Phil Town’s Rule #1, Part #5

[This is the final part of a multi-part review of Phil Town's book Rule #1, The Simple Strategy for Successful Investing in Only 15 Minutes a Week! If you haven't already, you might want to read Part 1, Part 2, Part 3, and/or Part 4 first.]

Does anybody really believe that they can buy a book containing a sure-fire formula for riches? I do not mean conceding that it is remotely possible, I mean truly believing that Town’s book, or one of its thousands of competitors, will disclose a magic technique to the reader. I am sure that there are a few out there that are that gullible, but I don’t buy the idea that Town’s large readership is made up entirely of such folk.

So maybe my efforts to demonstrate that Rule #1 does not work were a waste of time. If Town’s audience does not really expect his scheme to make them rich, then why bother showing that it will not? Moreover, if we accept that there are very few people out there who are both in the habit of reading books and naïve enough to think that reading a particular one will make them rich, how do these books become bestsellers?

For me, the most meaningful revelation from Rule #1 is just how impractical it is to carry out what Town advises. I expected that his formula for picking stocks would not work in the sense that the stocks picked would not do particularly well. I did not expect that it would not work in the sense that it would barely function, that it would be so hard to use it to pick stocks at all. And you might think that this kind of not working would be a big problem for the sales of the book. A scheme that is easy to operate but does not pick winning stocks at least has the virtue that it could take a year or two before the readers realize it is defective. A scheme that is more or less inoperable from the start would, you would think, be noticed right off and become a hindrance to climbing the bestseller lists.

The flaw in that logic is that it assumes that readers actually attempt to follow Town’s advice and discover it is defective. But just as the vast majority of Town’s readers does not, in the cold light of day, really think that his scheme will make them rich, the vast majority also does not bother to try to follow it. Why would they? They know deep down that it will not work, so why put in the considerable effort required to shatter the illusion that it might work? Which then begs the question, why buy the book at all?

Because Rule #1, like nearly all books (and seminars, for that matter) is, ultimately, primarily a form of entertainment.

Consider television cooking shows, a genre that dates back to the earliest days of the medium. Although nominally instructive, it is clear that almost all viewers will never cook the elaborate dish that the host prepares. They watch not to so they can follow the instructions, but because it is entertaining. If you are into food, watching a skilled chef prepare and discuss a dish is fun. You can, at least in the abstract, imagine yourself preparing and even eating it, and that is enjoyable for many. I know people who buy and read cookbooks on the same basis.

Or consider cowboy hats. Putting one on has no chance of turning you into a cowboy. But it helps with the fantasy of being one. (In reality, it is probably not a great job: long hours, low pay, lots of big dumb smelly animals, and no Internet access.)

The fantasy that goes with Rule #1, and other books like it, is that you will read them and become rich. That any modestly intelligent reader knows, at some level, that this is really unlikely, does not diminish their appeal. A person can read the book and imagine becoming rich just like the ordinary people in the inspirational stories included in the text. That some of the instructions are, in fact, impractical is unimportant. They only need to seem practical to somebody who will never attempt them. Just as the host of a cooking show can get away with using obscure ingredients or a tricky technique requiring years of practice, Town can get away with vague instructions that do not produce the desired result.

So in a narrow sense, I am willing to forgive these books for being as bad as they are. They fill an entertainment role for some, and, apparently, do it well. The problem is that personal finance is still an area that American adults need to master. After you are done watching the celebrity chef prepare Cajun crawfish stew, somebody still needs to cook dinner.

[Links to parts of this review: Part 1, Part 2, Part 3, Part 4, and Part 5]

Books, Gurus, Investing | Frank Curmudgeon | February 12, 2009 11:31 am

9 Comments

By Isaac, February 10, 2010 @ 1:59 pm

You raise some good points. It is not easy as it looks. But the thing that appeals to people is that many, many have been burned by fund managers, mutual funds, and buy and hold stategies. Town strikes a cord in that people getting involved with their investing can beat the experts…they also can do worse of course. But self-empowerment does sell.
By getagrip, February 23, 2010 @ 10:18 pm

Sigh, and I had such high hopes for this book. However, upon reading the “every other type of thing you’ve been told to do in investing is wrong and I’ve got the real answer” first chapter, along with the vague “I went from one thousand to 1 million in a couple years” claim, my WTF meter rang off and I just had to check out some reviews.

Thank you for this, if I want to effectively day trade I’ll read up on that. You’ve saved me some hours of crunching through the rest of the book before taking it back to the library.
By UFjeff, March 1, 2010 @ 11:40 am

I don’t mean to play devil’s advocate, but how can you criticize whether or not this book works, if in fact you yourself have not tried the methods? I’m not new to the investing / trading arena, and while I can’t say this book, or any other for that matter, is a homerun because that’s subjective, I do see this book helping people break their “fear of trading,” which many newbies and even veteran traders often face. He’s just trying to say that you can do exactly what mutual funds are doing without having to pay the fees. All most mutual funds are trying to do is mirror the market.

