My review of Rule #1, The Simple Strategy for Successful Investing in Only 15 Minutes a Week! by Phil Town was done from a pre-production version of the book -- a paperback copy that wasn't yet finalized that publishers send out to people to review. However, a few weeks later, they sent me a hard cover version of the book (thank you very much!). The package also contained a document titled "A Conversation with Phil Town" which was basically a pre-developed interview with Phil. I asked his representatives if I could reprint it here and they gave me permission. I thought it would be a nice addition to Phil Town day.
Here goes:
Q: Your Rule #1 strategies are markedly different from conventional and accepted investing practice. How do you explain that?
Phil: My firm rule is: Don’t lose money. That said, the secrets to being successful in investing—and not losing money—are incredibly different than what everybody believes. Everything we’ve been told about investing is wrong. Even Warren Buffet’s been calling them myths for a long time. First myth: diversify; buy lots of different kinds of stocks so you lower your risk. What if I told you diversification is for the ignorant? What if I told you that the only people who should diversify are people who don’t have a clue about what they’re doing? The best investors in the world don’t diversify.
Q: What if I’ve never invested in the stock market? I don’t understand it. Will I be able to use Rule #1?
Phil: Of course. Take it one step at a time, don’t use real money at first, and remember Rule #1. You are looking to buy a dollar of value for 50 cents. Do not allow yourself to be told you can’t invest profitably by someone who isn’t doing it. Why should you allow them to decide how well you will live in 20 years?
Q: What about the long-term hold; isn’t that what we’re supposed to do? Put money away for a long time and ride out the bumps in the market.
Phil: That’s the second myth. Yes, the market goes up in the long run, but the long run can be longer than you have. From 1905 until 1942, the long-term “ride out the bump in the market” was 37 years. What if right now as an investor you were putting your money away for a long-term hold and you knew it wasn’t going to go up for 30 more years? In the 1960s, my dad said I should put money from my paper route into a mutual fund. So I did. I put in $600 and 20 years later I had $400. I lost $200 in 20 years, but my dad, who was saving for retirement during the ‘60s and ‘70s, saw his retirement dream decimated by a stock market that didn’t go up.
Q: One hundred million Americans have hired mutual fund managers, yet you call investing in mutual funds, following the third myth. Why?
Phil: Fortune magazine did a study a couple of years ago and found out that only 4% of the mutual funds in the last 20 years beat the market at all. And that means if the stock market doesn’t go up, neither does your 401K. Now, there are about 100 million Americans who are in serious trouble for their retirement and many of them may not even realize it. The early group of baby boomers is starting to turn 60 this year. But the average boomer has only $50,000 to retire on. Listen to the rock and the hard place they’re in. They put it away at 4% and 20 years from now, they’re going to have only $100,000. On the other hand, if they go out there and try to make a high rate of return, say 15% or 20%, and don’t know what they’re doing, they could lose their $50,000 and then what do they have? Can they count on Social Security?
Here’s what I’ve discovered. If you combine the simple rules of investing that have worked for 80 years, along with tools that are on your computer, the average person out there can make 15% a year and it only takes about 15 minutes a week.
Q: I’ve always heard that I should be wary of the claim that I could earn a return as high as 15%. Isn’t this too good to be true?
Phil: Ben Graham, Warren Buffett’s teacher, famously said that high rates of return are not related to risk at all. They are related to what you know. Obviously, if you don’t know anything about investing you should stick to an indexed mutual fund. But just a little knowledge is all you need to make 15% a year.
Q: How do I start?
Phil: It’s simple. First, identify a really wonderful business that you love. You know great companies because you spend money with them: Bed, Bath & Beyond, Chico’s, Budweiser, Harley Davidson, and Whole Foods Market are a few. You want to buy it on sale. You never pay retail. When it stops being on sale, you sell it, and then you go find another one and repeat it over and over again, until you get rich.
Q: What do you mean by “on sale”? How will I know a company’s sale price when I see it?
Phil: By knowing what this company is worth and checking your Internet tools regularly. Here’s how. There are analysts whose job is to figure out how fast Bed, Bath & Beyond or Whole Foods are going to grow. They set up a system, available on your computer now, where you click a button and it gives you that information. The only other part of the equation is: How much money do you want to make per year? Personally, I want to make 15% a year. That’s my minimum acceptable rate of return. So, if I know how fast the company is going to grow then it’s easy to grow today’s current price forward ten years and figure out what it’s going to be worth. The computer does that for me automatically. Then it tells me that if I want to make 15% a year, here’s the retail price, or what I call the sticker price. But I never pay retail, and neither do you. You don’t go down to the car dealer and pay the sticker price. So, we take 50% off of that sticker price; this is our on-sale price. I also call it a margin-of-safety price, because it is half of what the business is worth. Finally, it’s time to look at the actual market price and see if you’re going to be buying this business right away or not. You buy it when the market price matches or is below your on-sale price, your margin-of-safety price. Then you sell it when the market price gets back up to the sticker price.
Q: How much time will it take me to create a good list of companies that I like and manage them as a Rule #1 investor?
