Phil Town’s rule #1 investing


Rule #1 by Phil Town is not a general personal finance book, and it's not a book for beginning investors — it turns a lot of conventional investment wisdom on its ear. The book explores a philosophy ascribed to Columbia University's Benjamin Graham (author of The Intelligent Investor), and popularized by Graham's student, Warren Buffet (perhaps the most successful investor of all time).

What is The Rule? “There are only two rules of investing: Rule #1: Don't lose money […] and Rule #2: Don't forget Rule #1.” Town writes: “Most Americans are trapped in mutual funds that, at best, ride the waves of the market.” He believes that his method can help investors break free from these cycles.

At its heart, Town's philosophy is simply “buy low, sell high”. He's not pushing a get-rich-quick scheme (though at times, especially early in the book, that's exactly how it comes across). But he's certainly encouraging his readers to abandon traditional “get rich slowly (and surely)” techniques.

Town argues that there are three myths of investing:

  1. You have to be an expert to manage money.
  2. You can't beat the market.
  3. The best way to minimize risk is to diversify and hold for the long term.

Dollar-cost averaging will not protect you, he says. These statements may make some nervous about Town's philosophy. In the recent Wall Street Journal article about personal finance books, one expert cautioned:

“Any book that suggests it has a new way to riches should probably be a little suspect,” says Prof. Kenneth Froewiss, a finance professor at New York University Stern School of Business. A good book about personal finance, he says, always elaborates on three simple themes: Save early, know your risk tolerance, and diversify.

Town says that “knowing you will make money comes from buying a wonderful business at an attractive price”. If you can find a wonderful business, know what it's worth as a business, and then buy it at a discount, you will become rich. If you repeat these steps, you will become very rich. “The price of a thing is not always equal to its value,” he says, arguing against Efficient Market Theory. He points to the recent Tech Bubble as an example. (As you might expect, Town doesn't care for A Random Walk Down Wall Street.)

Rule #1 describes how to evaluate the investment potential of a business. You want:

  • A company that means something to you (you know its inner workings because you're passionate about it).
  • A company that has a wide moat, or protective buffer (whether this is a competitive advantage, a huge cash reserve, or an exclusive license).
  • A company with excellent management.
  • A company with a margin of safety (that is, a company priced so low that even if you miscalculate its target price, you're not going to lose money).

Using Town's method, an investor creates a watch list of companies that meet each of these four criteria. Each company's financials are checked against five measures of fiscal health (return on investment, revenue growth rate, earnings-per-share growth rate, equity growth rate, and free-cash-flow growth rate) over periods of one, five, and ten years. If a company's numbers look good, the investor develops a target price for it.

And then the waiting begins.

When the market price reaches 50% below what the calculations show it ought to be, the investor fully commits himself. Sort of. Ideally, says Town, you would hold a company's stock forever. In reality, he argues that there are a couple of times to sell:

  • When a company has ceased to be wonderful.
  • When the market price is above the sticker price.

It is here that the Rule #1 system begins to resemble day trading. When you've found your ideal business, and when it passes the Rule #1 criteria and is selling at half-off the sticker price, you begin buying and selling the stock based on market conditions. You use a set of tools to make your decisions, constantly moving in and out of the stock. You're committed to the stock for the long haul, it's true, but you're attempting to use market timing to maximize your returns. (Town stresses that these tools should not be used to find and value stocks, but only to time the re-purchase (or sale) of a stock to which you're already committed.)

The book jacket incorrectly touts this as a “fifteen-minute-a-week” system (which makes it sound even more like a get-rich-quick scheme). The author, though, is clear that more time is needed to make this work. He admits that constructing a watch list takes several hours per company. It's only after the watch list is created that the time investment declines.

I can't recommend this book, but that's because it's beyond my ken. I don't hate it. In fact, I find the ideas fascinating, even plausible, but I lack both the experience and the expertise to evaluate Town's system. It seems to be made of equal parts sound advice and gimmicks. I'd love to read a review from somebody more firmly rooted in investment theory.

