As a Board member, Phil Town had the privilege of getting to know Dr. Salk personally.  He was truly a great man in private as well as one of the most influential men in the history of mankind.  One night after a dinner at his beautiful home in La Jolla, he told me a story about how people are toward you when you’re trying to do something new.

He said that when he first started developing the vaccine against polio, the people who loved him and wanted the best for his career and his life told him that if his idea was any good, it would have been done already.  But it hadn’t been done; therefore it couldn’t work and he was wasting his time.  But he realized that as much as they loved him, they didn’t see the possibilities he saw… and so he continued in spite of the skepticism.

Once he had developed the vaccine far enough that he could test it, he did – and the tests went well.  However, the results were preliminary and certainly not perfect – so the people who loved him and wished his career well said the test results were trivial and his work, though interesting, couldn’t make any real difference in the long run in preventing the disease.  Still, he persevered.

Finally, years later, when polio had been nearly eliminated from the planet and millions had been saved, the people who loved him and wished him well in his career came to him at award ceremonies to congratulate him and to tell him they knew it would work all along.

He said to expect this process in anything you are doing that is going to make a real difference in the world: First, they will say it will never work.  Second, they will say it works, but it’s trivial.  Third, after you’ve succeeded, the exact same people will say they knew it would work all along!

He said don’t let the skeptics stop you if you think what you are doing is worth trying.  Even the ones who love you.  Even the ones who want what’s best for you.  Your life is up to you.  Live it like it really is and try to make a difference.

Phil Town has always appreciated that advice from one of the great men of our time.  Phil Town hopes you can use it, too.

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In this Phil Town video you’ll get an idea of the setting for the show MSNBC’s YOUR BUSINESS. Phil Town is a frequent investing expert on this show. Phil Town travels from Atlanta and Jackson Hole to speak on RULE #1 investing.

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Phil Town said that there is no minimum book value per share for a couple of reasons.

First, any book value per share is meaningless without knowing how many shares are out there.  What we really care about is the total value of the business. We talk about that book value in “per share” prices, but that’s just convenient and useful because we almost always buy pieces of an investment instead of the whole thing (even though we think of it as buying the whole thing).  Seeing the investment in terms of its smallest piece makes it easier for us to figure out what our particular pieces are worth.  Other than that, the per share thing is useless information.

Considering book value or equity (not “per share”), the second reason we don’t have a meaningful minimum is that the key to good Rule #1 investing is buying a wonderful investment at an attractive price — and wonderful businesses can, for a very small investor, be very small or very large.  Obviously a small business will have a small BVPS.

The key is knowing you’ve got the 4 M’s. We can buy all of a laundry business with a book value of $10,000 and Sticker Price of $50,000, or we can buy pieces of Exxon.  This is the beauty of learning The Rule:  it applies equally to purchasing a small laundromat or a piece of Exxon.  And it’s so simple: Wonderful business, attractive price.

Now, having taught you all that, I have to also teach you that for you and me the difference between large or small public businesses (businesses that have registered with the SEC to trade pieces of the business in stock markets) and small private businesses is liquidity.

What liquidity measures is your ability to get in or out instantly.  Little investors have liquidity in many more public businesses than big investors do.  We use that to our advantage with the arrows.  If a business is trading at least 1 million shares a day and is priced at $2 or more per share, there is enough liquidity for Rule #1 investors to invest $10,000 or so.

Obviously the $50,000 laundry does not meet the liquidity requirement.  That means that if you buy it, you may not be able to find a buyer to sell it to in some convenient time period. And that makes for more risk unless you really got a great deal, right?  So, after years of doing lots of public and private businesses, I’ve come to prefer the liquidity of public investments.

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So let’s look at the difference between investing $50,000 right now in real estate vs. $50,000 right now with Rule #1 investing.

Here are the numbers:  You buy a $250,000 house someplace for $50,000 down with a 6% 30 year fixed mortgage.  Your payments are $1200 a month but you rent it for $1200 and cover your mortgage payments.  You are, however, in the hole for insurance, maintenance, advertising and taxes.

On the other hand, let’s allow you to never miss a month’s rent and you can increase the rent by 4% a year.  By your 9th year, you’ve been able to increase rents enough to cover everything.  From there on to the 30th year it’s all cash flow.  Then you sell the place.  At that point, the house is worth $811,000 and is totally paid for.  Plus you’ve pocketed another $175,000 that you reinvested wisely and made the same return on that as on your house over all – about 10% per year for an additional $440,000.  Total return equals $1,251,000.  Your compounded ROI for 30 years is 11%.  Quite respectable although I did not deduct for management which I expect you will do yourself.  This is not an insignificant headache and makes scaling up the investment dollars difficult.  Nonetheless, let’s compare that to our 15% minimum Rule #1 return.

First, we have no management.  We do not have to negotiate.  We do not have to drive around neighborhoods looking for a deal.  These are not insignificant advantages.  What we do have to do is spend about 15 minutes a week managing our few businesses.  And we have to know how to do Rule #1 investing, of course, but it’s easy to learn once you see the advantages.

