Review: Rule #1 by Phil Town

Last August, I had the chance to see Phil Town speak. I had never heard of him until that day, but I must say I was impressed. He was entertaining, knowledgeable, funny, and made a compelling case for his investment philosophy. I emailed him when I got back and we've "talked" via email a couple times since then. I read his Rule #1 Blog often to see what he's discussing. In short, I like Phil. So I was excited to read and review his new book, Rule #1, The Simple Strategy for Successful Investing in Only 15 Minutes a Week!

Before I get into my review, I want to tell you what the book is about, which is stated concisely in the opening paragraph of the book:

This book is a simple guide to returns of 15% or more in the stock market, with almost no risk. In fact, Rule #1 investing is practically immune to the ups and downs of the stock market.

Color me skeptical at this point.

From there, the book first tears down current investment principles and practices before detailing Phil's principles. Here's a summary of Phil's thoughts on the current state of things from the materials that came with the book:

If your money is in mutual funds—especially the type found in most 401Ks—then you could be setting yourself up to feel the longest and most painful sucker punch ever endured by the investment community. If you’ve been drinking the mutual fund Kool-Aid, then, historically you’ve heard that stocks have outperformed every other type of investment in the past one hundred years. That’s true. But what your financial advisor hasn’t told you is that within that timeframe, the stock market has flatlined for periods of 20 years or longer and the latest data are showing that one of those 20-year, down-for-the-count stretches is imminent. Unless you’re planning to live to be 120, you don’t have time to weather extended and anemic periods of no growth in your investments.

Next, Phil details Rule #1. Simply stated, the rule is "Don't lose money" (taken from Warren Buffett), but Phil says that what it means in practical terms is "to invest with certainty." He goes on and says certainty comes from "buying a wonderful business at an attractive price." He then details The Rule #1 strategy which includes four basic steps:

• Find a wonderful business
• Know what it’s worth – exactly what it’s worth
• Buy it at 50% off
• Repeat until very rich

If you're rolling your eyes at this point, stick with me -- we'll be discussing all of this in just a bit.

So, how do you do this exactly? Phil lays out the "Four Ms" to finding a great business to invest in:

• Meaning – Does the business reflect your values?
• Moat – Does it have a wide moat; can the business protect itself from attacks by competitors?
• Management – Is it well managed and financially strong?
• Margin of Safety – Can you “buy a dollar of value for fifty cents”?

And within "Moat", there are five numbers that need to be evaluated for any potential business including:

• Return on Investment Capital (ROIC)
• Sales Growth Rate
• Earnings Per Share (EPS) Growth Rate
• Equity or Book Value Per Share (Equity or BVPS) Growth Rate
• Free Cash Flow (cash) Growth Rate

The majority of the book is dedicated to detailing the Four Ms, demonstrating how they can and should be used, and giving examples on identifying good investment opportunities. (BTW, Phil also does this on his blog, so if you want to see his principles in action, check it out.)

My thoughts on this are mixed. On one hand, I like the simplicity of index funds. They have low fees (which helps out the return), take little time to manage and are easy investments to use and track. Besides, they come highly recommended by people who manage billions and investment pros. I've had good experience with them in the past as there returns are solid.

That said, maybe I've just been drinking the mutual fund Kool-Aid. Phil's theories intrigue me. There's a part of every investor that thinks he/she can beat the market and with the right system can get 15% returns consistently. And many of the measures he uses make sense: buying at a discount, looking at key numbers, making sure there's limited competition, etc. So he does have a point and can back it up with solid principles.

But in the end, I just don't buy it. In particular, here are the parts of his claims I just can't believe:

• 15% annual returns with no risk -- If this is actually the case, why is Phil telling everyone about it? He could make way more money simply being quiet and investing himself rather than writing a book, couldn't he?
• Immunity from the ups and downs in the market -- I guess if you buy something that can't go down any farther, the market can't even hurt it -- but I don't think this is what he's saying to do.
• 15 minutes a week -- If you do everything he said and only spend 15 minutes a week doing it, it will take you about four years to pick your first stock.

As I said, I like Phil as a person, but I simply can't recommend this book. It's good enough for you to check out at the library and see if you might want to buy it though (especially if you like new thoughts in investing). For now, the Free Money Finance Rating Rule #1, The Simple Strategy for Successful Investing in Only 15 Minutes a Week! on my 0 thru 10 rating system: 4 Stars.

BTW, I've offered to interview Phil to let him convince me that his system really works. I'll let you know what he says.

Free Money Finance books that earn 8 stars or more (not all money related):

• The Millionaire Next Door
• How to Win Friends and Influence People
• Your Best Life Now
• The Purpose Driven Life
• Think and Grow Rich
• The Power of Positive Thinking
• Richest Man in Babylon
• The Automatic Millionaire
• Mind Over Money

Comments

[Cap]

quite a review. I'll have difficulty in writing a review, especially if I like the person. I seriously rolled my eyes too. It looks like Graham and Buffett were cited quite a bit through out the book - and thats not really a bad thing.

but yeah the review is quite a contrast to some that I've read online.. course I took most of those positive review I read with a grain of salt too. Will still pick the book up at the library though (if its available).

looking forward to the interview it it goes through!