One saving grace — and it's a big one — is that the system includes a built-in escape hatch. By using the “margin of safety”, you are buying heavily discounted stocks of good companies. It's unlikely that they could fall further. (But not impossible.)

For more information on Rule #1, check the following web sites:

  • Rule One Investor is the book's official site. It includes additional information, including handy calculators. (Which is good, because much of this system requires number-crunching.) Free registration required.
  • The Rule #1 Blog is author Phil Town's personal site where he answers questions and provides additional insight. I like the fact that Town makes himself publically available. This, too, makes me less inclined to classify this as a “get rich quick” scheme.
  • A review of the book at Fat Pitch Financials also seems ambivalent about the system. The author writes “I really wish Phil would have shared more information about his past performance using his investment techniques.” I agree.
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VinTek
VinTek
14 years ago

Oooh, I love it when financial writers identify themselves with famous authors like Graham and Buffett, then do the exact opposite by switching in and out of stocks. Of course, he’s going to wind up paying the full income tax rate on all his gains, since they’ll be considered short-term capital gains. He’ll also wind up generating pretty good-sized expenses on his trading. EMH is something I consider *mostly* accurate. Certainly bubbles in the market exist, which one might be able to exploit if daring, intelligent and lucky enough. But as we’ve seen with bubbles time and time again, the… Read more »

AK
AK
4 years ago
Reply to  VinTek

Nice comments VINTEK, just wanted to add that if you annualize Mr. Town’s claim of 1,000 X in 5 years, that comes out to 298% annualized. Can anyone find any stocks from the early 80’s where this would have been possible?

JLP at AllFinancialMatters
JLP at AllFinancialMatters
14 years ago

JD,

Good review. I haven’t read the book and don’t plan on reading it.

VinTek,

I AGREE 100%! I especially agree with his $1,000-to-$1,000,000 claim. I have yet to see proof of this. I asked him about it via email and he gave me a vague answer. I don’t want to publish it, but if you email me, I’ll be happy to tell you what he said.

VinTek
VinTek
14 years ago

Hi JLP,

I appreciate the offer, but I think I’ll pass. Based on your description, Town’s e-mail wouldn’t tell me anything anyway. Besides, it’s always easy to construct a perfect trading history if you already know where the stocks have gone (the old 20/20 hindsight). From what you say about the e-mail, he doesn’t even go that far.

Jim
Jim
14 years ago

means, moat, management, margin of safety…
sound like Buffett.

the problem with good companies at low ball prices is that it’s rare. a good company would have to be in dire situation. like the CEO getting arrested.
Would anyone/Phil dare buy Tyco in 2002?

J.D.
J.D.
14 years ago

Please note that while I entertain a healthy skepticism regarding Town’s claims and method, I believe that he’s trying to approach this from a rational, classical perspective. I think that from his point-of-view, he’s trying to use standard tried-and-true advice, but is just systemizing it. What I’d like to see is some sort of project that takes his method, crunches the numbers, and spews out results. It should be easy to look back and find companies that have made it big based on Rule #1 investing, right? And it should be easy to determine which current companies meet the criteria.… Read more »

JLP at AllFinancialMatters
JLP at AllFinancialMatters
14 years ago

“here’s a system for which we can easily measure performance, but there are no real measurement that I can find. Why not?”

Therein lies the catch-22 with value investing. You see if there was a system available to do such a job, the findings wouldn’t be useful because a lot of people would be doing the same thing, which is not what you want when it comes to investing. That’s why we don’t hear Warren Buffett telling us everything he knows about investing.

