When I was contacted to review Phil Town’s latest book, Payback Time, I was thrilled. I read his first book,Rule #1, and when I used the principles he outlined, I actually made quite a lot of money investing in individual stocks.
In the past year, I’ve done more investing along the lines of How A Second Grader Beats Wall Street and have made a lot of money there as well. But I’m currently in the process of selecting some businesses to investigate.
The book’s major premises:
- Price and value are not always in sync. Having worked as a commodities buyer for several years, I can readily testify to this.
- Mutual fund managers aren’t all they’re cracked up to be.
- Once you determine a business’ value, if its stock goes on sale, buy more. Town calls this “stockpiling” (essentially, it is a buy low and sell high strategy which so many people know, but fail to do).
- Invest only in businesses you actually understand. Really. If you don’t have a genuine understanding of the business, or at least a deep interest, don’t invest.
- Make sure that business has a strong competitive advantage.
- Investigate the management like you own the company … as a stockholder, you do.
So what is “payback time”?” It is the price of the business that will be repaid in X number of years out of earnings the business generates. If you spend $27 per share on a stock and it earns $3 per share, it should have a 9 year “payback.” Town recommends only buying stocks with a payback of 10 years or less. The lower the better.
Concentrate your energies, your thoughts and your capital. The wise man puts all his eggs in one basket and watches the basket. –Andrew Carnegie (worth an estimated $250 billion in 2009 dollars)
This isn’t active trading. Town recommends sitting on the sidelines and keeping your money in a savings account when the business you’re interested in is not on sale. It is a conservative, “watch that basket” type of investing.
Should you buy Payback Time? If you’re interested in value investing and have the time, resources, motivation, and inclination to research different businesses, you would probably benefit from this very interesting, very well written book.