Phil: Figure about four to ten hours of research per company that ends up on your Watch List—those companies you may want to buy. You won’t put several hours into each one you look at, only the choice few as your list gets narrowed down. It takes me about 15 minutes a week to review my portfolio and run my numbers. Many weeks, I spend less than a minute a day because I have a fairly short list of businesses that I am interested in owning and good tools that do most of the work. We don’t diversify; remember that’s a myth. We only want to own four or five. Why? Because we don’t have time to follow more. We have to do our research and keep knowledgeable to understand what we own. Beyond that, personally, I’d rather be snowboarding or riding my horse in the mountains.
Q: I’ve been making a nice return with a three-way split: real estate, bonds, and stocks in mutual funds. Why should I switch financial horses midstream? What’s my safety net?
Phil: I’ve spoken before roughly 2 million people about this, and I’ll tell you what I tell them. Real estate is great. I have a lot of it. Bonds give you a low, safe return while you’re figuring out what to buy next, but unless you are already rich, you can’t plan on retiring with the income from bonds. And mutual funds are only good if the stock market goes up. Unfortunately, we just had the biggest bull market in history, so now the market is likely to go nowhere for quite a long time. Most people are so unprepared for that little problem they don’t even want to consider the possibility. There’s no safety in sticking your head in the ground. Your only real safety net in this world is to have some knowledge about how to invest properly and take responsibility for your own financial future.
Q: What do I have to know to do this?
Phil: We have to know just four things to buy a wonderful business at an attractive price. In essence, Rule #1 is about being a good shopper and building your safety net by using what I call the Four Ms. The Four Ms are Meaning (does the business reflect your values?); Moat (does it have a wide “moat” to protect itself from competitor’s attacks?); Management (is it well managed?), and Margin of Safety (is it on sale for 50% off retail?).
Q: The federal government and most financial analysts say we need about ten times our annual salary or a million dollars to retire on. How can all those boomers you mentioned go from $50,000 to a million dollars and retire?
Phil: The answer is they can’t. It’s not possible. The only reason most analysts think we need a million dollars is they plan to have us invest in a bond that’s going to pay us practically nothing. So they say we need this huge pile of money. Instead of doing that, now we’re knowledgeable, we know we’re not at risk if we buy a really wonderful company when it’s on sale. And you know what? All you need is $300,000 to make $4,000 a month for your whole retirement, and that doesn’t include Social Security. If the average boomer can put away $300 a month, in 10 years, he will have his $300,000, if he compounds money at 15% a year.
Q: Will I need a broker to invest money in the market?
Phil: You will need a broker but you don’t need to pay a lot of money per trade. Somewhere between $5 and $14 is the most you should pay. Use any online search engine, such as Google, and look for an “online brokerage.” You’ll get a list of websites. Pick a brokerage, call the toll-free number and an informed person will guide you through opening an account. You may choose a brokerage that has a brick-and-mortar office nearby, but that’s not necessary. You can do most everything these days over the Internet or through the mail.
Q: Do I need high-speed Internet access?
Phil: No. You can do this easily with dial-up. And if you don’t have any Internet access, visit your local library, Internet café, Kinko’s, or wherever you can access the Internet cheaply and easily in your area. These days, it’s not difficult to find Internet access, and with a little practice, it’s quite painless to learn how to navigate the Internet.
Q: Let’s say a smart person looks at a company, does all the math, sees vast potential, but no fund managers agree and the stock price never goes up. Isn’t the key to investing predicting what most people will do—in other words, stepping into the shoes of the majority and seeing the market as they see it?
Phil: This question relates to speculating and stock investing. I cannot reiterate this enough: As Rule #1 investors, we have to act as business buyers buying businesses—not stocks. We don’t care what others are doing. We don’t care about the stock market. All we want is to buy a wonderful business at a great price. We know we are going to make money because Mr. Market always prices things correctly…at some point. And you can take that to the bank.
Q: Is there anything to be gained by balancing a portfolio with bonds, so that in years of flat equity returns when bonds are riding high, Rule #1 investors can participate somehow?
Phil: Try to remember this: I don’t care if you are buying real estate, stocks, private businesses, gold coins, antique cars or bonds, Rule #1 isn’t about “balanced portfolios.” It’s about buying a dollar of value and only paying 50 cents for it. So if you know bonds are cheap, buy them. And remember that there are wonderful businesses available at attractive prices in almost any kind of stock market condition.
Q: What are the tax consequences of buying and selling stock regularly?
Phil: If you are using one or more of the many IRA and other retirement plans, there are no tax consequences. Inside an IRA you can buy and sell as much as you want and you don’t pay tax on the gains. If you work for a small business or are self-employed, you can put thousands of dollars into an IRA every year. It is a huge advantage. The key is to have the most tax-savings account possible and be able to freely buy whatever you want in the market with no restrictions. You want the account to be “self-directed,” meaning you control it.
Q: Have you ever made huge mistakes?
Phil: Sure, I’ve made big mistakes, but I haven’t made any that cost me my money. I lost some of my gains because I held on too long. Without naming names, I bought into a software business once that made me a million dollars on about $500,000 invested, but I thought it would go to $20 million. It did, but it was massively overvalued and then, surprise, it crashed back down. I got out with my million, but just barely. From this I learned to unload at or just above the sticker price, the Rule #1 name for the price of a business that’s fair—that’s neither overpriced nor under-priced.
Q: Is there a website where I can get help with all this Rule #1 activity?
Phil: Absolutely. Mine.
This series sponsored by Gannon on Investing, the value investing blog and podcast.
. My questions are in black, while his answers are in red. 
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