Comments: New Rating for Rule #1

As many of you know, we had Phil Town Day at Free Money Finance on Monday. The day centered on Phil's book Rule #1 that comes out March 21. For those of you who missed any of those posts, here they are:

• Phil Town Day at Free Money Finance: Phil Town's 10-10 Rule
• Phil Town Day at Free Money Finance: Rule #1 and the Four Ms
• Phil Town Day at Free Money Finance: Phil's Podcast and Some Revelations
• Phil Town Day at Free Money Finance: The Five Moats
• Phil Town Day at Free Money Finance: $1 of Value for 50 Cents
• Phil Town Day at Free Money Finance: An Interview with Phil Town, Part 1
• Phil Town Day at Free Money Finance: An Interview with Phil Town, Part 2

My initial review of the book gave it only four stars, but I started to re-think my rating as I learned more about Phil's teaching. I was thinking of giving it a new rating, but thought no one cared. Then I got this comment from a reader:

How many stars would you give his book after the interview cleared up some of your questions about its claims?

So I guess at least someone cares/is paying attention. ;-)

But the comments didn't end there, though. There were a couple that were critical of the book. Here's the first:

What's so hard about this? Just pick the stocks that everyone else has overlooked right before everyone finds them. Come on!

Anyone who has bought stocks before knows this is pure rubbish. And to use Warren Buffet as an example of how well this strategy works is laughable. Buffet doesn't touch anything until his army of accountants, MBA's and lawyers have thoroughly torn a company apart. And even then he doesn't wade in unless he's got a seat on the board.

Another example of those who can do and those who can't sell books.

Seems like a pleasant, well mannered guy though. :)

Ha!

Yes, this is one thing that still concerns me about the book and its promise -- time. It's going to take a lot more than 15 minutes a week to manage stocks Phil's way. Now Phil does say that it will take 4-10 hours for EACH stock you will want to CONSIDER for a purchase. Still, this might be on the light side time-wise.

The next comment was made in the same spirit as the first:

The real question to ask of Town is, "can you consistently beat a diversified portfolio of index funds over the long term". Phil Town isn't a scam per se, it's just really expensive, really bad advice. Holding a small number of stocks is really risky, no matter what Town says. Holding a large number of value stocks in an index fund is much, much less risky, but will still give you above-S&P500 returns. A stock might be "underpriced" according to Town's system, but who knows if it will become "rightpriced" while you're holding it?

The market is random and, because it's a market, half of the people are going to better than average and half are going to do worse. Value stocks have, as an asset class, historically outperformed the S&P 500, and no one really knows why -- maybe there's more risk, maybe they're just not popular.

Town sounds to me like the new Charles Givens (of "Wealth without Risk" fame). It will be interesting to see if soon there's a flood of blogging/comments by people who lose a bundle with this methods.

Oh yeah, Charles Givens. I remember reading his stuff as a teenager. Wasn't he just the greatest? ;-)

Anyway, I'm sure Phil won't be pleased to be compared with him and honestly, I'm not sure it's a fair comparison. Phil does have some sound principles. Charles? Not so much.

But something kind of still bugs me about Phil's book. I talked about the claim (15% return with no risk in 15 minutes per week) and not believing it, but I'm past that a bit (see comments below). But something just doesn't sit right about Phil's advice on 10-10 stocks and his answer to one of my interview questions (see question #2). My feelings are summed up in this comment a reader left:

I also forgot to add that first Mr. Buffett, Jr. (Phil Town) touts his 10-10 rule and then when asked about specific stocks recommendations says, "I don't stay in anything very long".

So which is it? 10 years or 10 minutes? I'm confused.

Me too.

But maybe there's an explanation. This comment followed:

I read an advanced copy of Phil's book. His 10-10 rule is perfectly consistent with the fact that he's not necessarily in a company for very long. That's because he advises people to FIRST identify great companies they'd support for the long haul; and THEN, to buy & sell these same companies over time so that you avoid ever taking a loss on them. As he says, any company, no matter how great, can lose half its value overnight due to an irrational market and the ensuing movements of institutional money. So you can love Whole Foods, let's say, and want to own it for 10 years, but that doesn't mean you should be sucker enough to lose half your investment in it just because fund managers sneak out over night while you're sleeping.

The reason he advises buying & selling is because he's teaching people a method by which to avoid taking a loss, ever. If you learn how to read the indicators you can sell your holdings in a company before it goes down in price, then buy it back later before it goes back up again. This is how he makes money with the method, and how others do as well.

His book is all about how to use free tools like MSN Money to do all of this. No expensive seminars required.

That's not how Warren invests, though.

But to be fair, I went back and re-read all the posts and skimmed the book again. As they say in the NFL, "upon further review" there's a lot about the book that I do like. The main turn-off for me initially (which is still a turn off to be honest) is the claim of 15% return without risk in 15 minutes a week. The book is more like a 10-12% return with lower than average risk in several hours per week (or more) initially, then dropping to less than that after the initial investment of time. However, there is that inconsistency above that makes me wonder about it.

Overall, I'd say the book is "fair." My suggestion is to check one out from the library, look it over, and if you like it, then buy it. That's what I do with most books anyway and I end up buying only those that I think I'll read/refer to more than once. (And this is what I would have done with this book if they hadn't sent me one free.)

Based on this assessment, I decided to bump the book's rating up a notch. Based on my 0 to 10 star system Rule #1 now gets: 5 Stars.

Comments

[Steve Mertz]

5 Stars!! You are generous Free Money.You are right to question the time element. When I was running our portfolio of 4 stocks and 3 mutual funds it increased in value from $300k to $1.2 million...and I spent a lot more than 15 minutes a day. Ps. when Buffet invests in a company it is almost always a convertible issue that pays him a dividend while he waits. The same deal is not available to you and I :)

[Moussa]

Not to judge or anything, but I feel like you're spending too much time promoting a book that you only give a 5 stars to.

