Rule #1 Book Summary - Rule #1 Book explained in key points

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Rule #1 summary

Name: Rule #1
Rating: 4.4 (131 reviews)
Author: Phil Town

Phil Town

The Simple Strategy For Successful Investing In Only 15 Minutes Every Week

4.4 (131 ratings)

18 mins

Table of Contents

Rule #1
summarized in 8 key ideas

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Key idea 1 of 8

What’s in it for me? Learn the only rule you need to beat the stock market and get rich.

For most of us, the stock market is basically a no-fly zone: it’s too complicated, and too dangerous. Let the experts handle it, we say.

But that’s a shame, because there is a way that anyone can make money in stocks. It comes from a Warren Buffet idea that Phil Town expounds in Rule #1: Find a wonderful business, determine its value, buy its stock for half that value, and repeat until rich.

These blinks enable you to do just that. They teach you the key indicators for that right, wonderful business that could change your life.

After reading through these blinks, you’ll know

which statistics prove companies have advantages over their competitors;
why the market isn’t as efficient as people like to think; and
why a diversified portfolio isn’t a magic bullet.

Contrary to popular myths, you don’t have to be an expert to be a great investor, and it is possible to beat the market.

It’s common knowledge that you'd be remiss to invest without consulting a financial expert, right? Well, the notion that managing money demands both time and expertise isn’t exactly accurate.

You don't actually need to have depth of knowledge and all the tricks of a professional financial adviser. You just need a few good tactics.

Fortunately, today the internet has the tools and knowledge you need, at minimal costs. Information and tools such as stocks’ histories and statistic calculators can make a lot of the work easier for you. For instance, websites such as MSN Money, Yahoo! Finance and CNN Money have data on thousands of stocks and the site www.ruleoneinvesting.com has several investment calculators.

Thanks to technology, these tools are actually far more accurate than anything experts had ten years ago.

Aside from these tools, you also need to know that you really can beat the market. To do so, you must sell stocks for far more or buy for far less than their real market value.

Yet, according to the prominent Efficient Market Theory (EMT) you can’t do this, as everything that can be known about a company is already figured into the price. Thus, stock prices can’t be too high or low.

But this is wrong.

Many of us recall the bubble in the nineties, where, contrary to EMT assumptions, prices were far above their real market worth for some years, only to plummet dramatically afterwards. Additionally, Warren Buffett showed that at least 20 investors were able to beat the market for over 20 years.

So cast aside the myths of expert help and an unbeatable market because, thanks to the internet and the strategies in these blinks, you can make great investments yourself.

The popular strategy "diversify and hold" is not nearly as safe as it's cracked up to be.

You've heard the formula, “diversify and hold” a million times; it's supposedly the safest way to invest in the stock market. But it’s also problematic.

First, it would’ve failed for approximately more than half of the last century.

Only invest in a business you understand and you’d like to own.

If you were to buy a business, rather than stocks, would your criteria for doing so be any different? Shrewd investors only invest in a company they’d like to own in the long term, so thinking about buying stocks as if you were to buy the company will guide you towards investing carefully.

When you consider buying stocks, you probably think it’s easy to get out quickly if the company is doing poorly. You could therefore be tempted to opt for a risky business, pay too much attention to one promising growth-rate in an average business, or even lose money in a market bubble.

There are good criteria for a company's ability to stand its ground.

Like moats around a castle, certain assets protect a company against competition and inflation. When investing, it’s a good bet to choose companies with one or more of these “moats.”

So what exactly do moats do? A moat enables a company to dominate a market, increase its prices to keep up with inflation and produce enough profit to expand.

Steady businesses have competitive advantages.

We’ve now seen what moats are and how they can help businesses become extremely successful. But how can you know if a company has one? Well, you can be sure that a company has a moat if they score well on five specific indicators for a minimum of ten years.

The best indicator of a wide moat is return on investment capital (ROIC) over at least a ten year period. ROIC is the rate of return a company makes from the money it invests in itself in a year. For example, say you invested $20 in stamps and then later sold them for $30. Your profit would be $10. The ROIC is the profit divided by the total you invested, which in this case would be 50 percent.

Some competitive advantages are easy to spot.

Let’s turn to three other ways to tell if a company has a moat, all of which are straightforward calculations.

The first calculation is figuring out if they’ve had at least a 10 percent increase in earnings per share (EPS) for approximately ten years.

For a Rule #1-investor, a company is only promising if the CEO is driven and owner-oriented.

When you’re considering which company to invest in, you can always refer to those Big Five criteria in the charts. But there’s something else that’s worth noting; how effective is the CEO you want to entrust your money to?

You need to opt for an owner-oriented CEO. They’ll make smart long-term decisions and inform the shareholders on what they need to know.

Demand a big margin of safety.

Remember the first blink in which we said that the Effective Market Theory is wrong?

Here’s why: contrary to the theory, price and value aren’t the same thing, and the key is to buy when the difference gives you an advantage. A stock’s price is what you pay, whereas its value is based on the money a business generates over time.

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What is Rule #1 about?

Investing isn’t just for experts. Really, anyone can become a savvy investor without even studying finance. Rule #1 teaches you all the specific qualities to look for in a company, along with some simple calculations you can make yourself in order to choose the most promising stocks.

Best quote from Rule #1

An expert is a person who avoids small error as he sweeps on to the grand fallacy. - Benjamin Stolberg

—Phil Town

Who should read Rule #1?

Anyone searching for a safe way to make money through clever investments
Novices who want to learn more about finance

About the Author

A highly successful investor, Phil Town managed to turn $1000 into over one million dollars over the course of five years. He is an acclaimed motivational speaker and a best-selling author.

Categories with Rule #1

Money & Investments

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