Rule #1 (Phil Town)

• Rule #1 is "Don't lose money" or, a bit more explicitly "Buy wonderful businesses at attractive price".
  • Wonderful means (3 Ms):
    • Meaning: you understand the business,
    • Moat: it can consistently produce high ROI,
    • Management: the management is competent and aligned with shareholders.
  • Attractive price is <50% of a fair price (this is the fourth M: Margin of Safety).
• Meaning: something that you have passion and talent for and you understand the industry well. Bascically invest in business that you understand well and won't be bored following.
• Moat: durable advantage, hard to compete with them. These companies are easier to predict because they show sustained growth. Moats are usually based on:
  • Brand
  • Secret (IP)
  • Toll (exclusive control, usually regulation/licensing-related)
  • Switching costs
  • Ability to price cheaply
• Moat indicators (The big Five):
  • ROIC
  • EPS growth
  • Sales growth
  • Equity growth
  • Cash growth
  • Also check that the debt is sustainable (can be paid from FCF of 3 years)
• Don't buy businesses without a moat -- they are hard to predict.
• Management:
  • Owner-oriented (invested themselves, honest)
  • Driven (have a BAG: big audacious goal)
  • Look at insider trading
  • CEO compensation
• When to sell:
  • The business is no longer wonderful.
  • The price is too good (then we can sell, and invest elsewhere for more reliable profit).
• Tools for price movements: MACD, stochastics, moving averages. You can use technical analysis to get in and out at a better point.