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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