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James Reston

Daniel G. Amen

Marshall Goldsmith

Jean Edward Smith

Table of Contents

Introduction: Make Money No Matter What 1

Chapter 1: The Myths of Investing 11

Chapter 2: Rule #1 and the Four Ms 33

Chapter 3: Buy a Business, Not a Stock 39

Chapter 4: Identify a Moat 53

Chapter 5: The Big Five Numbers 65

Chapter 6: Calculate the Big Five 95

Chapter 7: Bet on the Jockey 111

Chapter 8: Demand a Margin of Safety 132

Chapter 9: Calculate the Sticker Price 145

Chapter 10: Know the Right Time to Sell 172

Chapter 11: Grab the Stick 186

Chapter 12: The Three Tools 196

Chapter 13: Take Baby Steps 216

Chapter 14: Eliminate the Barriers 246

Chapter 15: Prepare for Your First Rule #1 Purchase 259

Chapter 16: Q&A 274

Glossary 293
Acknowledgments 301
Index 303


Chapter 1: The Myths of Investing

An expert is a person who avoids small error as he sweeps on to the grand fallacy. --Benjamin Stolberg (1891--1951)

The gold standard of low-risk investing is a ten-year United States Treasury bond, which, at the time of this writing, has a return of about 4 percent. Invest in nothing but these bonds and you're guaranteed a 4-percent haul. The only problem with such a strategy, especially for the millions of soon-to-be-retired baby boomers, is that, at 4 percent, it takes 18 years to double your money. In addition, after 18 years, even with a low inflation rate of 2 to 3 percent, most of the gain is absorbed by higher prices, leaving you with only slightly more buying power than you had 18 years earlier. Despite this reality, investors buy billions of dollars of these 4-percent bonds.

Why in the world would anyone want to own a bond that barely keeps pace with inflation and realizes almost no real gain in wealth? Because almost everyone is convinced that a higher rate of return necessarily means a lot more risk. And they're more afraid of losing money in an attempt to get a higher return than of their inability to retire comfortably.

The fact is, a higher rate of return is not necessarily contingent on incurring significantly more risk. Let me explain.


HIGH RETURNS DON'T NECESSARILY MEAN MORE RISK

During a talk at the America West Arena in Phoenix, Arizona, I asked the audience, "How many of you drove your cars here today?" Most people raised their hands. "Okay, almost everybody. And how many of you took a huge risk driving here?" A few hands went back up. "You guys took a huge risk driving here?" I asked incredulously. "Either you drivers didn't really take a risk and are just clowning around, or at last we've found the problem with Phoenix traffic--you people with your hands up don't know how to drive. Is that it?" Everybody laughed. "Okay, so it wasn't so terrifying to drive down here. But now imagine that you're coming here but instead of you doing the driving, it's your eleven-year-old nephew behind the wheel. Are you taking a lot of risk now?" People laughed and nodded yes. "The trip was the same--going from Ato B. But when you put someone in the driver's seat who doesn't know how to drive, a relatively safe trip becomes an incredibly risky trip."

Exactly the same thing holds true for your journey to financial freedom. If you don't know what you're doing, your journey is going to be either very slow or very dangerous. That's why most people think that going fast (going after a high rate of return) is dangerous--because they don't know how to drive the financial car, and not because going fast is necessarily dangerous. It's only dangerous if you don't know what you're doing. And the essence of Rule #1 is...

 

Few investing audios spell out how to pick winning stocks as thoroughly as this one. With an engaging narrative flow, the lesson analyzes every possible way to look at publicly traded companies--how they are valued, the viability of their products or services, their competitive strength or vulnerability in various markets, their brand value, and so forth. Phil Town has a decidedly fundamentalist approach and an amazing gift when it comes to engaging an investor's personal interests when thinking about investing. His supporting arguments will sound bulletproof to both fundamentalists and traders alike. Helped immensely by Marc Cashman's vocal energy, these strategies make intuitive sense in spite of their complexity and detail. T.W. (c) AudioFile 2006, Portland, Maine

 

"Town's investment guide is manna from heaven... engaging and accessible... Town's ability to break down that philosophy into a detailed, step-by-step program that can be understood by any reader with basic math skills is unique... will leave readers feeling empowered and ready to manage their money themselves."

 

"Extraordinarily readable...provides investors with surefire tools to outperform costly advisors. Follow Town's simple, time-tested precepts, and even unsophisticated investors will leave most mutual fund managers in the dust."

 

"A really smart, homework-driven read that tells you precisely how to do it. Rule #1 may be the clearest and best book out there to get you on the path to riches. This one's special!" --James J. Cramer, host of CNBC's "Mad Money"

 

"Rule #1 is an investment Bible for our time. In fun, easy-to-understand words, Phil Town tells you how to buy quality stocks at a discount."

 

"For the individual investor, Rule No. 1 should be, 'Read Rule #1.' This book debunks a lot of myths in the market and provides pearls of common-sense wisdom...Indeed, Rule #1 rules."

 

"Rule #1's common-sense, pragmatic approach is money in the bank.  This step-by-step guide is methodically researched and terrifically accessible ... Can you really beat the mutual fund mangers and so-called experts at their own game?  Hell yes!"

 

"Rule #1 is probably one of the most inclusive, no nonsense, fundamental books about investing in the stock market I've ever read. This book is a must-read for everyone; from beginner students of the market to super know-it-alls."