InvestED: The Rule #1 Investing Podcast Phil Town & Danielle Town

Have you ever cloned another investor? As the name implies, cloning refers to the strategy of following or copying the ideas of famous investors or fund managers. Most investors believe this is an ethical strategy, and Rule #1 investors actually take advantage of the fact that we can clone or follow expert investors. 

This idea of cloning goes all the way back to when Warren Buffett first started watching Ben Graham’s investing strategies, and other investing gurus openly stating that they cloned other great investors that came before them.

Mohnish Pabrai, for instance, is one of the more successful investors out there. He is a shameless cloner and follower of Warren Buffett and Charlie Munger. In fact, Pabrai once famously stated that “Thou shall be a shameless cloner.” 

Although, the best investors in the world know that cloning is only an efficient strategy when you do your own research on top of that. But what tools will help you successfully clone experts?

One of the most popular tools which I discuss today is Dataroma, to track stock picks and portfolios of legendary value investors such as Warren Buffett. The data is consolidated, categorized and presented in an easily accessible format.

What you should look out for while analyzing investors in these tools is how many stocks they own. If an investor owns less than 20 companies, for example, they’re almost certainly a Rule #1-style investor. Only clone investors with this characteristic—investors who stick to a few stocks and are passionate about those companies. Because this means they’re putting in 5% of their portfolio on average into one business, which is a scary thought for the vast majority of people who manage money. They don’t want to get committed to anything because they don’t have that level of certainty, and they’re not doing that kind of research. 

This week, I discuss these tools and the process of cloning in-depth, and discuss why this could be an effective strategy if done correctly. 

Learn more about finding quality stocks to invest in with my Four Ms for Successful Investing Guide. Click here to download: https://bit.ly/39fTzUK
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This has been an emotionally exhausting year for everyone, and you’ve probably been affected in one way or another.

Gratitude can be a powerful tool for resilience in the face of adversity, so this week we’re practicing being thankful before the upcoming Thanksgiving holiday. We are incredibly grateful for all of our listeners and hope you enjoy thinking about investing from a different perspective this week.

Years ago, I spent some time in Japan with a good friend of mine named Wahei Takeda. He’s known as the Warren Buffett of Japan, who made his entire fortune from scratch in post WWII Japan. 

Wahei told me that the most important thing that you can do every day, the thing that was responsible for him making billions of dollars, is “Be thankful 1,000 times a day.” This hit home, as I felt like I’ve been doing it my whole life, but I’ve never heard anyone put it into a formula for making money and using it as a guide to investing. Wahei calls it, “Maro Up.” “Maro” means being thankful.

When Wahei buys a company, he goes to the CEO and tells them that he wants them to learn the technique of being thankful. This idea of being thankful must be really basic and fundamental to some kind of law of nature.

So this week, I challenge you to be aware and thankful as much as you can. Put yourself in that psychological position of gratitude. Be thankful for your investing knowledge, and all it has given you in your life. Be thankful for your computer that allowed you to learn, and your ability to read so you could consume life-changing information.

There’s something about it that’s so powerful! It turned Wahei, who was poor, struggling in a country that had been devastated, into a billionaire. If it worked for him, we should try it too.

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Phil predicts a devaluation of the buying power of the US dollar. Therefore, there may be problems on the horizon for investors.

Inflation is a natural result of currency fluctuations, because it will cost more to purchase goods and services. In some markets, inflation destroyed the stock market for 20 years! For instance, when there was a high rate of inflation in the United States from 1965-1983, the rate of return was nearly 0%.

If Phil’s predictions are true, there will be a major problem for investors with diversified portfolios, because your buying power will be dwindled down nearly in half.

Diversification is the idea of creating a portfolio that includes multiple investments in order to reduce risk. Someone who is an entrepreneur might think it is best to lower his or her risk and have 100 businesses, rather than focus on one or two. Most people over-diversify. They split their money into hundreds of stocks in hopes of making a great return. This is not the best strategy, because your rate of return is going to be widely dependent on whatever fluctuations the market is experiencing. If you know how to invest, you don’t have to diversify. 

But on the other hand, investors who own fewer companies will be in better shape. Warren Buffett is a perfect example of this! He made billions of dollars in the 1970s—in fact, it was his best era for investing. The reason for this is because as the market started to realize that there were serious structural problems with currency, it became extremely volatile. The market went from 1000 on the Dow Jones peak in 1965, down 30-50% about 10-15 times in the next 15 years. Rule #1 investors thrive in this kind of market environment. This is why it’s so important to understand when and why businesses go on sale, per the Rule #1 investing principles.

Focus your portfolio on businesses you understand, that you know you are buying cheap, and let the diversification happen naturally. It’s worse to be in things you don’t understand than to be un-diversified in industries you do understand. If you’re doing your work well, you shouldn’t have an industry-wide permanent bad surprise. The number of stocks I own, and thus my diversification, such as it is, will ebb and flow as I find great businesses to buy.

Phil also believes that as a result of this election, there will be dramatic changes in fiscal policies and in tariffs with China. All of these side effects will create a lot of short-term volatility. Even just a few days after the election, the market immediately jumped up, and has just recently leveled out. It’s hard to tell what will come next.