Ron
Ron
14 years ago

Never judge a book by its cover. I bought it, read it, did what he said, opened a Roth (the gains are tax free), and in one month I am up 12.5 percent AFTER commissions for just one month. Annualize that. FYI Buffet “dances in and out of positions” (Buffet’s own words in letters to shareholders). Moving in and out allows you to take advantage of the gains and minimizes your losses on the drops. It is working for me. TYC in mid 2002 was at 12 bucks. If you bought it and held on to it until today, you… Read more »

Justin Brand
Justin Brand
14 years ago

For those new to the Rule #1 process, I invite you to check out http://ruleoneforum.com This is an open discussion group dedicated to the teachings of Mr. Town and the Rule #1 Method. With nearly 1000 members and new posts/discussions daily, you will have access to volumes upon volumes of user-submitted information and insight. Our members have developed numerous automated techniques to aid you in the process of gathering a company’s “Big Five” and reaching an appropriate Margin of Safety. To date, we have have uncovered around 70 “gems” that meet or exceed the Rule #1 criteria. Ongoing discussions of… Read more »

Speculation Rules
Speculation Rules
13 years ago

It sounds more like Peter Lynch than Warren Buffet. The problem with deep value is normally it changes value so slowly – it may take a very long time to see your reward. That said, deep value investing is a workable system – if your personality matches the style. As to Professor Froewiss – the vast majority of people lose money long term, maybe it is time to consider a change. I will probably read the book eventually, thanks for the review. To gain even one good insight is worth the money and time. If you haven’t read Benjamin Graham… Read more »

Jim
Jim
13 years ago

Unlike most of the reviewers here, I HAVE read the book. Town goes to great length to explain that his information is nothing NEW but instead a way of describing to the common person (who is not based in — or afraid of — investing)how to get started. Yes, it is based on the same principles ascribed to by Warren Buffet, and Buffet’s professor from Columbia University, Benjamin Graham. However, it is much more readable I’ve heard than Graham’s classic, “The intelligent Investor”. I highly recommend the book. In fact, since incorporating his technigues, I have taken personal responsibility for… Read more »

Julie
Julie
13 years ago

Hello, I found a list of Rule #1 qualified stocls for sale on Ebay for $25 that has actually allowed me to kick start my Rule #1 investing! I was very skeptical but actually reviewed the list against my own MOS calculations, found several on the list (of 51 stocks in total) that had a good moat, were currently priced at MOS or below and that allowed me to invest right away. I felt it was a bargain that let me start putting Rule #1 to work right away but will let you be the judge. Here’s the link for… Read more »

Hazel
Hazel
13 years ago

Thanks for the tip Julie. I just bought a list of rule #1 companies from Ebay and I plan to start investing soon. For the critics of Phil Town, I suggest they read his book first.

Dave
Dave
13 years ago

Julie is the person selling the list on ebay. She goes around to various forums and posts as if she bought the list as a customer rather than disclosing that she is actually the person, or works for the people, who are actually selling the list.

I don’t have a problem with capitalism, but thought folks should know the truth about the list.

In fairness, I have not heard anything bad said about the list.

Jonathan
Jonathan
12 years ago

I found it to be quite frustrating finding Rule #1 stocks. Therefore I wrote a program to run on my servers.

Every day my server analyzes over 9000 stocks searching for companies that meet the following Rule #1 growth requirements:
Equity
Sales
EPS
ROIC

Approximately 1% of the publicly traded stocks meet the criteria above.

This report is generated before the market opens each trading day and lists stocks that meet the above requirements.

It also includes technical arrows and MOS.

I also offer a monthly subscription at the following location:
http://hyperdiversification.com/subscribe.aspx

Jason
Jason
12 years ago

The book is fabulous. Paul specifically tells you try the investing with “fake money” on his spreadsheets. Do this for about 6 months or so. How hard is it to follow directions. My 9 y/o daughter read the book and does the investing on the spreadsheet found on Paul’s website. She uses “fake money”. Hell, if her money were “real” she would have a gain of 25.4% since April 11, 2007. Why all the negative comments is beyond me. FOLLOW DIRECTIONS. Thank God for the book –

Jian-ping Gu
Jian-ping Gu
12 years ago

I have developed software based on the theory in Mr. Phil Town’s book “Rule #1”. My software can automatically acquire Big5 numbers from the web and to calculate the real worth of the stock. The only thing that the user needs input is the stock symbol. I am looking for serious investor(s) to help to improve/commercialize the software.

