Episode 23 |

Make Millions with Value Investing: Phil Town

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This Week’s Guest

Phil Town is a hedge fund manager and value investment banker that has devoted his life to teaching others how to make amazing money on the stock market. He went from being a near-penniless river rafting guide to multi-millionaire hedge fund manager in 5 years. He’s the best-selling author of two books, Rule #1 and Payback Time. He’s the founder of Rule #1 Investing, an investing education program, and travels the globe educating new investors in how to amass their fortune.

Episode

Phil Town believes that investing in the stock market doesn’t need to be risky to be profitable, and that you can make money in absolutely any time and state of the market, especially in recessions. What we know of with mutual funds and the majority of hedge fund managers isn’t what Phil considers investing-instead, they are simply speculating on how the market will perform, which is incredibly risky indeed. Instead, here’s how you can find the true, measurable value of companies, and how to buy them on a sale price that is virtually guaranteed to make you a lot of money. We discuss:

  • How to find a company with a durable competitive advantage
  • Why modern portfolio theory doesn’t account the fear and greed that rules the stock market
  • Why diversification isn’t the golden rule you thought it was
  • How to tell if a company is on sale

How to Invest Like Warren Buffett

  1. Most people think of investing as diversifying across hundreds of stocks
    • they try to buy low and sell high
    • you are never going to get the same returns as Buffett does with this practice
    • these people aren’t investing, they are speculating on the market
  2. Instead, Buffett focuses on doing one thing very well-he buys good businesses when they are on sale

Speculating

  1. If you have to make the market go up to make money, you are not investing, you are speculating
  2. In the last 140 years, the market has gone up in general
    • but there are long spans of time where it is sideways or down for as long as 26 years
    • baby boomers might retire in a cycle where the market is not up

Real Investing is Very Low Risk

  1. If you’re buying low, the risk will be low
  2. The key is to find bargains
    • if you wait, the market will go back up and the price will increase as well
  3. Over a period of time, you completely liquidate your investment risk
  4. We want to get to a situation where the market just doesn’t matter

PayBack Time

  1. Invest as if you are buying the entire company or franchise
  2. You’re not looking to sell, you’re looking to nurture and watch it grow
  3. You want the company to produce cash flow

Where Portfolio Theory Goes Wrong

  1. Developed in the 1950s
  2. The theory says that the market is rational and will sell something for what it is worth
  3. However, this theory is falling apart at the edges
  4. The market is loaded with emotions including:
    • fear of the money manager losing their job or losing money
    • fear of being left behind and everyone doing better than you
    • these emotions battle each other on the market every day
  5. the market was hugely overpriced in 2009 and then crashed later
  6. You need to have the ability to understand the true value of a business you are investing in
  7. Businesses have a real recognizable value, unlike gold or real estate
  8. But, don’t spend too much time in a business that is too hard to figure out
    • Buffett has a “too hard” pile
  9. This value is called “the sticker price”
    • you want to get a better deal than the sticker price

The Event

  1. A great company has an unrelated event happen to it that causes a lot of stock holders to want to jump ship, when you can come in and buy
  2. When buying, a 50% below sticker price is a good place to aim
  3. You must know exactly what the event is that makes a company go on sale
  4. for Gildan, Arab spring caused cotton prices to soar, and Gildan admitted it would be in the red for around 2 years
    • the stock price plummeted
    • but, people were confident that the company is still awesome and valuable and will bounce back
    • There was a low risk because people knew it was a good company, and the event was unrelated to them

Ben Graham

  1. Invented what we call Value Investing in 1949
  2. understands that the market fluctuates between greed and fear
  3. market will eventually swing into the fear zone and you’ll have fantastic companies being sold for a great price
  4. You can then sell them 5 or 6 years later when they are overpriced

Buying Wonderful Businesses

  1. Ask yourself, “Am I capable of understanding this business?”
    • look at what you are passionate about and comfortable with
  2. A good company needs protection against competition
    • no matter how low prices go, they are making money when no one else is
    • for example, a railroad-there is a huge barrier to entry, because no one is realistically going to build a whole new railroad system.
  3. Types of durable competitive advantages to look for when investing in a company:
    • company secret
    • brand moat-like Chipotle with healthy ingredients
    • lowest pricing moat-you can manufacture the product for the lowest, so you can sell it for the lowest and still make money
    • toll moat
    • switching moat
  4. Invest in what you value
    • you vote with your money
  5. The Three M’s
    • Moat
    • Meaning
    • Management

What Makes Management Great

  1. They do a thing called the three circles exercise
    • what are you passionate about?
    • What are you talented enough at to be world class?
    • How can you make money doing this?
    • focuses on passion, talent, and where they can make money and look at the intersection to get everyone on the same plane
  2. Same goes with investing
    • what are you passionate about?
    • What do you know about?
    • where do you make or spend your money?

