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 :)