The book Rule #1: The Simple Strategy for Successful Investing in Only 15 Minutes a Week by Phil Town is considered a classic in the world of investing. It outlines a straightforward framework for evaluating potential investments and building long-term wealth. The core premise of the book is learning to only invest in high-quality companies trading at bargain prices to maximize returns. By following Phil Town’s investing rules, readers can simplify the complex world of investing and set themselves up for success. Some of the key takeaways include focusing on return on invested capital calculations, margin of safety, the payback time rule, and having conviction in your investments. Readers praise Rule #1 for its back-to-basics approach and find Phil’s story relatable. The PDF version allows readers to easily reference Phil’s timeless investing wisdom anytime.
Calculating Return on Invested Capital is Key
A critical component of Rule #1 investing is evaluating a company’s return on invested capital (ROIC). ROIC tells you how efficient a business is at generating profits from its capital. By comparing ROIC to a company’s weighted average cost of capital (WACC), you can estimate the excess returns or ‘economic moat’ a business earns. Phil recommends only investing in companies with an ROIC meaningfully above WACC. This approach helps investors objectively compare investment opportunities across various industries. You want to own stable, consistent compounders over time.
Always Build in a Margin of Safety
Another central theme of Rule #1 is the importance of a margin of safety when investing. A margin of safety means purchasing a stock well below its estimated intrinsic value, which helps minimize downside. Phil advocates conservatively projecting future cash flows and using modest terminal value assumptions. By being disciplined about only buying high-quality businesses at bargain valuations, investors give themselves a buffer if growth slows. While it requires patience, investing with a sufficient margin of safety sets investors up for superior long-term compounding.
Use the Payback Time Rule
Throughout Rule #1, Phil emphasizes the payback time rule to gauge when to sell an investment. The payback time refers to how long it will take for a business to earn back your initial investment from its cash flows. Phil suggests selling once the payback time exceeds 3-5 years, as longer payback periods signal excessive valuations. This straightforward metric keeps investors focused on solid total returns versus capricious market prices. The payback time rule helps instill discipline to sell into euphoria and realize gains.
Rule #1 provides timeless investing wisdom to help investors maximize gains and minimize errors. Phil Town draws on his investing experience to break down the concepts and tools needed to make rational investment decisions. The PDF book allows readers to easily reference Phil’s framework when evaluating new opportunities. By focusing on ROIC, margin of safety, and payback time, Rule #1 sets forth an elegant approach to build long-term wealth.