INVESTED

How Warren Buffett and Charlie Munger Taught

Me to Master My Mind, My Emotions and My
Money (with a Little Help From My Dad)
DANIELLE TOWN
DANIELLE TOWN is the daughter of bestselling financial author Phil Town who wrote the bestseller Rule #1. Growing up,
Danielle rigorously avoided learning about investing until she became a lawyer and found her money and life were out of control.
To regain her financial freedom, she asked her father to teach her value investing, the investment approach used by Warren
Buffett and Charlie Munger. Phil Town agreed to take a year to teach her daughter how to go from being a reluctant investor to
one who knows exactly how and when to invest in wonderful companies. What began as a series of conversations eventually
morphed into a year-long investing plan and a personal finance podcast called InvestED (www.ruleoneinvesting.com/podcast).

The author's website is at: www.danielletown.com.

ISBN 978-1-77544-943-0

SUMMARIES.COM is a lifetime learning company specializing in business smarts. We provide concise information and tools for
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 Invested – Page 1

MAIN IDEA
The best way to achieve financial freedom is to Month #1 – Be brave Month #2 –#2
Month Know yourmber
– Know number Month
Month#3
#3––Vote with with
3 – Vote youryourey
money
become an "educated investor" – someone who
invests to make money by backing companies with Write down the things you would Calculate how much you need in Identify how you currently vote
missions you personally understand and support. do if you can achieve financial order to achieve financial freedom with your money by the
freedom. It's important to start with as you define it. It's only once you decisions you make. Then think
the end in mind when it comes to know this that you can decide the about the missions you'd like to
learning how to invest. Articulate best way to move forward. support in the future instead.
what financial freedom means.
Page 2 Page 2 Page 3

MonthMonth
#4 – Start
#1 – doing research
Be brave MonthMonth
#5 – Moats & management
#2 – Know mber Month #6 #6
Month – Circle of competence
– Circle of compo

The first principle of value Identify three companies from Clarify to yourself what your
investing is to do your research. your research which have a personal circle of competence
Start reading business news and moat and strong management. is. Also face head on your
So how exactly do you become an educated company filings. Start doing Learn how to calculate their preconceptions about
investor? You have to learn and then apply the and keep doing research. growth rate going forward. money & financial freedom.
value investing principles and methodologies used
by people like Warren Buffett and Charlie Munger of
Berkshire Hathaway, the world's most successful Page 3 Page 4 Pages 4 - 5
investors.
Allow yourself about 12 months to fully learn the
Month
Month#7#1– –Look for bargains
Be bLookrave Month
Month#8#2
– Margin
– Knowofmber
safety Month Month
#3 – 3 #9 – Stories
– Vote with yourey
underlying philosophies and practices of value
investing. Aim to take a step forward every month
as you start applying what you learn. Set aside a Choose three companies you like Calculate the Margin of Safety For the three companies you
little time each month where you will work on and calculate their Ten Cap price price for each of the three have been researching, write
advancing your investment program and you'll be and Payback Time. Apply Warren companies you've chosen. their Story and their Inverted
amazed at how much you can achieve over the Buffett's calculation of Owner Use that to decide on a buy Stories. Try to figure out why
course of a year. Earnings to price a company. price you'd be happy with. you should not buy them.
"Once you have your bearings, take your practice
where you want it to go. Make the practice of Page 5 Pages 5 - 6 Page 6
investing your own, and you will have something
that stays with you your entire life, a powerful skill
that no one and nothing can take from you. I hope it Month
Month#10
#1 –– Be
Portfolios
brave Month
Month#11
#2 – Know
When mber
to sell Month
Month#12
#3 –– 3Pause
– Voteand celebrate
with yourey
compels you to think about your finances
differently—not as a means to an end but instead Pick your favorite company and Set up your systems to keep You've come a long way in the
as a source of happiness and freedom. My practice write your wishlist to put tracking the performance of past 12 months as you've
of investing has created the deep happiness that together your very own "antifragile the companies you like on an moved towards becoming an
comes from my authentically making the life I want, portfolio". Have a plan for ongoing basis. Be ready to move educated investor. Pause, take
and that happiness feels passionate, big, and free. how and when to invest. when the time is right. stock and celebrate progress.
May your Investing Practice be successful beyond
your wildest dreams."
Page 7 Pages 7 - 8 Page 8
– Danielle Town

