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 field of science.  One night, after a dinner at his beautiful home in La Jolla, he told Phil a story about how people act 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, 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 may say it will never work.  Second, they could say it works, but it’s trivial.  Third, after you’ve succeeded, the exact same people might 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 MSNBC show Your Business. Phil Town was a frequent investing expert on this show. Phil Town travels from Atlanta and Jackson Hole to speak about investing.

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

First, the value of looking at book value per share is amplified by 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. 

Considering book value or equity (not “per share”), the second reason we don’t have an absolute 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. 

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 learned all that, you should know 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 as it relates to the stock market is primarily liquidity.

What liquidity measures is your ability to get in or out quickly.  Little investors tend to have  greater liquidity in 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.

Obviously, the $50,000 laundry would probably 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. That makes for more risk, unless you really got a great deal, right?  The liquidity of public investments is a strong advantage.

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So let’s look at the difference between hypothetically 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 $1,200 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 assume you 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 would be 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 hypothetically 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. An alternative to fickle real estate investing is becoming 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 like me can only understand a few industries well enough to be comfortable. 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.  Also, it means that I may buy a business that could 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 can prevent me from the darkness I wander into.

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 value investors for the last hundred years and it will be the basis of value investing for the next one hundred as well. 

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

In Phil Town RULE #1, Phil showed you how to do an analysis of a business and then trade it using tools that track the Big Guys.  If you’ve followed what Phil Town taught you, hopefully you’ve survived during market meltdowns.   But, too many of you guys may be jumping back into stocks you really don’t know the value of.  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. 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.  He wants you to feel 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.

Investing should be just like buying a $10 bill and paying $5 for it.  Investing is buying a Picasso at a garage sale.  When you do ‘investing’, you are looking 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. 

PAYBACK TIME spells out for you exactly how to do that sort of long term, buy and hold, stick it away forever sort of investing. I call it stockpiling.  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.  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 and is it on sale?  Wonderful and cheap.  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 lackluster 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 teaches 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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