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Foolish Book Review: "Rule #1"

By Tom Taulli - Updated Oct 24, 2017 at 4:39PM

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Phil Town offers an easy-to-follow guide for using strategies from Warren Buffett and Benjamin Graham.

For new investors who want a simple approach for mimicking legendary investors Benjamin Graham and Warren Buffett, Phil Town's Rule #1 is a good start. However, the big flaw is that the author makes investing look too simple -- implying that somehow, by working 15 minutes per week, you too can build your own miniature Berkshire Hathaway fortune.

After a stint in Vietnam as a Green Beret, author Town took up a career as a rafting guide. By age 30, he met his mentor, "Wolf," who taught him Rule #1. Actually, it refers to Buffett's famous quote: "There are only two rules of investing. Rule No. 1: Don't lose money. And Rule No. 2: Don't forget Rule No. 1."

According to Town, he parlayed a borrowed $1,000 into $1 million within five years. Then again, if you check out his website, it looks like he makes a good amount of money from his motivational talks as well. Town is a skilled promoter; he has his own blog, podcasts, and even a MySpace page.

Such cheekiness is usually a turnoff for me, but his book nonetheless provides valuable investment insights.

A stack of books.

Image source: Getty Images.

Town's main thesis is quite Foolish: Buy "a wonderful business at an attractive price." This leads to Town's Four Ms:

Meaning: Town promotes the New Age concept that you must have a passion for the business you own. Huh? Then again, Town is a motivational speaker, and as a result, the book sometimes sounds like a rah-rah convention speech.

Management: Town offers few concrete details here. He advises readers to do a Google search and find CEOs who are "owner-oriented" and "driven." According to Town, if you do this, you will avoid implosions like Enron and WorldCom.

Moat: Buffett defines a moat as a "durable competitive advantage that protects it from attack, like a moat protects a castle." On this point, Town's argument seems much stronger. He breaks a moat down into five components:

  • Brand, which means a company can charge a premium price because of consumers' trust in it.
  • Secret, a patented technology or trade secret.
  • Toll, an exclusive control of a market, like a utility.
  • Switching, which means a product has become so central to a company that it's tough to leave.
  • Price, the ability to be the low-cost provider.

Town uses a variety of factors to identify a moat, such as 10%-plus growth rates (for 10 years) in return on investment capital, sales growth rate, earnings per share, book value, and free cash flow.

Margin of safety: This means buying a company at a steep discount to its intrinsic value. (Town calls it the "sticker price.") Actually, Town's model to calculate intrinsic value is fairly easy, involving only a handful of ingredients (earnings per share, the price-to-earnings ratio, and growth rates of earnings). He uses a variety of examples, including Dell, GM, and Harley-Davidson, and provides instructions on how to use online services like Yahoo! and Microsoft to find financial information about companies.

Unfortunately, at times the book is confusing. On page 41, Town tells us that we need to buy stocks as if we are going to hold on for 10 years. Then, in Chapter 12, he talks about how you can trade in and out of stocks using technical analysis tools.

Town can also be repetitive. For example, the last chapter is a 19-page Q&A, which is mostly a rehash. It's something you can skip.

Finally, Town makes a bold statement: By using Rule #1, you can easily make 15% per year. Well, if you can do this -- and only spending 15 minutes per week -- don't be surprised if Buffett personally calls you for a job interview.

Interestingly enough, Town provides no statistics to back up his claim. He doesn't even give any background on his own investment track record. (He does say he bought stock in Google and made a big profit.)

All in all, if Town had either backed up his claims or refrained from making such bold statements, tightened the narrative, and provided some more consistency, his book could have been a standout. Instead, it's a fairly good primer for newbie investors seeking core principles of investing. More importantly, once you learn these concepts, you can read the true book on the topic, Benjamin's Graham's classic The Intelligent Investor.

Dell and Microsoft are both Motley Fool Inside Value recommendations. Dell and Yahoo! are Stock Advisor selections.

Fool contributor Tom Taulli does not own shares of any company mentioned in this article.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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Stocks Mentioned

Berkshire Hathaway Inc. Stock Quote
Berkshire Hathaway Inc.
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$427,405.00 (-0.56%) $-2,425.00
Microsoft Corporation Stock Quote
Microsoft Corporation
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Alphabet Inc. Stock Quote
Alphabet Inc.
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$2,963.73 (0.62%) $18.34
Berkshire Hathaway Inc. Stock Quote
Berkshire Hathaway Inc.
BRK.B
$283.72 (-0.44%) $-1.25
Dell Technologies Inc. Stock Quote
Dell Technologies Inc.
DELL.DL
General Motors Company Stock Quote
General Motors Company
GM
$60.78 (-1.22%) $0.75
Alphabet Inc. Stock Quote
Alphabet Inc.
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