Phil Town, author of “Rule #1: The Simple Strategy for Successful Investing in Only 15 Minutes a Week,” (Three Rivers Press, 2006/2007, $14.95) is a keynote speaker at the Star Ledger/Commerce Bank “Road to Personal Wealth” conference on Saturday, November 17, at 8 a.m. at Rutgers’ College Avenue gym in New Brunswick. Cost: $60 at the door, including breakfast and lunch. Call 908-797-8604.
Town maintains that, using his book, financial novices can study the stock market for just 15 minutes a week and get a 15 percent return on their investments with almost no risk. He claims that Rule #1 investing is practically immune to the ups and downs of the stock market (www.ruleoneinvestor.com). Some excerpts:
I didn’t invent the Rule. It was first set by Columbia’s Benjamin Graham and then, more famously, adhered to by Graham’s student and the world’s most successful professional investor, Warren Buffett. According to Buffet, “There are only two rules of investing: Rule #1: Don’t lose money…. and Rule # 2: Don’t forget Rule #1. The three myths of investing:
Myth 1: You have to be an expert to manage money.
The Internet has changed everything. The tools that used to cost $50,000 a year are available for less than two bucks a day and take only minutes a day to use instead of 50 hours a week. And the Internet tools are more accurate, more timely, and easier to apply than anything your fund manager had just a couple of years ago. All you need is a little instruction and a brief learning period. But don’t bother to ask your broker, financial planner/adviser, CPA, or fund manager if you should do this on your own. You know what they are going to say. It’s your money and you’re the only one who really cares about what happens to it.
Myth 2: You can’t beat the market.
This myth was started in the 1970s by, among others, Professor Burton Malkiel of Princeton University. His book, “A Random Walk Down Wall Street,” still sells. He influenced a generation of professors who, as a body, subscribed to what has become known as Efficient Market Theory (EMT). EMT says markets are efficient — that is, they price things according to the value. In other words, the price of the stock at all times equals the value of the company.
Buffet quips that he hopes business schools will turn out fund managers who believe in EMT so that he will continue to have lots of misinformed fund managers to buy businesses from when they price them too cheap, and to sell businesses to when they’re willing to pay too much.
Myth 3: The best way to minimize risk is to diversify and hold (for the long term).
Diversification spreads you out too thin and guarantees a market rate of return — meaning whatever happens to the whole market happens to you. Diversification is for people who have 30 years to go, have no desire whatsoever to learn how to invest, and are going to be happy with an 8 percent yearly return and a minimum standard of living in retirement.
As Rule #1 business buyers, we pick a few choice businesses in different sectors of the market. So even though we aren’t “diversifying” like mutual fund managers, we’ll be setting up a portfolio that reflects different categories of businesses. Our goal is to find wonderful companies, buy them at really attractive prices, and then let the market do its thing— which means eventually the market will price these businesses correctly at their value.
There are opportunities to buy wonderful companies at attractive prices —- they really do exist — if you’re willing to do your homework and say good-bye to mutual funds.
Rule #1 investing comes down to four straightforward steps
Find a wonderful business.
Know what it’s worth as a business.
Buy it at 50 percent off.
Repeat until very rich.
If you can answer a big unconditional YES to all four of these questions, the 4 Ms, you’ll know if this business is one you want to buy.
Does the business have MEANING to you? demands you buy it only if you’d be willing to make this business the sole financial support of your family for the next 100 years. In other words, you’d better know what you are buying, because if it goes down, your family is going to starve. It also demands you act as if you’re the sole owner.
Does the business have a wide MOAT? demands the business be able to defend itself against attacks by competitors, as if they were attacking armies trying to sack the castle. In other words, you’d better be able to accurately predict this business’s long term future.
Does the business have great MANAGEMENT? demands that you be confident that the people running the business are doing so as if it were their family’s only means of support for the next 100 years. In other words, you’d better be convinced they’re not going to rip you off for their short-term benefit.
There’s nothing better for sleeping well at night than knowing that some honest, owner-oriented, and driven person is out there thinking about how to make me money.
Does the business have a great big MARGIN of SAFETY? demands you know the value of the business and can get it on sale. In other words, you’d better be able to buy this business cheap enough that you can sell it later without losing money — even if you were wrong to buy it in the first place.
It used to take a lot of time to figure this stuff out, but now it’s fast with access to the right tools. You only have to find a few businesses you can say yes to, and you’re pretty much set for a while. From that point on, you just monitor your businesses and let the money roll in.