As I said in my review of Rule #1, The Simple Strategy for Successful Investing in Only 15 Minutes a Week!, Phil Town defines Rule #1 as "Don't lose money" (taken from Warren Buffett) and says that what this 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
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
Overall, these are solid, bankable principles. As I said earlier, my issue with this book isn't the thinking behind it, but the claims (15% return in 15 minutes a week with no risk) it makes.
If you can find a business that meets these criteria, it's likely that it will do well over a long period of time. How well? It's hard to tell. Can you find a business like this? Warren Buffett and a few others do, but not many can. Phil's out to persuade us that everyone can. I want to believe it (there's something inside every investor that says he/she can do better than everyone else), but just can't at this point. Can I be convinced? Who knows?
What do you think? Join the discussion as we "celebrate" Phil Town Day at Free Money Finance.
This series sponsored by Gannon on Investing, the value investing blog and podcast.
Phil's 4 Ms are similar to Frederick Kobrick's BASM model for evaluating businesses.
Posted by: Tim MMF | June 16, 2006 at 05:03 PM
I heard Phil on a CNBC interview and had to buy his book. I loved the story, easy to understand instructions on how to invest, and put a value to a company. Not knowing a thing about the markets, I find it so easy to make money using his directions. I've got to say I've made $1,500 in 6 week's on $6,000 invested; now I can’t find enough money to invest in stocks. I want my kids and wife to learn I bought my Dad his book ... you guys go be critical, I'm going to retire early and go play.
Posted by: Dan | July 08, 2007 at 09:05 PM