Invested by Danielle Town and Phil Town
Danielle Town, the author and a lawyer, describes her experiences as a brand new investor learning about investing from her father, Phil Town, the bestselling author and founder of Rule #1 Investing. The book has 12 chapters, the one year journey from January to December documenting steps she’s taken along with her father’s coaching to become a savvy investor.
The book explains the flavor of abdication when it comes to investing: Mutual funds, Market index funds, Exchange-traded funds (ETFs), Robo-advisers. But the author prefers to invest in individual companies by following certain rules. Her father specifically prefers US companies claiming that “we have a literal moat from two oceans, the world’s most powerful military, solid currency, a free press, and trillions of dollars to invest in the future. We also have brilliant minds, hard workers, great ethics, a culture of personal responsibility, fair taxation, and limited government intrusion. Those are the reasons why putting money in the American stock market is investing and it’s not a bad decision.”
Those certain rules that she’s learned from her father are basically from the renowned American investors Warren Buffet and Charlie Munger who would put their money into a company when the following rules are met:
Rule#1 understanding the business. It must be a business he is capable of understanding.
Rule#2 MOAT. It must be a business with some intrinsic characteristics that give it a durable competitive advantage. Things such as Brand (like Apple), Switch (painful to switch or replace like Facebook), Toll bridge (due to government regulation and intervention, other can’t enter and compete in the market, like Boeing), Secret (trade secret or a vast portfolio of IPs like Qualcomm), Price (low cost provider like Costco)
Rule#3 Management with integrity and talents. It must be a business that has management with integrity and talent. Look for biography and leadership style of executives such as founders, board of directors, and C-suite executives, how happy it’s employees are, management numbers, etc. For management numbers, look for return on equity, return on invested capital and debt.
Rule#4 A price that makes sense and gives a margin of safety. It must be a business that he can buy for a price that makes sense and gives a margin of safety. One can use these Three Methods of Pricing/Valuation:
1) Ten Cap price (based on Owner Earnings from entire business, 10% rate of return),
2) Payback Time price (based on free cash flow),
3) Margin of Safety valuation (based on earnings with consideration of earning per share-EPS, growth rate, price per earning-P/E, and 15% minimum acceptable rate of return-MARR).
All in all, it’s a great book, easy to read, and blended with casual conversations between the daughter and the father on investing. A lot more details in the book on each of the rules and some best known investing practices that could help you get started with your investing journey.