Ram
Ram
12 years ago

Hey Jian-ping Gu,

I would love to take a look at this software, I’ve been a follower of Rule #1 investing for a while and I may be able to help you point out flaws if any, email me, [email protected]

Actuary
Actuary
12 years ago

Phil Town is an utter moron who is making ridiculous money off of the same types of people who play the lottery every day or throw a ton of money into casinos. I saw this clown on a CNBC presentation about a year ago. He went on some rant about how mutual funds are a “scam” and steal money from you (aside: which in certain cases is somewhat accurate but certainly not in all fund families). The idiot then proceeded to throw out 3 stock picks which he said should be trading at double their value: Walgreens (WAG), UnitedHealthcare (UNH)… Read more »

mx4cc
mx4cc
7 years ago
Reply to  Actuary

For the record, if you check all three of those stocks, while they may have gone down some after March 09, all of them as of Aug 2013 have gone up 100%. Maybe Phil’s not too far off…

Patrick
Patrick
11 years ago

I have also read this book and recommend it highly. I have used the methods(with slight personal variations) and am making 25% returns in this market. Conversly, I am down 30% in my 401K mutual funds. I will stick with Town’s advise.

Keith
Keith
11 years ago

I attended the motivation seminar with some coworkers, and Phil Town was one of the speakers. I was like, who is this yo yo when they introduced him. I knew who Colin Powell, and Michael Phelps was, but not this guy. Well, it didn’t take long to realize that this guy was a good motivator. His enthusiasm was infectious and he got my attention. His personal story fits in well and he came across as a guy who happened to have luck on his side–probably because he worked hard and made his own luck. Anyway, I’m going to try it… Read more »

Tim
Tim
11 years ago

I have read the book and have been thoroughly impressed with the numbers. If you do not want to be burdened with all the formulas, check out stock2own.com and they will do it for you for free. Phil’s methods work.

Christopher
Christopher
11 years ago

There is a great quote that like by William Paley that sums up Phil Town’s critics. “There is a principle which is a bar against all information, which is proof against all arguments, and which cannot fail to keep a man in everlasting ignorance–that principle is contempt prior to investigation.” I have read Phil’s book twice and applied his principles to my stock investing. I can tell you that I average 40% returns and as of this writing have grown my account by 101% in the last 6 months. Best part about “Rule #1” was apparent during the recent market… Read more »

Eric Funk
Eric Funk
11 years ago

Good news guys – it works. 20% gains – 2007 through April 2009, while the market is down 40%, and my companies dropped 50%. The challenge for me is to not make it more complicated than it is. Once you find your great companies, just follow the rules and you’ll be fine. I know, I’ve tried it my way.

Dave
Dave
11 years ago

I use phil’s methods.. I actually wrote a script to scan for stock matching the criteria. I started with $5,000. 1 year later is was $25,000 today its over $100k. I use technical indicators to stay out when things are going south (2008/early 2009) and get back in when things are good. It’s not rocket science. It’s the same exact thing buffett does, you just don’t hold long term. There are companies that show up in the scans. Out of 7-8k that are scanned its about 1 to 4 at any given time. I love how no one has tried… Read more »

Johnnyb
Johnnyb
10 years ago

A great resource for finding rule #1 stocks is stock2own.com: http://www.stock2own.com It took me a long time and a lot of reading to find this site. Saves lots of time and the data is accurate and up to date. I don’t mind doing the digging and calculations on my own, in fact I recommend that you learn how to do it without the help of this site, but once you understand how to do them on paper, why spend the further time analyzing when it’s all here. This site is a big fan of Phil Town’s work and reports everything… Read more »

Randy
Randy
10 years ago

I’m a big fan of Phil Town’s books and workshops. His material is great for the beginning investor. I’ve done very well is a bad market using his stuff.