We buy a business (or a part of a business, ie, investment) with our $50,000.  Since we’re going to use leverage in the real estate transaction, we’re going to use it here, too.  Our online broker will lend 50%.  Now we have $100,000 to invest.  We buy a wonderful business at an attractive price and sell it when it gets unattractive and buy another one.  We do that for 30 years averaging 15% but paying 8% margin costs on $50,000.  (I’m not getting taxed in either case because I’m doing both in an IRA).  After 30 years, my RULE 1 Investing is worth $6,500,000 after deducting margin costs.  My 30 years compounded ROI is 18%, only 7 points higher than the real estate transaction, but 5.3 million dollars more in my bank account.

But if you are a Rule #1 investor, you will continue to invest the $6.5 million at 15% and then live on the 15% increase each year.  That means you are receiving about $80,000 a month.  That’s not a typo.  Your income off the 6 million is almost 1 million a year.  Of course you do have to pay tax on that so you’ll end up with about $50,000 a month which is only $20,000 in today’s dollars.

You can stay ignorant of Rule #1 investing, go exclusively for real estate and try live on the result the rest of your life or become a Rule #1 investor.

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Let me add one more thought regarding ‘undervalued’ for RULE #1 investors. My view of undervalued is formed from buying private businesses and venture capital investments.  I don’t see it the way Wall Street sees it at all.  Undervalued, to me, means the following:

First that the business is predictable enough to get a solid valuation – this first requirement eliminates a lot of businesses simply because former river guides can only understand a few industries well enough to be comfortable, and it eliminates a bunch more that I do understand but which do not have historical numbers solid enough to base anything on.  And yes, that means that I pass up a lot of investing opportunities that are getting turned around and are on their way up.  But then if they really are, in a few years I will have an investment opportunity.  And also, yes, it means that I am sometimes buying a business that is about to go crash without notice.  Thank God for good RULE #1 indicators.  They save me from my own ignorance.

Second, based on a predictable growth rate the current market price is about half what it should be if I want a 15% return. Buying with that big of a margin of safety also saves me from the darkness I wander in.

So it all boils down to this:  invest in stocks as businesses, understand the business so that you can know what the business is worth, and then wait for Mr. Market’s regular fluctuations to price it with a big margin of safety.  This way of RULE #1 investing has worked for the last hundred years and it will be the basis of investing for the next one hundred as well.  (And we add one little modern strategy – we use the  Phil Town Investools arrows to protect ourselves from the Big Guys who can tank this overpriced market and our ‘undervalued’ stock along with it.)

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Finally it’s done.  Phil Town’s new book, “PAYBACK TIME: Making Money is the Best Revenge” will be in the bookstores for investors and wanna-be investors everywhere on March 2^nd, 2010.

In Phil Town RULE #1, Phil showed you how to do a quick analysis of a business and then trade it using tools that track the Big Guys.  If you’ve followed what Phil Town taught you you’ve done well in this market meltdown.   But too many of you guys are jumping into stocks you really don’t know the value of.  You didn’t do your homework.  As some of you discovered, you can get burned trading that way.  That certainly wasn’t his intention when Phil Town wrote RULE #1.  He wanted you to be investors.  But Mr. Town created a bunch of traders.  Trading can burn you if you don’t have a good investing foundation.  Phil doesn’t want you to get burned.  He wants you to get rich.  In fact, Phil Town wants you to get rich without taking any more risk than you are taking in some indexed mutual fund.  Phil Town says “I want you to know you are going to be rich with great certainty”.  He wants you to know that when you are ready to stop working for a living, you’ll have a bunch of money in great businesses that will last you the rest of your life.  For that, you are going to have to learn to become an INVESTOR.  For real.

An investor is someone who buys an asset they know the value of and pays less for it than it is worth.  Investing should be just like buying a $10 bill and paying $5 for it.  It should have that level of certainly connected to it.  Investing is buying a Picasso at a garage sale.  When you do ‘investing’, you know you are going to make money.  At the right price, buying a government bond is investing.  At the right price buying a house is investing.  At the right price, buying land in Jackson Hole is investing.  At the right price, buying gold is investing.  At the right price even buying a 2001 Range Rover that won’t start is investing.  (I’ve got one for you if you’re interested and baby the price is right!  I can’t stand even looking at the thing.)

PAYBACK TIME is the first book to spell out for you exactly how to do that sort of long term, buy and hold, stick it away forever sort of investing.  It is about how the best long term investors in the world go about making those gigantic long term 20 year compounded rates of return of 30% to 50% per year.  This is how we do it step by step so simple that everyone can do this.  It ain’t rocket science, guys, its just knowing two things: Is it a wonderful business?  Is it on sale?  Wonderful and cheap.  That’s it.  Simple.  Easy.  Wonderful is pretty easy.  And knowing its on sale?  Well, lets just say that Payback Time is not just about revenge.  Its also a term we use when we buy a private company to get an idea of how long it will be before earnings let us get our money out of the deal.

So why read it now?  Because now we are back in an investors stock market.  Back in the 60’ – 80’s the market had massive ups and downs that added up over 20 years to a zero rate of return.  But in exactly that sort of market investors like Warren Buffett just killed it.  That’s when he made his billions on billions.  And if you follow what Phil Town teated you in PAYBACK TIME, you can just kill it, too.  Town will tell you why in the book.  And he’ll tell you exactly how.

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Click here to view the embedded video.

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