Rule #1 Investing

by Sean on March 11, 2007


[widget:ad_unit-1214156511]I just finished reading a great book by Phil Town – Rule #1.  It is amazing!

Phil Town is a follower of Warren Buffet’s investing strategies, which boil down to one simple rule to follow: Never lose money.

The whole reason behind the "Never lose money" rule, according to Mr. Town, is that if your investment loses even a small percentage of its value, it has to kick it into high gear and increase by an even larger percentage to regain its original value.  For example, a $100 investment that loses 50% of its value has to see a 100% gain to regain its original value of $100.

So, it seems obvious, but how do you go about investing without ever losing money?  The first step in the process is to buy your investment (stocks, in the case of Phil Town’s book) at only 50% of its actual value.  If you buy at way-below-value prices, you lock in your profit on the front end.  After all, just as water seeks its own level, the stock price should at some point reflect the actual value of the stock.  So, buy low.

The book goes into great depth on how to select your stocks to make sure that they’re good companies, with a solid history and a (hopefully) bright future, and how to know what the actual value of the stock is.  Then, it’s simply a matter of waiting for the stock price to fall to 50% of its value.  Buy, wait until the stock price climbs to or above the value of the stock, and sell before it goes back down.  When it goes back down, wait until it hits that 50% price point again, and repeat the previous steps.  Town even gives you some lessons about using technical indicators to time the purchase and sale of your stock.

This book actually got me excited about investing in stocks.  Of course, I’ll paper trade first, to see if the system works before diving headlong into it, but it looks great.  What looks even better to me is that Phil Town doesn’t seem to have a vested interest in selling you expensive seminars or "bootcamps", in the style of former stock-picking guru Wade Cook.  I find it easier to trust a guy whose only apparent interest is the one-time sale of a book.

I’m working on a spreadsheet that will make the selection process more automated, and take a lot of the emotional aspects out of stock picking.  Don’t worry, I’ll make it available to you when it’s ready.

Also, I’ll be posting my progress with Rule #1 investing on my blog, mostly to pressure myself into making regular progress :)

{ 15 comments… read them below or add one }

bigbuddha March 13, 2007 at 8:32 pm

I’ve just read the book as well, over the last week. It is an excellent book and does give an excellent guide in how to invest and get into the stock market.

However be warned, you’ll need more than 15 min per week initially at least

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Sean March 14, 2007 at 1:05 pm

I’m hoping that the Excel spreadsheet that I make will greatly speed up the process. That being said, the 6-10 hours upfront that Phil Town says it will take to research a company thoroughly will totally be worth it if the system does indeed work.

The spreadsheet I’m working on will, if all goes well, be able to access an API from Google, Yahoo!, or MSN and automatically fill in the required numbers when you type in the desired ticker symbol.

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Ben March 30, 2007 at 3:58 am

I can’t wait for you to release this spread sheet.

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Lance April 30, 2007 at 10:35 am

Just curious how the Rule #1 spreadsheet is coming along?

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Sam May 1, 2007 at 4:40 pm

hello,
I was wondering how the spreadsheet is going. I can’t wait for you to release it, If you need people to test it out before you release it to make sure its working fine ide be more than happy to help.
Good luck

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Sean May 1, 2007 at 11:25 pm

I’m actually still working on getting the Rule #1 spreadsheet "good enough". I’d love to have it "just right", but I will release it as soon as it has the functionality that I want. Patience, my friends.

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GG July 8, 2007 at 4:36 am

How about the spreadsheet?
Is it finished yet?

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Patricia L Salmons July 15, 2007 at 7:25 pm

Gosh, I can hardly wait Sean, for the worksheet….I’m trying to put one together also. I just finished Phil’s book also…had finance in college, but I hated it. It all seems so simple now. I plan on being a day trader…with mentors like Sean, Phil Town and James Cramer from Mad Money on CNBC on at 6 & 11 (which is a must see, I record every show)…if we follow the rules…hopefully we’ll all prosper.

Love this site, thanks so much Sean
God Bless all

Patty, WV

p.s. does anyone know of any chat rooms they w/recommend on this type of investing?

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Hema July 25, 2007 at 6:17 pm

there are two spreadsheets (one does automatic data retrieval) in download section at roicommunity.com which is a forum for rule #1 investors.

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Tomer November 10, 2007 at 1:38 am

You’ll have fans from the far Israel when you’ll publish the Excel spreadsheet you are programming.
Doing all research “manually” takes lots of time, so it will be more then grate to have such an automatic tool which reduces the time consuming for looking a great company to invest in.
Any prediction when you are about to publish it?

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ryan November 27, 2007 at 5:34 pm

that roicommunity.com spreadsheet is pretty great!

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Ygor February 6, 2008 at 1:23 pm

I am making my first step following the #Rule 1 and I am looking at CVS:

Current EPS: 1.9
Estimaed EPS Growth: 16%
Estiamted PE in Ten Years: 25
Future EPS: $8.38
Future Value: $209.50
Sticker Price: $51.79
MOS: 25.89

CVS is very good in the BIG Five, so I would like to know if somebody else is fllowing CVS to compare numbers.

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JJ August 5, 2009 at 8:51 pm

How is that spreadsheet?

Try http://www.big5roi.com/passingStocks

This scans for the big 5..lists all the stocks that meet it…pretty cool..and its free

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Fred June 24, 2010 at 1:54 am

From what I have heard Phil Town is using a combined strategy between technical and fundamental analysis.

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Dave August 3, 2010 at 12:10 pm

I have finished the book and looking forward to beginning some paper trading. There is one thing that I can’t seem to figure out, and that is, when calculating any of the big 5 numbers (except ROIC), I don’t know how to calculate the percentage if the number doesn’t double.

For instance, a one year calculation of sales going from 11,250 to 12,100. Obviously 11,250 doesn’t double into 12,100. I was under the impression that I take the difference and see what percentage that number is of 11,250 but don’t know if that’s correct, or if that would work for a span of 3 years/5 years.

I may be asking a very simple and obvious question, but I can’t figure it out. Can anyone help?

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