Phil Town

The Third M

The four M’s of RULE #1, Meaning, Moat, Management and Margin of Safety, are the key to finding wonderful businesses on sale.  The third M – Management – is the hardest to evaluate.  There are no tools to objectively decode the passion, honesty and owner-orientation of the CEO of a business.  You have to do the homework.  And you have to know what you’re looking for.

A good friend of mine, Steve Farber, and I worked together many years ago consulting to executives about becoming better leaders.  Steve just wrote a really great book and I want you to read it.  Its title says it all: Greater Than Yourself. 

That’s what I want my CEO to think and feel about the business I own.  I want him to sublimate himself to the task of making my business successful and a positive contributor to life on earth on all levels – certainly for me, the owner, but also for the people he’s leader, the suppliers, the customers and the environment. 

Steve is a great writer.   His first book, The Radical Leap, was named one of the best 100 business books of all time.   I read Greater Than Yourself in an evening.  It will help you spot a great CEO.  Even better, it will help you be a better leader yourself.

Now go Play.

Phil Town

READER REVIEW: "BEATING THE STREET"

As promised yesterday, here's Rule #1 reader Lee's second book review -- of "Beating the Street" by Peter Lynch.

... Another book worth your time is "Beating the Street" by Peter Lynch (Simon & Schuster, 1993, 300 pages).

Lynch is a famous and successful mutual fund manager, so I was curious to see how his approach compared to Buffett and Rule #1.

I was surprised (and reassured) to find that even though Lynch spent his career in mutual funds, he pretty much supports Phil's position that individuals can and should pick their own stocks. He preaches the same approach of investing in things you know and understand, and buying companies when they're on sale.

One of the best reasons to read this book is to understand how the managers of large funds operate.

READER REVIEW: "BUFFETT: THE MAKING OF AN AMERICAN CAPITALIST"

I'm adding a new feature to the Rule #1 blog: reader-submitted book reviews of investing and finance titles that may be of help to new Rule #1 investors.

All Reader Reviews will be filed under the Book Reviews tag, alongside my reviews of investing books and others' reviews of Rule #1. (Heck, if you want to do a review of Rule #1, go ahead and email it to me.  Be sure to write "Book Review" in the subject line.)

Lee was kind enough to submit the first two Reader Reviews.  (Thanks, Lee!) I'll publish one today, one tomorrow.  First, a brief note from him:

Phil,

WOW! I know you're extremely busy and didn't really expect a response. Thanks a million for reading and responding to my email, and the offer to consider my 4M analysis.

I've spent hours reading the blog and wanted to contribute something.  Following are reviews of two books I think your audience would enjoy. I've tried to keep them brief, and relate it back to Rule #1.

Feel free to post, edit, or discard as you see fit.

regards,

lee r.

THE LITTLE BOOK THAT BEATS THE MARKET

People are curious about my take on Joel Greenblatt's book.  Read on to find out what I think.

Phil,

Saw you at a "Get Motivated" seminar in Cleveland, want through InvesTOOLS training - lost $1,000 on options - and THEN read your book.  Now ready for Rule #1 - never lose money.  I also just read The Little Book That Beats the Market by Joel Greenblatt (Columbia Business School Professor and hedge fund manager)  - he also talks about finding good companies at bargain prices and calls it "magic formula investing". 

He talks about Benjamin Graham, the Margin of Safety, EPS and Return on Capital.  However, he adds in Earnings Yield - the bargain price is determined by a higher earnings yield.  Is he just computing Value by a different means?  Also he sets Return on Assets (ROA) at a minimnum of 25%, talks about being committed to holding the stock for a minimum of 3 to 5 years, and says this approach works best with companies with a market capitalization above $50 or $100 million.

How is this different from Rule 1 Investing - is it?  Are these just personalized embellishments?  Why is ROA important   (I'm obviously asking for your opinion on this)?  Thanks.

Carol 

Here's my response:

I like Joel Greenblatt's approach to investing.  He uses a lot of the same key things we look for in Rule #1 investing.  But I thought I'd talk about what he calls the "magic formula" - the Earnings Yield.  Here's how Earnings Yield works:

RULE #1 BOOK REVIEW: VALUE BLOG REVIEW

Here's a review of Rule #1 on the Value Blog Review.  Thanks, Steven!

RULE #1 HITS #1

Today, April 16,  Rule #1 is the #1 NY Times Advice/How To Bestseller.  You can also read a recent New York Times review of the book here.

David Bach and Me

I’ve been on stage with David Bach for the last year at about 20 events around the US. We’ve passed in the hotel lobby but never spent any time together. But we share a common passion. I just read his book, The Automatic Millionaire and strongly recommend you read it. David is at least as interested in helping people find their way to financial security as I am. And we both are interested in seeing others get there with as little effort as possible.

Rich (and Going-to-Be-Rich) Women

Phil Town attended the Women’s Millionaire Conference, Portland, March 19th, 2005. A thousand rich and willing-to-be-rich women all in one place.  I’m waiting in the wings as a wonderful MC and comedienne from Dallas, Texas is cracking the place up.  Back stage it sounds like this crowd is fired up, which means its going to be a fun place for me to speak.