We have only two requirements. The first requirement is easy and the second one is even easier.
The first requirement is that it be a wonderful business. Just that. Nothing else. We never buy anything that we don’t know is wonderful. And I mean something very specific and easy to figure out when I say “wonderful.” I mean a business that will continue growing at a predictable rate for 20 years. That means a wonderful business first and foremost has a PREDICTABLE rate of growth. Here is an example of a wonderful business with a wonderfully predictable rate of growth: Walgreens. WAG. Take a look at the last 25 years of equity and earnings growth rates.
But here’s the catch: In order to know that a business’s growth is wonderfully predictable, you have to know something about it. It has to MEAN something to you because if it does you will understand it more easily and more quickly. And it should not violate your values (because that makes you a hypocrite). And understand the business enough to know that they are the best at what they do (we only go with the best).
You need to know that it has a lot of automatic protection against competition. I call this a MOAT.
And you need to know that the MANAGEMENT, in particular the CEO, are intent on building this business for the benefit of all the stakeholders – including and most especially the owners. You and me.
These three M’s are quite simple to figure out and you will find that in a year or so you have too many wonderful businesses that you would like to own.
The second thing is easier than knowing the business is wonderful and tends to narrow the number of wonderful businesses we can buy. The second thing is that we need to buy the business at an attractive price. By “attractive price” I mean a price that is so good that I am certain that I am going to make money. This is not a difficult concept. We simply wait for what we want to buy to go on sale.
The key to this idea is the rather shocking notion that in the stock market, the price of a stock is not always the same as what it is worth. This is a revolutionary idea for some reason. Your mutual fund manager does not believe this idea. He thinks that price and value are the same – which is why he lost 40% of your money in your 401k and why your retirement, if you leave it in his hands, will not be nearly what you hope. Even a 6% annual return is out of reach for your fund managers if the stock market does not go up for the next 15 years, a probability rather than a mere possibility.
Knowing the value of a business is quite easy. Remember that its growth is predictable? So we just grow it at that predictable rate, figure out what it will be worth in ten years and then figure what we have to pay for it today to make 15%. I call that the Sticker Price, like the sticker price on the window of the new car.
Then comes the three most important words in investing: Margin of Safety (MOS). Since I’m a river guide and since since things can change even for a really wonderful predictable business, I need a big discount off of the Sticker Price. A big discount. BIG. 50%. The amazing thing about the stock market is that with patience I can buy wonderful businesses at 50% off all the time. Try that in real estate!
Wonderful business, attractive price. The key to good investing for the last hundred years and it will continue to be the key for the next hundred.
So can YOU do it? Why not? You won’t get rich quick, probably, but you’ll get rich eventually. If all you do is invest $300 a month, you’ll be able to retire comfortably in 20 years starting with nothing.
So here’s a few questions for your wife: Why not learn to invest like the best, like Buffett, Graham, Nygren, Ruane? Why not make 15% to 20% a year no matter what the market does? Why not be skeptical about the mutual fund industry and their claims that the market always goes up and that you’ll always get an 8% return? Why not take control of your financial future instead of leaving it in the hands of people who have proven they are clueless?
And one final question: What else would you suggest you do?
I hope this helps you guys,
Now go play!
Phil Town
There are two critical RULE #1 investing tenets. Both Phil Town requirements can be learned.
The first requirement is that the investment be a RULE #1 business. We never buy anything that we don’t know is wonderful. And I mean something very specific when I say “wonderful.” I mean a business that will continue growing at a predictable rate for 10 years. That means a wonderful business that has a consistent rate of growth. Walgreens (WAG) is an example of a potentially wonderful business that we may be interested in investigating. Take a look at the last 10 years of equity and earnings growth rates.
In order to know that a business’s growth is predictable, you have to know something about it. It should MEAN something to you, because if it does you will better understand it. And it should not violate your values (because that makes you a hypocrite). You should understand the company enough to know that they are good at what they do.
You need to know that it has protection against competition. I call this a MOAT.
And you need to know that the MANAGEMENT, in particular the CEO, are intent on building this business for the benefit of all the stakeholders – including and most especially the owners. You and me.
These three M’s can be determined using the Rule #1 basics.
The second thing is that we need to buy the investment at an attractive price. By “attractive price” I mean a price that is so good that I believe there is an excellent chance we are going to make money.
The key to this idea is the rather shocking notion that in the investing market, the price of an investment is not always the same as what it is worth. This is a revolutionary idea for some reason. Some mutual fund managers may not believe this idea. Some think that price and value are the same.
Finding the value of a business is a straightforward process. Remember, we are looking for predictable growth. Once we find an applicable growth rate, we grow the company’s earnings at that rate, figure out what it will be worth in ten years, and discount it at our MARR. I call that the Sticker Price, like the sticker price on the window of the new car.
Then comes three important words in Phil Town investing: Margin of Safety (MOS). Since I’m a river guide, and since since things can change even for a really wonderful predictable business, I need a big discount off of the Sticker Price. A big discount. BIG. 50%. The amazing thing about the stock market is that with patience I can buy wonderful businesses at 50% off our sticker price sometimes. Try that in real estate!
Wonderful business, attractive price. The key to good investing for the last hundred years and it will continue to be the key for the next hundred.
So can YOU do it? Why not?
So here’s a few questions for your spouse: Why not learn to invest like the best, like Buffett, Graham, Nygren, Ruane? Why not be skeptical about the mutual fund industry? Why not take control of your financial future instead of leaving it in the hands of people who may not have your best interests in mind?
And one final question: What else would you suggest you do?
I hope this helps you guys,
Phil Town
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