Here are other resources I found for Mr. Town: http://www.rule1investor.com

scott
scott
10 years ago

At some point, the SEC will check Phil out, just like they did with the other scammers from Investools, and likely find his trading records don’t match his claims either. Investools just paid a $3 million settlement for the lies, and some of their speakers paid $250k fine, and some who were under investigation, fled before they had to reveal their trades. Let Phil Town come forward with his trading records and prove otherwise. He has been a public speaker forever, selling all kinds of business products from stage. But if the truth were known he’s not a trader, and… Read more »

Christopher
Christopher
10 years ago

Hey Scott, Did you read Phil’s book? I have, several times, and I have implemented the system in his book and I can personally testify that it works. It works better than advertised. I have been following his method for over 2 years and have consistently pulled high returns. The first year I made 80% on my money, the second year I made 40% in the first quarter and then went to cash and took the rest of the year off. If he is selling snake oil, it sure works for me! I am still investing and doing well. I… Read more »

Jaime
Jaime
5 years ago
Reply to  Christopher

Hi Christopher. I just read your comment on Phil Town’s Rule One book. I’m being invited to a seminar by Phil and wonder how are you doing in your investing and if you still think Phil’s advise still works. I live in Los Angeles CA and would have to fly to Atlanta GA for the seminar. It will take some investment on my part and want to make sure it is worth it.
Thanks
Jaime

Camer
Camer
10 years ago

not a bad read but if you are looking for an investment system to make money this is not the way to go. too much broad sweeping generalizations of analysis. sets growth rates and required returns at specific levels and doesn’t account for accounting differences quality of numbers or prevaling market conditions. too much gimmicktry not enough numbers. just comes across as a guy not experienced enough in investing to be teaching people how to do it.

mike at AfterHoursInvesting
mike at AfterHoursInvesting
8 years ago

I agree that his math does not add up many times, and it seems like he should be a multi billionaire from his annual compounding return of 15% and “never losing money”, but he does reference stories from his past where he’s lost a lot not following his rule… i.e. losing 5 million investing in Steve Job’s failed NeXt platform that might explain where some of his big returns have gone. 😉

Quinton Hamp
Quinton Hamp
8 years ago

Is it just me, or is it weird that everyone who has had success with this system has earned exactly 40% ???

I hate spammers.

That said, thanks for the review. I’m just starting the book and was wondering if it actually is worth anything.

Perhaps I will open a fake account and try the principles out before putting real money in.

Jon
Jon
7 years ago

Some of these comments here are just moronic and show complete lack of any investing and financing experience – or comprehension. Yes, Phil Town is the real deal and his logic is sound – just as normal VALUE INVESTING is the real deal and its logic is sound. It worked with Buffett, Lynch and many others. If you took the time to actually read the book by Phil Town you’ll find out he is not trying to sell you anything other than education – you can get the book from the library if you’re too skimpy. If you’re curious about… Read more »

Karen
Karen
6 years ago
Reply to  Jon

I have been investing in both individual stocks & mutual funds over the last 15 years, and would consider myself fairly knowledgeable about investing. Phil happened to be a guest speaker at a conference I was at last week, and I was actually quite impressed with his enthusiasm and must admit learned quite a bit from the presentation. I never sensed in any way he was making a “get rich quick” sales pitch, but was instead passionate about people learning more about how to take their investment decisions into their own hands. I was especially impressed by his message of… Read more »

Karl
Karl
6 years ago

hi, I was new to investing before I read the book. I admit that Phil’s ‘1000 to 1,000,000’ in 5 years does seem a little far fetched and im not sure how much truth there is in that to be honest! However, I can testify that the methods seem to work. While I have not become super rich, ive achieved an effective return of 18% per year over the four years since I started – which is a much better return than any savings bank will give me. You need to spend a lot more than 15 minutes a week,… Read more »

Tomek
Tomek
5 years ago

Really would like to see Town’s record of “1k to 1mln in 5 years”. It sounds great, and I am afraid it only sounds…

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