From Publishers Weekly
Starred Review. For amateur investors who admire the incredible returns produced by Benjamin Graham–Warren Buffett–style value investing but can’t figure out how to replicate these billionaires’ methods at home, Town’s investment guide is manna from heaven. A former river-rafting guide, Town learned how to calculate such crucial numbers as Return on Investment Capital and Equity Growth Rate from “Wolf,” a wealthy rafter whom Town saved from a rapid in …
Buy Rule #1: The Simple Strategy for Successful Investing in Only 15 Minutes a Week! at Amazon
I ordered this book sight unseen from Amazon because of the advanced reviews. If I had seen it first, I *might* not have bought it. But I’m still glad I have it anway.
What I really like about this book is that it explains key financial figures for calculating the future worth of a company and for deciding what a good price would be to pay for the company today (in terms of the paid stock price.) This aspect of the book is invaluable and is easily worth the cost of the book.
What I don’t like about the book is the presumption that you can just sit down, at any given time, and with a little research, quickly find a company that’s on fire sale and that will safely reap 15% a year or more, for many years out. It takes special circumstances to find companies in such positions. One of the author’s inspirations, Warren Buffet, has not found many such opportunities for years now, which is why he is sitting on 46Billion in cash. He can’t find anything to buy that’s cheap enough and that would meet the author’s criteria!
So the author is disingenuous in suggesting that you, after reading the book, and putting in a few minutes a week looking at web sites, can discover a gem that the greats like Buffet haven’t been able to find. Bargains like this don’t come along everyday. But they do come along over time.
And that’s why I ended up really liking this book. The author’s instructions on how to find such gems thrown into the trash by the market, when such situations occur, is the clearest, best, and simplest description I’ve come across (and I have no less that 3 sagging shelves of investment books.) I’m going to use the information the author gave so that, when the market tanks, say, I can pick up some of the great companies he describes and KNOW, because of his formulas, that I’m buying a jewel at a bargain basement price. I’d been looking for that information for some time, thus, in the final analysis, I really do value this book.
Overall this is the best investment guide I’ve found yet. Rule #1 is “Don’t lose money.” Fair enough; no one wants to lose $$. But how? The author answers that question. First, buy wonderful companies. For Town, that means companies with strong and consistent growth: 10% minimum average annual growth for EPS, free cash flow, sales, and book value for the last 10 years. Efficient, well-managed companies, with great return (10% or higher) on invested capital. Once you’ve found that company, determine the fair value, and buy it ONLY when it’s at a 50% discount, thus giving you a “margin of safety” against the vagaries of the “Mr. Market.”
He makes it sound easy, but it’s not. He admits that it can take 4-8 hours of research on each company to determine if it’s “wonderful” or not. And even after you’ve done a preliminary search with a stock screening tool, you might have to research dozens of companies to find one that’s wonderful AND trading at a 50% discount.
One great feature of this book is that Town provides a fairly simple method for determining the fair stock price of a company. This is a notoriously difficult problem, but Town’s method is quite good. The problem is that you have to determine the expected growth rate of the company and the future PE ratio. He provides methods for doing so, but the process is necessarily quite speculative. But if you’re going to invest in stocks (as opposed to mutual funds), this difficulty is unavoidable. At least his method is fairly rigorous and scientific. There is little guess-work. Town recommmends buying only when the price is at least 50% below the “fair value price.”
Once you’ve chosen a “wonderful” company and sunk your life savings into it, Town outlines a trading strategy designed to avoid losing your money (rule #1). His trading method relies on 3 technical analysis indicators, MACD, Moving Average, and Stochastic. These indicators are easily available at many free stock charting sites. Basically, you trade out when the trend is going down, and trade back in when it’s going up. It’s therefore a form of market timing, which is very controversial and tricky. The advantage is that you will avoid the big market meltdowns like 2000-2002. Even if you don’t know anything about technical analysis, his method is easy to follow. On the other hand, if you don’t feel comfortable market timing, you can buy and hold, and still presumably do well if you’ve chosen your stock according to Town’s guidelines.
According to Town, anyone who follows his method is guaranteed to get 15% minimum annual return in any market conditions, thus doubling your money every five years. Unfortunately, there are no “sure-fire” methods for getting that kind of return, especially in a bear market. But in any case, he still provides a detailed, coherent, and understandable method for finding great companies to invest in and avoiding losses.
This book surprised me by marrying together several common methods for investing in stocks for above average returns. I don’t recall any other book advocating this particular combination. I was intrigued enough to begin a test of the method. It’s too soon to see how it will go, but I suspect that I may be able to improve my returns. Time will tell.
Rule #1 as most investors know is to avoid losing money. That’s because it’s too hard to make up losses. So you pull out quickly before a position weakens very much according to this book . . . in fact, faster than most people do now. But it’s good to have a sell discipline and most books are pretty weak on that point.
The book begins with a variation on the Benjamin Graham and Warren Buffett school of investing . . . buy $1 worth of a fine growth company for 50 cents. He urges you to buy quality companies at an attractive price based on a ten year perspective for growth in and high levels of return on invested capital, sales growth, e.p.s. expansion, and book value per share growth.
Then, he turns to a few technical rules to buy and sell positions quickly based on a combination of MACD (using a 8-17-9 test), relative stochastics (using a 14-5 test triggered at the 20th and the 80th percentiles), and stock price compared to a 10 day moving average. When all are positive, buy. When all are negative, sell.
If you don’t know what those measurements are, the book will explain them for you. They sound more complicated than they are.
If you follow this approach rigidly, you should pick up on the middle part of a major up move and be out before the stock price can decline very much to eliminate your profits.
The book provides considerable detail on how to acquire these statistics for free on the Internet. And that’s where I had a quibble. I tried to follow his advice for making the weighting adjustments to what MSN Money provides automatically . . . and I couldn’t find a way to make the adjustments. So I’m using the standard weightings on Yahoo Finance instead. Perhaps it’s that I’m not very good at following directions . . . or perhaps because I use a non-standard browser . . . but I gave up after two hours of futile efforts.
I also don’t think you can really pursue this approach in 15 minutes or less a week. If you get into a volatile position during a time of market gyrations, you’ll need to spend more like a half hour a day . . . unless you are only looking at one stock.
But if you had used this approach during the Tech bubble, it would have saved your bacon. That’s how the author was able to keep his hands on the 7 figure value of the portfolio that he pyramided from a small initial investment in the late 1990s.
Anyone who wants to have a new approach to high return investing should definitely examine this book.
Very interesting!