[Steve Mertz]

Phil is a speaker-speakers are encouraged to write books to increase their credibility & to increase their fees! It's even better if your book creates doubt and fears and stirs controversy. And then you,the expert, come in on your horse and save the day!

[j.b.]

well, my feeling upon reading the book was not that it was trying to make big impossible promises. more like it was trying to point out that nobody can retire off mutual funds - their profits barely keep pace with inflation. really, the only shot boomers (anyone really) have at a comfortable retirement is to invest their own money and try and make a larger return. then you're not paying some financial services pro a commission for turning out a crap but "serviceable" performance with your life's savings.

if you're rich and have tons of dough, maybe all this is a moot point, but for most of us working regular jobs, i think any advantage anyone can give us is appreciated. i plan to try phil town's investing techniques. even if it takes a few hours a week, to me, that's time well spent. i'd rather pay myself than some wall street guy. i know me better and trust me more!

[Rich V]

Is there really any system that works with the stock market? I'm trying to learn Phil Town's system but will it work? I have a mutual fund and stocks that are not making any money. I see that I have alot to learn so I'm starting with Phil. All my life, the only way to make money was to get a job and work for it. Can a simple person like me make money the stock market. Not by luck but by learning how the stock market works. How come Phil never tells us the stocks that he buys and sells, options and dates that made him millionaire. I would think that if he really wants people to learn his system he would more open. After all, alot of people could be ivesting their life savings on his system. Maybe he should add "IF YOUR LUCKY" to his title. Thanks

[FMF]

Rich -- You're question is the reason I go with index funds. See this link for details:

http://www.freemoneyfinance.com/2006/03/why_i_like_inde.html

[John Scott]

Hi:

Your review is way off base on Phil Town. To suggest that he wrote a book JUST to make money is false.

First of all, Phil has made several million documented dollars in the stock market. He has been speaking on the Peter Lowe Mega Arena Tour for over 10 years WITH NO BOOK. Many people kept hounding him to write a book, and with MUCH encouragement for years.......he finally did with the help of others.

Consider these facts:

FACT: Of the thousands of mutual funds, only 4% actually made any money...most of these so-called professional money managers couldn't ever BEAT the market for many years running....yet idiots leave their money with them.

FACT: Phil has also made millions in Real Estate ownership, but he thinks it is way too much work and cites many examples in his book where stocks returned much, much higher returns.

FACT: Phil teachers you how to do the research to find good companies to buy, but you just want him to do all of the work and RECOMMEND to you which stocks to buy. You are lazy. He is smart for NOT recommending specific stocks, as is the case with many online brokers. Grow up...no one should care more about your money than YOU!

FACT: You HAVE been drinking the mutual fund Kook-Aid and are settling for dismal returns from your so-called professional fund manager. Over 82 Billion dollars of investor money was lost in mutual funds last year alone.

FACT: I have made OVER 20% annually for the last 6 years doing the techniques that I learned from Phil when he spoke in Pittsburgh, and I am laughing all the way to the bank!

FACT: Smart investors learn to make money when the market is going up....BUT also how to make money when the market is going down. I suggest you learn the latter, for obviously you don't know how or are unwilling to learn. When you learn the stochastics and MACD charts, there is very little risk.

[FMF]

John --

I think you need to read more than one page of this blog before you say I don't know how to make money.

[James]

In response, this is a good review. Skepticism is a good thing, because it instills caution. This is true whether picking a stock or taking advice.
Why does Phil feel the need to brag about his achievements in this book. "I had over 20 million dollars in this investment at one point" and especially "I used to be just like you" detract from the overall message. Peter Lynch doesn't do this, and since Phil is no where the talent Lynch is, I think he should refrain from the self agrandizing.
Also. Warren Buffett explicitly states in his 2000 annual letter to shareholders that p/e tells you nothing about the value of a business. But Town uses this as a measure of value.
A good starting point, but no substitute for the Berkshire annual letters and Grahams titles.

[Thespgios]

I've read Rule #1 of Phil Town. I think It's good for small investors like me.
Dear James: P/E is not a measure of value. It is used to calculate the future price.
I've researched it carefully as well as read much about Phil Town and I've felt Phil Town is good enough for everyone can believe in.

[Jonathan]

I agree that it takes a significant amount of time to find 1 Rule #1 stock. I found it to be quite frustrating finding Rule #1 stocks. Therefore I wrote a program to run on my servers.

Every day my server analyzes over 9000 stocks searching for companies that meet the following Rule #1 growth requirements:
Equity
Sales
EPS
ROIC

Approximately 1% of the publicly traded stocks meet the criteria above.

This report is generated before the market opens each trading day and lists stocks that meet the above requirements.

It also includes technical arrows and MOS.