What is “Rule 1 Investing”?

Rule #1 investing was coined by Phil Town (www.ruleoneinvestor.com). It is based on a philosophy ascribed to Columbia University’s Benjamin Graham (author of The Intelligent Investor), and popularized by Graham’s student, Warren Buffet (perhaps the most well-known investor of all time). Town believes that “Most Americans are trapped in mutual funds that, at best, ride the waves of the market.” He believes that his method can help investors break free from these cycles.

The Myths of Investing

Town argues that there are three myths of investing:
1. You have to be an expert to manage money.
2. You can’t beat the market.
3. The best way to minimize risk is to diversify and hold for the long term.

Rule #1 describes how to evaluate the investment potential of a business. You want:

A company that means something to you (you know its inner workings because you’re passionate about it).

A company that has a wide moat, or protective buffer (whether this is a competitive advantage, a huge cash reserve, or an exclusive license).

A company with excellent management.

A company with a margin of safety (that is, a company priced so low that even if you miscalculate its target price, you’re not going to lose money).

Conducting Rule 1 Research Properly

The jacket of his book suggests that this investment strategy can be employed in as few as “fifteen-minute-a-week”. Proper research will inevitably take longer than that. However a number of subscription sites are now available that screen businesses based on Rule #1 criteria and monitor the 3 triggers suggested by Town.

The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax advisor.

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