Tuesday, April 18, 2006

Rule #1

A friend passed a book on to me this past weekend. Phil Town’s Rule #1. For the uninitiated, “Rule #1” is a reference to Warren Buffett’s first rule of investing which is “Don’t lose money”. Using Buffett’s rule (and investment process) Town transformed himself from a beef jerky eating, river canoeing, rattle snake wrestling adventure tour guide to a book writing, public speaking, millionaire blogger. I’ll reserve comment on whether or not I think the book is a read since I just sort of skimmed it. But I was able to ferret out the punch line – following Buffett’s Rule #1 will lead to superior returns.

Town suggests that the way to adhere to Buffett’s first rule is to look at five different things about a company. They are:

  • return on invested capital (ROIC),
  • revenue growth,
  • earnings per share (EPS) growth,
  • equity (or book value) growth, and
  • free cash flow growth.

He says that we should be looking for companies with at least 10 years of history, and except no less than 10% per year in each of the growth figures. We should also look for companies with an ROIC of at least 10% as well.

Sounds reasonable. I thought it’d be interesting to take a few companies on our watch list (perhaps some in our portfolios) through the Rule #1 paces. So I’ll be doing that over the next few days and posting the results here. Stay tuned.

In the meantime check out the book for yourself:


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