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.
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