[Tim MMF]

I'm curious why you took the time to reconsider a book that on your scale is only fair? I agree that 15 minutes per day cannot gaurantee 15% return with no risk.

I might have to thumb through this book next time I'm at Powell's.

[FMF]

Moussa -- Ha! I'm sure Phil's book people don't consider this "promotion." They're probably praying I stop talking about it given my rating of 5 (BTW -- a rating of 5 on my scale -- click through the above link for details -- basically says you should check it out at the library, not buy it.)

[FMF]

Tim -- Basically I felt like I'd spent so much time learning more about it (especially with Phil answering my questions) that it deserved another look. It the end, it went up slightly -- from a 4 to a 5 -- but my recommendation is still the same overall: get it from the library.

[Mark]

Greetings!
I'm a big fan of Phil's so I feel the need to defend him. I first saw him at a "Get Motivated" seminar about a year ago...I was there to see someone else, but Phil's presentation was one of the best. Before seeing Phil, I had no interest in investing, but that has all changed. I started following his advice from his blog and we exchanged a few emails. When I finally got comfortable with the idea of investing in the market, I found one company and researched the bejeezus out of it. I ended up purchasing a few thousand dollars in this company's stock at the end of June '05 and today, I'm up over 60%! Did it take more thn 15 minutes? Sure. Will the next investment I make take more than 15 minutes? Probably. Does Phil's method work? You bet it does! And he never tried to sell me a thing, in fact, he told me where to look on the Internet for FREE information.

My two cents worth...thanks!

[twb]

Generous FMF, very generous.

[William Tanksley]

I haven't started trialing Phil's method, and it'll be a while before I do (I agree that he's understating the time, although it MAY be because he's got good software, which he mentions in his podcast).

HOWEVER, all the people above who are claiming that he's utterly wrong and giving very very bad advice -- NO. You are operating under Modern Portfolio Theory, and as such you assume that the market is perfectly efficient and risky returns are random. Both assumptions are highly questionable, have never been proven, and people provide counterexamples every day. This doesn't mean that the efficient-market-hypothesis is false per se, it just indicates that there's more to it than Modern Portfolio Theory considers (which is no surprise, it's just a simplification).

Personally, I believe that the market is efficient as a whole, but the efficiency is caused by people buying and selling based on information they possess. Before they acted on the information, the market did not "know" that information. I also believe that although MPT offers a great way to manage risk when you're not able to control it, its assumption that the normal distribution applies is inaccurate.

(Oh, and by the way -- to the person who claimed that 50% of the Market will experience losses "because it's a market" -- easily disproven. 50% of the _futures_ market will experience losses because it's a zero sum game. The majority of stocks produce a profit because the economy is growing; it's not a zero sum game. And a market is by definition composed of trades which are profitable at the time to both sides: both the "buyer" and "seller" are giving up something they value less in return for something that they value more, so there's ALWAYS a gain to both sides.)

A good fun read that might show a little bit about the controversy in Modern Portfolio Theory would be "Fortune's Formula". It's not really about the controversy, but it manages to show it and make it interesting. (It's not about how to invest; it's more of a history, but as interesting as any sci-fi I typically read).

-Billy

[Phil]

Relative to the market average (not in absolute terms), half of investment dollars will beat the average and half will not. This is what a market average is, so it's not "easily disproven".

Graham divides stock buyers into speculators and investors. He spends a lot of time in The II arguing against speculation, and that's what it seems like Town's method is. He wraps it up as investing (e.g., the 10-10 rule) but it's really about pulling the plug when the arrows tell you to. Sure, you might be able to get a 60% return once or twice, but can you consistently do it over the long term? Probably not.

[joel]

I find it interesting how many people have firm opinions about a book that they haven't even read... It sounds pretty good to me. I've been following the blog almost since the beginning. It'd be interesting if a group of people paper traded following his advice, then wrote up their results.

[twb]

Billy, just to set the record straight, MY opinions are based upon 22 years of investing in stocks, 13 of those as my sole source of income, not modern portfolio theory...whatever that is.

[William Tanksley]

TWB, thanks -- I do respect your experience (mine is much briefer) -- but your speech makes it very clear that you've been taught by people who use modern portfolio theory. That's no insult; MPT is very useful. It's also true that it has huge shortcomings; there's a lot of things that it assumes that just aren't true.

[Burton]

Interesting how everyone seems to be judging this based on preconceptions. Here's the ones I noticed.

- It's dangerous not to be diversified.
- His method is speculation because you sell when a company becomes overpriced.
- Use of technical indicators that warn when big funds are making a move makes him a speculator.

Also, how did you come to this conclusion:
"The book is more like a 10-12% return with lower than average risk in several hours per week (or more) initially, then dropping to less than that after the initial investment of time. However, there is that inconsistency above that makes me wonder about it."

????

I'm trialing his method next week.

[FMF]

It's an estimate based on 15 years of investing experience.

[on the fence]

Does this system work for all markets? Can you find companies that you know, and like that the market has undervalued by 50%.
His seminar also talks about covered calls why is this not entering into the conversation when talking about following his method?

[Jason]

I just saw Phil Town on MSNBC. What a used car saleman this guy is! How could you say that mutual funds are a bad idea, especially index funds? His philosophy is based on finding a stock you really like then investing in it. HUH? How do you decide which stock you really like? Unless you are a finance professional, how could you have the analytical skills required to pick the right stock? Aside from that, there are many facors beyond a single business that could sink a stock - ie macro-economic trends. The whole idea of diversification is that none of us know how any one stock will perform, because WE DON'T! This guy is selling books and nothing more.