Phil Town on Investing
Phil Town is the author of one of my favorite books on Investing. I had the privilege of meeting him on one occasion and found him very knowledgeable. Having read his book I highly recommend it to anyone who is planning to start investing in stocks. He explains in very simple words some difficult concepts.
His approach to investing is simple and effective at the same time. In a nutshell his approach is as follows,
1. Find a company that you really like and have a good knowledge about. If you love eating at Chipotle, research its stock. If you are an ardent Apple fan, research Apple’s stock. Dont try to invest in a company that you dont have much idea about.
2. Ok so you really like this company. The next thing to find out is if the company is fundamentally strong. For this he recommends looking at key financial ratios which are mainly,
- Minimum average annual growth for EPS
- Free cash flow
- Sales
- Book value
For each of these ratios he explains in detail what kind of growth should you look for. I really enjoyed reading this part of the book since I always used to get confused on what financial ratios should I focus on from the hundreds that are available.
3. If the stock matches the above criteria, the next thing to find out is if the management of the company is good or not. Obviously you want to buy companies that are well managed. One of the easy ways is to look at the insider ownership. You want the company management to own a large stake.
4. Alright so now we have a company that you love, it has good fundamental and a good management. What’s the next thing to look for? It is the MOAT. What distinguishes the company from its competitors. Is it branding, monopoly or is there a very high cost of entry?
5. Last but not the least, determine the fair value, and buy it ONLY when it’s at a 50% discount, thus giving you a “margin of safety” against the vagaries of the “Mr. Market.”
Again the above points are just a short introduction to his book. I highly recommend buying the book and reading it. I have so many books that I have bought but never had enough time to read.
Lets look at my portfolio. I have a sizable chunk of my portfolio in Garmin and it gets a check mark on all the above points. Phil Town seems to agree too. This is what he writes in his blog,
http://www.philtown.com/phil_towns_blog/2008/04/garmin-much-ado.html
http://www.philtown.com/phil_towns_blog/2008/04/garmins-moat-ga.html
Garmin has dropped by 65% in the past few months without any change in its fundamentals. It announced blockbuster results in the last quarter. This is what I call market madness. I would buy more at this price unfortunately I don’t have any free cash lying around.
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April 19th, 2008 at 12:35 pm
Absolutely. What better to rely on than fundamentals. The trick lies in identifying these fundamentals. Always used to wonder if there can be a ‘magic trick’ ever to do so. Well, this IS next to it.
Need more such stuff man!!
April 29th, 2008 at 10:33 am
Thanks for the mention!