If it was a $50 book then I’d have a different argument, but it’s not. I’ll buy it just to see what his strategies are. Every financial book makes claims. Just take the important points of the book and apply it to your style of trading, or don’t.
By RickV, March 17, 2010 @ 4:28 pm

I’m one of those folks who has a little experience with investing and EXPECT to get 10% on my investment if I let monkeys handle my money. After a thorough read, what I got was this: Town’s Graham/Buffett method of investing proposes that I can get 15% on my money. This doesn’t ssem like such a huge stretch when I consider the fact that Buffett still isn’t losing money. The one gripe I have is that he characterizes good companies as being almost as common as flies. He tells us that if the numbers don’t look good, forget it, there are plenty of good companies out there. 15 minutes? Try 15 hours…then you will come up with a handful of good investments. So does the rubber meet the road? All I can say is that I decided to drop $8,000 into these hand-picked hotties and 1.5 years later, I have doubled my money. It’s not a bad system, but I agree that there are plenty of dark crevices into which one could fall. The key appears to learn a good system and then keep learning and adjusting your system over time. Of course, you could simply take the shortcut and just look at the S&P Fair Value calculations and buy at 25-50% off. Generally, the Town method gives me very similar calculation for my hotties.
By Jason, March 26, 2010 @ 11:32 am

I tried this book as a fresh faced beginner, some years back and it doesn’t work. If you want to loose money go right ahead and dive in.

After, a month or two of trying to make a “margin”, I bailed and read the intelligent investor by Benjamin Graham and all of Warren Buffets, letters. I’ve since read all the investing classics and rule one ain’t one of them.

There is NO substitute for hard work in this process.

Here’s the thing, the stock market is a closed system, for everyone who gains 15% there’s someone loosing 10% (if we assume the economy grows at 5%). It’s like handing everyone a million dollars and saying, hey no problem with the economy, chill out, take some acid, and inflation doesn’t exist, la la la…

Cloud Cookoo land!

Actually, the only way to make money doing this (and I do) is the following:

Be as sure as you can about the value of the business, I mean really sure, not projecting price to earnings or PEG or any of that rubbish, really get under the hood. There are ways and means to do it, they all require careful study, and they don’t all apply to all types of businesses. You have to understand what it is you’re buying.

Buy the thing at a discount, to it’s true conservative value. Again value, it’s hard to get a handle it but there you go.

Have the ability to wait it out, I’ve watched some of my buys get stampted and trampled down 60% or more in 2008. If you can’t live with that, pay your morgage off early, collect fine wines, buy government bonds. Be clear indicators will not save you!

Finally, here is a real solid piece of advice, if the wiltshire all share index is valued at 120% the value of the economy and you start buying, you will loose money over the long term, that’s a guarentee.

For those in Phils camp, keep on project future earnings with PEs of 50 jumping in and out of the markets with the rest of the lemmings, remember it’s a closed system, and you’re making me rich (thankyou).
By Graham, June 4, 2010 @ 9:59 am

Good article. An advice to know and follow
By George, July 23, 2010 @ 11:32 am

Jason, first you state the stock market is a closed system. Then you talk about 5% growth. You can’t have it both ways.

As for Phil Town, in what part III, the author shows his method made 4% vs 2% of those that didn’t make it. Okay, what did the mutual funds do in the same period? We’ve all seen the chimp beat the funds. There might be a reason every year the various “which fund to buy” issues are top sellers.

I’m about convinced any system will equal or beat the average mutual fund. If for no other reason than the fees cut any improvement over the S&P to insignificance.
By Matt, August 8, 2010 @ 12:48 pm

I think that it is a good book, if nothing else it gets you thinking about the market. I think it was a good learning experience. I am a beginner, was afraid of the stock market, didn’t know where to start; and even if his strategy doesn’t work, the book has compelled me to develop my own strategy. It has also gave me a couple of methods on how to research a company…and it was a really easy read. Do I believe by reading his book and follow his strategy that I will get rich or obtain 15% gains? who knows, but I will say that it has givin me a desire to learn more. Do I think there is more to making money that what this book holds? Absolutely, but to me this has compelled me to learn more about what I don’t understand, and I am sure that I will be successful.

Good article by the way.
By John, August 19, 2010 @ 7:53 pm

My question is, “What was Phil Town earning, BEFORE and AFTER he wrote his book and made personal appearances, etc.?”
Thank you for your in-depth analysis.