What does a former river adventure guide know about the stock market? Can a Vietnam-era Green Beret who lived in a tent down by the river for years

Transcription

1 What does a former river adventure guide know about the stock market? Can a Vietnam-era Green Beret who lived in a tent down by the river for years show anyone how to grow their money into a nest egg that potentially sets them well for retirement? Phil Town is the man who answers those questions not only ably but convincingly. Mr. Town, a multi-millionaire investor and motivational speaker, is the author of Rule #1, a guide to value investing that takes the reader by the hand and shows them how to equip themselves with online stock evaluation tools (for free) that help identify businesses that Mr. Town says adhere to his model for value and growth potential. Rule #1, according to Mr. Town, is to not lose money. If the reader follows Mr. Town s strategy of finding a wonderful company at a great price, they can be assured to not lose money in the long run. According to Mr. Town the whole process of finding these businesses should only take 15 minutes per week once you know what to look for. Not that he knew what to look for in the beginning, nor was he even much aware of the stock market. A Vietnam vet who became a river guide when he returned from the war in the late 1970s, Mr. Town was satisfied with his liveoff-the-land subsistence. Then on one of his whitewater treks in 1980 Mr. Town guided a group of travelers who got in a life-or-death race for survival against 1 of 6

2 the current. One of the rafters he saved was a man he refers to in the book as the Wolf, an investor in the Benjamin Graham and Warren Buffet mold. As thanks for saving his life, the Wolf taught Mr. Town how to evaluate companies and their stocks. His book, Rule #1, is devoted to teaching the reader how to apply the guidelines the Wolf gave him. The information in Rule #1 is nothing ground breaking. The principles are strongly rooted in the techniques of Benjamin Graham and Warren Buffett and Mr. Town readily admits to these men as his mentors. But the book cuts through a lot of nonsense and gathers together a strategy that can be readily applied if you know your way around MSN Money Central and are willing to pick up a calculator or even program an Excel spreadsheet. There s also websites, reader forums and podcasts that provide plenty of help and amplification. Mr. Town focuses on how to identify a great business through fundamental ideas he calls the Four Ms: Meaning, Moat, Management and Margin of Safety. Readers are asked to think of the stock as if they were buying the underlying business lock stock and barrel and owning it for at least 10 years or until they retired. Thinking in such terms, Town encourages the reader to look around them and search for established businesses that have special Meaning to them. For Mr. Town, Harley Davidson is a business that has meaning since he s a motorcycle enthusiast. Once Meaning is established, look for a Moat, or a 2 of 6

3 quality that separates that business from its competition. There are several kinds of Moats: Brand, Secret, Switching, Toll and Price. The more kinds of moats apply, the more unique the business. If the business has an adequate Moat, Mr. Town moves on to study Management. He s looking for executives who truly hold an ownership kind of stake in their company, people who are devoted to growing a business and not necessarily keeping a Board of Directors happy. Mr. Town suggests poring over company annual reports and internet profiles reading of the CEO, President, Operations Officer and other top-level executives. If the company has good management that is driven and devoted to the company, the last M can be sought after: Margin of Safety. Taking Mr. Buffet s idea of getting 50 cents for a dollar of value, Mr. Town has created a series of calculations that derive the Big Five numbers used to calculate a future share price for the business, a Sticker price and an acceptable entry point to buy. The Big Five numbers examine Return on Invested Capital, Sales growth, Equity growth, Earnings growth and Cash growth. Mr. Town guides the reader through how to derive the numbers by using the MSN Money Central website. Good candidates ideally have 10 years of past data to examine. Mr. Town s own blog site ( and the book s website ( present online calculators for these numbers 3 of 6

4 while a reader-run forum ( includes reader created Excel spreadsheets that query MSN Money Central for specific data on an individual stock. Once the Big Five are calculated, Mr. Town calculates an estimated stock price 10 years into the future that factors in at least 15-percent growth. From that future stock price a Sticker price is derived that is 25% of the 10- year price estimate. That is the price you might be willing to pay for 15-percent growth at fair value. But because Mr. Town is looking for stocks with a Margin of Safety, the entry price (or MOS Price) is half of the Sticker. That is the price you might be able to buy the business right now and have a lot of room for error. Mr. Town also includes some technical analysis of the stock s chart to determine if it s OK to buy or not. He uses a 10-day Moving Average, Stochastics and the MACD histogram to plot whether the big fund managers (who he says control 80 percent of the money in the market) are moving money into or out of the stock. Because these fund managers cannot move funds all at once, it sometimes takes weeks for them to make their move. The technical analysis tools help the individual investor see if they are about ho ride a wave or get caught under a falling knife. 4 of 6

5 Mr. Town s strategy intrigued me to use my programming skills to whip up an Excel spreadsheet of my own that calculates all of his numbers. I routinely plug in a stock symbol and see if it s at the MOS price right now. My last three stock purchases have been made using this strategy and all have lost less percentage-wise than the recent market downturn as a whole. With the market being a bit bearish these days it s a little easier to find businesses at their MOS price. But it s hard finding businesses that meet the Four M criteria completely. My penchant for tech stocks has been curbed substantially using this strategy because most of those businesses have short histories or have long runs with no earnings. Does it take 15 minutes a week, as Mr. Town advertises, to do this analysis? That s not been my experience. It takes more like minutes per stock to properly do all of the research Mr. Town advises. Still, that is a short amount of time to find a business that could potentially ring up big profits. While he shows readers the free way to get all the information they need, Mr. Town is also an avid user and paid supporter of InvesTools, a fee-based online investment research suite that some users report cuts that research time dramatically. I ll stick to MSN for now. I did not agree with Mr. Town about his advice to not diversify, but instead plow at least $2,500 but no more than $10,000 into one business. Mr. 5 of 6

6 Town is against Modern Portfolio Theory at its heart. MPT diversification, Mr. Town reasons, will spread you too thin to make money. Mr. Town s own style of diversification is to let the investment grow and once you make $20,000, put $10,000 down on another business and keep growing that way until you have five businesses. Mr. Town advises not to get into the stock market until you have at least $2,500 to apply to a business. Rule #1 is a great book for novice investors looking for a place to start. The book is written in a non-condescending how-to manner that s easy to follow. And there s lots of help from companion websites and Mr. Town s own podcasts. The ideas Phil Town explains are all solid ways to evaluate a business. He advocates research before leaping into an investment. Mr. Town encourages readers to paper trade until they are adept at the calculations and are convinced the strategy works for them. Mr. Town s favorite catchphrase in the book, the ending of all of his blog entries and podcasts is Now go play. It embodies his view that investing does not need to be so labor intensive that it gets in the way of ordinary life. While it may take a bit more time than 15 minutes a week to do the calculations and evaluation he outlines, Rule #1 is well worth the time. 6 of 6