Investment Jungle

Pros:

1. Easy to follow, step-by-step instructions to selecting stocks using Rule #1 methodology.

2. An easy read for a novice investor.

Cons:

1. Some statements are a little hard to take. For example, on page 4, Phil states that

I borrowed $1,000, and five years later I was a millionaire.

Rating: **** (4 out of 5)

For my first methodology to evaluate in stock market analysis, I have chosen Phil Town’s “Rule #1“. This book explains the system that Phil uses to earn 15 percent or more returns in the stock market.

About Phil Town

The book starts off with a history of how Phil got to where he is today. Basically, he was a drifter working many odd jobs such as digging ditches, washing rental equipment, pumping gas, driving trucks and bussing tables. Eventually, he found a job as a river guide. During one of his expeditions, he saved the life of a man named “the Wolf.” To save Phil for thanking his life, he taught him how to invest money in the stock market. From there, Phil borrowed $1,000 and 5 years later, he had made a cool million bucks!

The System

So what system does Phil use? It is easy. He buys “a wonderful business at an attractive price.” Great premise. So how does he go about determining whether a business is wonderful and how does he determine the attractive price that he would be willing to pay?

Buy a Business

Phil says that you should buy stocks in a company that you would be proud to own and that would support you and your family for the next 100 years. He stresses that you should buy businesses that you understand and would be able to explain to your partner. In fact, Warren Buffett follows this advice as well which is why he stayed away from the dot coms during the 2000 Tech Boom.

Demand a Moat

A moat is a

durable competitive advantage that protects it (the business) from attack, like a moat protects a castle.

Phil wants to ensure that whatever business we buy, it is able to hold back other competitors that are looking to claim some turf.

The Big Five

The Big Five numbers will verify whether a moat truly exists or not. The Big Five numbers are Return on Investment Capital and the following four growth rates: Sales, Earnings per Share, Equity and Cash. All of these Big Five should be greater than 10%. They should also be consistent over the last 10 years and preferably increasing. But the real key is consistency so that you will be able to predict a future value for the stock.

Management

Since you own this business, you definitely want to know who is running it for you and how effective they are. So you must research your management team.

Attractive Price

So now that you have hopefully found a wonderful business, it is now time to determine if it is selling at an attractive price. Phil explains how to calculate the Sticker Price (what the stock is worth) based on its predicted growth. Since we are not geniuses like Warren Buffett, Rule #1 investors demand a margin of safety. We want to pay 50 cents for every dollar. This means that our attractive price is half of the Sticker Price.

Technical Analysis

And lastly, now that you have found a wonderful business at an attractive price, you want to determine whether or not the ‘institutional money’ is buying or selling. You don’t want to go against these guys because they move the markets. Phil explains how 3 technical analysis tools (MACD, Stochastics and Moving Average) help you determine when to buy some stock in your wonderful business.

And that about wraps it up. Phil goes through great detail at each step and explains what to look for and how to perform the calculations.

Recommendations: I did enjoy reading this book and would recommend it to a novice investor. Sometimes, Phil does lay it on a little thick, but that is part of the motivational speech to get people out of their seats and give his system a try.

But the proof is in the pudding, so I will try using his stock market analysis techniques on various businesses and see what I can learn.

You can check out Phil’s website at www.ruleoneinvestor.com.  He has online calculators to help with the financial analysis.  He also goes in depth on how to use his formulas in Excel.

Check out these other reviews of Phil’s book at InvestorGeeks and at The Motley Fool.

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