An Investing shortcut

  1. Emulate what the best investors are doing
  2. they need to publish investments every quarter in their 13-F filing-look those up easily in Google

Charlie Munger

  1. Warren Buffett’s partner since 1950s
  2. What’s the key to investing according to Charlie?
    • be able to understand the business
    • needs to be durable
    • needs to have a management you trust
    • have a margin of safety in price

How Phil Nearly Killed His Mentor

  1. Phil used to be a raft guide
    • was guiding a group of hedge fund managers for a 2 week trip in the Grand Canyon
  2. Got stuck in a horrible rapids that leads to a drop of about 35-40 feet
  3. skidded the boat sideways to a hidden ledge
  4. they got out, one of the guys threw up, one game him a bearhug and said since he saved his life, he would teach him about investing
  5. he went to visit the hedge fund manager next year, and ended up becoming his apprentice
  6. then he went on his own with $1000 of his own money, at the end of five years he had a million and a half dollars

Phil’s Awesome Offer

  1. He has a coaching workshop in Atlanta that costs $1000
  2. But Optimized Geek listeners will get it for free
    • find it at optimizedgeek.com/ruleone
  3. What you need for the class
    • no investing experience needed
    • it would be great to read Phil’s book Rule #1
    • get ready for a very intense weekend-working til 10 or so every night
    • there’s a 2 hour break on Saturday to have dinner at Phil’s ranch and meet his horses
    • take advantage of the toolbox on his website, it has a bunch of exercises
    • no upsell going on, so don’t worry]
    • you will be responsible for your own lodging and transportation

Mutual fund managers

  1. They are the shadow of the stock market index
  2. They are not about making money, but about keeping you under their management

Risk Versus Volatility

  1. The modern portfolio theorist believes you can tell what the risk is in the market in an objective way
  2. If the stock moves a lot, they’ll assign it a much higher risk
  3. Risk is not understanding what you are buying
  4. When you invest in a mutual fund, you are ending up with 2 or 3 or 400 stocks you know nothing about
  5. The world thinks you get a higher rate of return when there is a higher risk, but that is simply not the case

Diversification

  1. Diversification across asset groups is a good idea
  2. However, in your long term stock portfolio, don’t diversify across a bunch of things you don’t understand
  3. instead, stick with 5 to 10 companies

Are We in an Economic Winter?

  1. The economy was artificially manipulated by the government to get us out of the recession
  2. Phil believes that there will be a series of crises as we pull back this artificial manipulation of the stock market
  3. so right now, stocks are very overpriced
  4. also means there will be opportunities to load up on great companies that are on sale during these potential crisis

Links and resources mentioned

Optimizedgeek.com/ruleone

Rule #1: The Simple Strategy for Successful Investing in Only 15 Minutes a Week!

Payback Time: Making Big Money Is the Best Revenge!

Security Analysis: Sixth Edition, Foreword by Warren Buffett by Ben Graham

Good to Great: Why Some Companies Make the Leap…And Others Don’t by Jim Collins

Get Optimized!

  1. Try out the three circles exercise to find awesome ideas for industries that you can invest in and really feel passionate about.
  2. Only pursue companies that you are able to understand. Do you find computer science a bit too complex or uninteresting to keep up with? Move on.
  3. What are the values that you truly believe in or hobbies you are truly passionate about? Do you love spending time outdoors and among nature? Perhaps buy into an outdoor gear company, a boat manufacturer, or into the tourism industry.

Thank you for listening

As always, thank you for tuning in. Please feel free to contact me or leave a comment. If you enjoyed this episode, please share it!
-Stephan

6 thoughts on “Make Millions with Value Investing: Phil Town

  1. I have just found Phil Town and have not read his books. Is this all legitimate? Why does he want to hold a seminar for free? It costs money to put one on. Does it involve options to a great extent?

    Thanks,

    Debbie

    1. He’s legit. I’ve been to the workshop, it’s excellent and high value. Why does he offer it for free? Because some percentage of the attendees choose to get mentored by him, which he charges for.

    1. He does it by demonstrating to investors how he can earn money by showing historical returns on the investment. Then people start to invest similar to how Buffett did and you take fees for making people better returns. Once that investor puts money in and realizes a return he gets more investment from other investors. Is like building a mini hedge fund which you can do by creating a company with less than 10 people. Buffett did the same thing when he started out.

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