I’ve seen the author Phil Town on TV a few times and his first book Rule #1 has a big following but I never got into it because it spent a lot of time on technical analysis, trading techniques and an analysis method that didn’t resonate with me.
But when I was contacted to receive an advance copy of Phil’s new book Payback Time, I was happy to hear it was more about value investing and analysis, and was glad to take a read.
The title refers to two things throughout the book.
1. Mutual funds are a waste of time and money where only the managers and brokers get rich
2. It is the price of the business that will be repaid in x number of years out of earnings
As with most books, it starts off by explaining why mutual funds are a bad idea backed up by data and Phil’s own personal experiences from the industry, and then moves onto the main concepts of what he calls “stockpiling”.
I have to admit I liked the section on the mutual fund and Wall Street bashing. It’s why you need to fire your financial adviser.
Stockpiling is a term used frequently in the book. It’s where an investor buys a company he / she truly understands and believes in with a margin of safety, and then continues to buy more if the price falls. Essentially, it is a buy low and sell high strategy which so many people know, but fail to do.
However, Phil does a good job of explaining the difference between price and value so that a beginner investor won’t be overwhelmed by the fear that a falling stock price will make them bankrupt, but rather a perfect opportunity to load up more as long as price inefficiencies exist.
Value Investing Principles
To decide upon which company to buy, you first need to find a company that you can understanding and be willing to work on as well. The book makes it clear that work is required to invest successfully but you don’t have to be a genius. He boldly states that any normal person can make 25% annual returns, compared to the average 6-8% you expect to see with mutual funds.
While looking for a company, you need to find awesome businesses that contains the 3+1 M’s.
- Meaning (understanding the industry, company and business model)
- Moat (competitive advantage)
- Management (passionate, ethical, dedicated, honest)
- and Margin of Safety (which is introduced later in the book)
The valuation method that Phil uses is a very simple method. He doesn’t use DCF valuation, Graham based formulas or EPV like I do. It’s very simple math, or you can use the tools on his site, but to summarize the method, you need to:
- Find the average PE
- Check BVPS (book value per share), sales, EPS and cash growth rate
- How many years does it take to repay debt from earnings?
If the company passes the criteria that each one is supposed to meet, you can now value the company.
- Use a discount rate of 15% aways
- Get the TTM EPS, growth rate calculated above, PE, and discount rate of 15%
- Follow the examples and instructions in the book or use the Payback Time calculator
A Very Practical Book
Payback Time, isn’t a value investing book per se, but for someone wanting to learn how to invest, it is an extremely practical book. In fact, it is more like an instruction manual.
The book provides step by step instructions and screenshots of Yahoo finance to show you how to find companies you are looking for. The valuation section is also dealt with in a clear step by step manner. It even goes into teaching you how to use the MSN screener.
The downside is that if the websites change, then the book is immediately outdated. Just like how the MSN screener is no longer available today.
Who is it For?
What I liked about the book is that it fills a big void by providing instructions on how to find, value and select a company. While the methods are not perfect (if there is one), I can see the book being valuable to many new investors. I see the book more as a skeleton to investing. This will be a good way for many people to start to learn.
The book is conversational and very easy to read, which I finished in 2 days by reading at a fast rate. If anything, I felt there was a little too much self promotion.