I read the book Rule #1 by Phil Town while waiting for an oil change. As a book, it’s been a success. It received 4-1/2 stars from 156 customer reviews on Amazon. It got on the BusinessWeek Best Seller List. It also got an endorsement from the former SEC chairman Arthur Levitt on the back.
However the first sentence of the book doesn’t pass the smell test.
“This book is a simple guide to returns of 15 percent or more in the stock market, with almost no risk.”
Really? Even Madoff couldn’t pull that off with a Ponzi scheme going. Madoff only gave 10% – 12% returns. The book’s inside flap says
“In this book I’ll show you how I turned $1,000 into $1 million in only five years, and then proceeded to make many millions more.”
I don’t know whether it’s true he turned $1,000 into $1 million in five years, but why stop there? Why not turn $1 million into $1 billion in another five years and turn $1 billion into $1 trillion in another five years? Oh, by the way, do you know what the annual percentage return is if you turn $1,000 into $1 million in five years? 298%.
Rule #1 is Don’t Lose Money. Sounds good. Nobody wants to lose money. The four straight-forward steps for Rule #1 investing are:
- Find a wonderful business [TFB: OK, there are plenty of them.]
- Know what it’s worth as a business [TFB: Easier said than done.]
- Buy it at 50 percent off [TFB: Like that's going to happen often.]
- Repeat until very rich [TFB: Doing it once, maybe. Repeat? Forget it.]
In Rule #1 investing, you are supposed to find great stocks at attractive prices. That’s not new. Everybody wants to buy great stocks on sale. The books says you use “Four Ms” to find these stocks: Meaning, Moat, Management, and Margin of Safety. The bulk of the book explains how to gather data and apply the four Ms using web sites like MSN Money.
The case study of a fictitious couple Susan and Doug Connelly is the most hilarious. The book makes it sound like the Connellys are real, not made up, but I doubt it. The couple love food and eating out in restaurants. So they researched restaurant stocks and chose The Cheesecake Factory (CAKE). Then the book conveniently had them buy the stock at a low point of $18.90 a share in Feb. 2003. They put their entire retirement savings into this one stock. Now get this (emphasis added by me):
“By getting in just below $19, and then moving in and out 11 times in two years with the big guys, and by adding in $500 a month they were saving, by July 2005, CAKE gives Doug and Susan a nice compounded rate of return of 56 percent per year, and their $20,000 is now worth $78,000.”
Man, if it were that easy! I’m speechless. Looking back into history, you can always concoct a story and hypothetical trades that make an investment profitable. You may even get lucky once. Then the book goes on to say:
“if they continue their savings and Rule #1 investing, by the time they retire, they’ll have grown their nest egg to almost $1,500,000. From that point on they’ll have to figure out how to spend an investment income of more than $220,000 a year.”
An investment income of more than $220,000 a year. Yeah right. I hope you didn’t miss the most important word “if.” If the Connellys are real, I’d like to interview them and see where they are now on their journey to $220,000 a year in investment income. Doing some stock trading using some “fun money” is fine. Betting the farm on Rule #1 is down right reckless.
I can tell you the book market is not efficient. Books like Rule #1 make big sales because they sell hope and dreams. I’m not saying all best sellers are bad. But many bad books make to the best sellers list because they are marketed well. Saving money by making lifestyle sacrifices is too hard. Investing in index funds is too slow. People would rather believe in picking great stocks and figuring out when to move in and out. If you pander to such desire, you will have a successful business.
0 star. Don’t waste your time.