10% over the past 10 years

Once you have these numbers and they all look good, you do some further calculations to calculate the future EPS, future share value of the stock, the “sticker price” of the stock, and the price you should buy it at that provides an acceptable margin of safety.

Overall, I liked his disciplined approach to selecting stocks. It makes investors do the required research to understand a company and understand how they have been doing. I am going to run some companies through the model and see what I get.

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