On today’s podcast, Phil predicts what may happen next in the market and why all you can do as a rational Rule #1 investor is rely on the knowledge you’re equipped with. 

Prepare yourself for whatever may happen in the stock market. Download my Stock Market Crash Survival Guide today: https://bit.ly/3eNtFZ6

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What's going to happen in the next few months following the election? Nobody knows for sure, but there will likely be some turbulence ahead. 

If you’ve been following along with my channels for some time, you know the best method to make long term gains in the market. You have to do the research and buy companies that fit the Rule #1 criteria and are “on sale.” 

So how come everyone doesn't just do it? It could be because they’re busy adjusting to the pandemic, stressed out, or dealing with other external factors. 

Now more than ever, you need to take care of your mind and body so you can avoid making costly investing decisions and, more importantly, stay healthy. 

When you get overwhelmed by stress or fear, your rational mind loses power, and your emotions take over. Being able to control your emotions is an essential part of being a successful investor. And being able to control your emotions depends on how well you take care of yourself day-to-day. If you let anxiety, stress, or fear drive your decisions, you will end up making completely irrational choices that could hurt you in the long run. 

Instead, you want to train yourself to observe those negative feelings and learn how to deal with them. Constantly falling victim to them will only send you into a downward emotional spiral that might lead you to make bad investment decisions. Always fall back on the investing knowledge you have and let your rational mind take over. 

Rational investors have the ability to recognize when they’re feeling a bit unbalanced - and then walking away. They come back to it when they have a clear head so they don’t make a rash decision based on emotions. 

Whether it’s practicing staying mindful, reading, working out, or meditating, try to incorporate some form of practice into your life that will enable you to keep a clear head during stressful times. It will be a big help in developing your ability to control your emotions. 

Prepare yourself for whatever may happen in the stock market! Download my Stock Market Crash Survival Guide today: https://bit.ly/2TPpbYt
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Danielle is back for this week’s episode of InvestED. After almost seven weeks into recovery since first experiencing symptoms from COVID-19, she starts to reintroduce routine activity into her daily life and discusses both the physical and economic consequences of COVID-19 with Phil.

Numbers have spiked in Europe in the past week and a half and there are theories as to why.

Why have rates in some countries spiked, while others have been able to keep their number of cases down - and what does this have to do with investing?

Phil and Danielle agree that the virus is very political in the United States, especially with the presidential election on the horizon. There is no doubt that if the pandemic continues the way it has, we will see some very serious currency related issues and possibly dramatic inflation.

Businesses such as theatres, sporting events, and restaurants are already on life-support, and the long term effects of people continuing to stay home from work and businesses will lead to many businesses going under.

Phil and Danielle agree that another stimulus package will be pushed through very soon, but the question remains as to what will happen with the currency; how much can you print and put into the economy, and how will this affect the US dollar (USD) itself?

On top of this, the USD is the world’s reserve currency. If the USD goes down in value, it will injure any other country who has the dollar sitting in its vaults.

So what should we as investors invest in, and how should we diversify our investments to protect ourselves from economic crash or inflation?

If you want to prepare for the next market crash, download Phil’s Stock Market Crash Survival Guide today: https://bit.ly/3m3J7mt
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A stock split is when a company decides to exchange more shares at a lower price for stockholders' existing shares. They happen from time to time, so it's important for us as investors to understand what that means.

Stock splits make stocks more accessible to individual shareholders, make selling put options cheaper, and typically tends to increase share prices in the short run. So does a stock split impact your investment if you already own the stock? It shouldn’t, because your investment should be the value of the entire business no matter how many pieces it is split into. 
 
There's another kind of stock split which is called a reverse stock split, where you end up with less shares than you previously started with. For instance, let's say you had 100 shares and they reverse split it 10 to 1, you suddenly have 10 shares. Does it increase the value or decrease the value? Not at all. 
 
Rule #1 investors look at the company not per share. They look at it as a whole company the way an owner does. This is why the company evaluation process is a critical step in investing—if not the most important. 
 
The company evaluation process includes confirming that the business has a margin of safety. Margin of Safety is the discount rate you can buy a wonderful business, which is generally 50% off the Sticker Price. Because the Margin of Safety is just 50% of the Sticker Price, it allows you the ability to purchase into the business with lower risk. Setting this limitation on the price of a business before you buy it helps protect you by providing an extra 50% cushion off the value of the company. Since you must do a lot of research before buying a business, it should always be something you’re confident in purchasing. However, anything can happen in the stock market, and it makes sense to allot yourself an extra measure of protection. Buying at 50% off does just that.

Another way to evaluate a company is by evaluating the business’s moat. Moat is the durable competitive advantage that a company has that protects it from being attacked by competitors.

Moat is what makes a company predictable and allows us to put a value on the business. Charlie Munger said that “Coca-Cola is the perfect business because it has this gigantic durable competitive advantage, or moat, which gives it predictable cash flow.” This allows us to figure out what the future cash flow will be and value the company today, so we know whether we can buy it on sale or not.

Today, Phil answers fan questions regarding stock splits, company valuation, and explains why it’s important to do your research and due diligence before committing to any companies on your watchlist. 

If you want to learn more about how to find excellent companies at attractive prices, download Phil’s Four Ms for Successful Investing Checklist: https://bit.ly/3jV5QAn

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