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Interview with Phil Town, Rule #1

Today I have the opportunity to present a brief interview with Phil Town about both his life and his upcoming book, Rule #1 [3]. Phil has been writing a blog [4] (unlike other authors who write a book and then a blog to promote it, Phil’s blog has been around for quite some time) on which he gives you an overview of rule #1 [5] and tells you how to submit “homework” that he can review. Onward to the interview…

jim: On your blog and in the book, you’ve mentioned less-than-glamourous jobs (such as being a ditch digger, equipment washer), what have you been doing recently? (besides writing Rule #1)
Phil: I’ve been busy promoting Rule #1, and since I live in Wyoming, I have to get in some snowboarding. We’ve been getting dumped on big time this year and the snowboarding has been amazing. Of course, I spend about 15 minutes a week investing. Then, to break the tedium of goofing off, I travel to give talks a few times each month. It’s kind of different from the old days. Money isn’t what life is all about, but having some sure helps you be able to do what you want to.

jim: A question that is always asked of investing writers who claim to have been successful is, why did you write a book? Why not keep all these secrets to yourself? And what led you to become a motivational
Phil: Let’s start with the last one first. Years ago a friend asked me to talk about the process of starting up a business, since I did a lot of new venture investing in the old days. I was taking acting lessons and trying to write a screenplay (see what too much leisure time will do to you?) and I agreed to do it mostly because I was afraid to speak in public and thought it would help me get over it. I had no idea I’d like it so much, and that led inevitably to the book.

I love telling people about what I’ve learned because knowing Rule #1 helps them take fewer risks with their money. Still, after years of public speaking, I’ve only addressed about 2 million people and there are 100 million investors in the U.S. alone who need to know about Rule #1. Writing Rule #1 was a way to get the word out to a larger audience, faster. And here’s the thing about keeping secrets: Rule #1 is no secret. Warren Buffett has been trumpeting Rule #1 for 50 years. Ben Graham taught classes on it at Columbia. The reason these geniuses were and are so willing to share it is that Rule #1 investing isn’t affected by other Rule #1 investors. All we do is wait patiently for normal stock market fluctuations to give us an opportunity to buy a wonderful business at an attractive price. The fact is, I need only a few of those opportunities to keep making 15% a year or better … and that’s all you need, too.

jim: What did you actually invest in to get from $1,000 to $1,000,000 in five years?
Phil: Going from $1,000 to $1,000,000 in five years means I was doing a bit better than 15% a year, so obviously I was doing something more aggressive than fundamental Rule #1 investing. But I was new at this and unafraid. Heck, I was already broke and living in a sleeping bag. Still, the key thing was that I was making investments with a big margin of safety so if things didn’t go well, I could still get out without losing any money.

That was a huge lesson and is the essence of Rule #1 investing: Don’t Lose Money. The investment that did the best for me was a tech company that I got into with a huge margin of safety and it went up big time for a while. From that investment I learned a lot about Meaning (understanding the business), Moat (durable, sustainable competitive advantages), Management and Margin of Safety—the 4Ms I talk about in Rule #1. The only one of the 4 Ms that I actually got right was the fourth one, margin of safety, but that one made me my first million even though I got the others wrong.

jim: If a reader could only take one piece away from Rule #1, which piece
would you most like them to remember?
Phil: To this day I think that the most important part of Rule #1 investing is to know what the business is worth and then buy it for half of that or less. Getting in at the right price makes up for lots of other errors in judgment. I’m not a genius like Warren Buffett, but as long as I don’t get the retail value too far wrong and as long as I buy the thing on sale, I’m going to do just fine. But there is a catch: To know the value of a business, you need to have some sense of the first three Ms: Meaning, Moat, and Management. The truth is, a lot of businesses simply can’t be priced. If they are inconsistent or have bad managers or no sort of monopoly, it is very difficult to know what the business is worth, and if you can’t know that, you can’t know if you are getting a good deal. Still, it’s all about getting a big margin of safety.
jim: Finally, one of the most compelling pieces of your personal story is your rise from a canyon river guide to a self-made millionaire and motivational speaker who has shared the stage with former presidents and other important figures. What advice would you give to folks who think they can’t “make it?”
Phil: Sometimes I think I’m an anti-motivational speaker because I know where my head was at when I started; beyond thinking I couldn’t “make it,” I also thought there was something wrong with people who did “make it.” My many trips down the Grand Canyon with some very wealthy people didn’t much change my mind. Truth is, money doesn’t make you happy or a nice person, it just means you have the means to live the life you want. What kind of life is up to you, and that’s where some people crash and burn. They get money but they don’t have a clue about being a good person so they just make themselves and everyone around them miserable.

That said, becoming a millionaire is actually so easy, everyone reading this can do it. If you really follow Rule #1, you can’t help but get there. The key is to understand the power of compounding money over a period of time. You can get rich just putting your money away in a long-term bond if you have enough time. The problem is, lots of people don’t have a long time anymore. So if you don’t think you can make it and you don’t have forever, study Rule #1 a bit and then practice without using real money. I can’t change your mind about “making it,” but a little bit of success will. Just take one little step at a time and pretty soon you will start thinking, “Hmm, maybe I can make it.” That turns into confidence and the certainty that if you keep this up, you will make it, no question.

jim: Was there anything else you wanted to add or a question you wish I had asked?
Phil: You did a good job of picking my brain. I’d add one more thing about learning to make 15% a year with Rule #1. Something really great happens for a lot of people. They realize that if they can make 15% a year no matter what the stock market is doing, they can retire on a lot less money than they thought they would need. In fact, even if you only have $1,000 right now, you can retire in just ten years with a little knowledge about Rule #1. Sometimes just knowing that it’s possible for us to get to the goal makes us willing to try. I think that with Rule #1, we can all get to a financial place where we can live the life we want without the pressure of not having money. And ultimately, that’s why I wrote the book, Rule #1.

You can find more information on Phil’s upcoming book Rule #1 : The Simple Strategy for Successful Investing in Only 15 Minutes a Week! on Amazon.com [3].