Month #1 – Be brave
The
12-Month
Plan Write down the things you would
do if you can achieve financial
freedom. It's important to start
with the end in mind when it
comes to learning how to invest.
Articulate what financial freedom
Job#1 as an aspiring investor is to clarify what you want
to achieve by investing. There are lots of potential
reasons but if you're like most investors, you're probably
trying to achieve financial freedom.
“Financial freedom” could mean having just enough in
the bank to add flexibility to our lives—to stay at a
low-paying job we love and be able to easily support
loved ones, to work part-time, to have reliable childcare,
to quit a salaried job and start a nonprofit, to move to a
safer neighborhood, to travel, to simply have a financial
cushion in the bank for the apocalypse. To live the life
each of us was born to live, whatever that might be.
Then there is the ultimate goal: to be truly financially
comfortable at the time that we want to fully retire or,
even better, to be able to forget the money and just do
what we love forever. That’s financial freedom."
– Danielle Town
The undeniable reality is you won't be able to get to
financial freedom by working at a job and saving as
much as you can. Inflation (which runs at 3 percent per
year long-term) will dilute the actual spending power of
your nest egg too much.
The only way to achieve financial freedom is to learn
how to invest in assets which appreciate in value and
then to make a start on making those kind of
investments. Clarify what you would do if you had
complete financial freedom and write that down. This will
be far more meaningful and motivational than merely
trying to add zeroes to your bank balance.
"The basic ideas of investing are to look at stocks as
businesses, use the market’s fluctuations to your
advantage, and seek a Margin of Safety."
– Warren Buffett
"If you want to get rich and stay that way, study Warren
Buffett; he is simply the best investing teacher in the
world. In 1956, he started the Buffett Partnership in
Omaha, Nebraska, to invest his own money and that of
family and friends. Over the next fourteen years his
partnership returns averaged 31.5 percent per year and
his $100 grew to $25 million (about $175 million in
today’s dollars). A runaway success already, in 1969 he
closed the partnership and urged investors to buy the
stock of Berkshire Hathaway, a public company that
Buffett and his investing partner, Charlie Munger,
controlled from Omaha and into which he put his entire
fortune. Today, he is an elder statesman of the value
investing world: at eighty-seven, he’s worth over $73.4
billion and continues to run Berkshire."
– Phil Town
The Month #2 –#2
Month Know yourmber
– Know number
12-Month
Plan
Calculate how much you need in
order to achieve financial freedom
as you define it. It's only once you
know this that you can decide the
best way to move forward.
"Your number" is how much money you have to save
before you can quit your job if you want to. To reach that
point, there are actually four numbers you need to know:
1 2 3 4
How much How many How much The required
you want to years you you can add rate of return
spend on have to inject to your to achieve
your lifestyle more money investments financial
every year into investing each year freedom
(Spreadsheet at www.danielletown.com/yournumber)
n How much you decide to spend on your lifestyle is
entirely up to you. Keep in mind, however, that
inflation will mean to maintain your specified lifestyle,
you will have to spend more in the future.
Invested – Page 2
n How many years you have to let compound interest
work its magic will be fixed so clearly you want to start
as early as possible – right now in fact.
n You have to fight to put as much money as possible
into your investment program because expenses
have a way of rising to match your income if you're not
deliberate and disciplined about this.
n The last component – rate of return on your
investments – is also fixed for most people unless
you are willing to learn to invest like Buffett and
Munger. If you can figure out a way to increase your
rate of return, you'll then be able to bring your
retirement forward by years, maybe even by
decades.
Some people try and abdicate running their investment
program and instead put their funds into mutual funds,
market index funds, exchange-traded funds (ETFs) or
Robo-advisers where computers pick the stocks. All four
of these investment vehicles have an underlying
problem in that they have management fees which
generally add up to 3 percent. When you add in yearly
inflation of 3 percent, those funds have to consistently
grow in value by 6 percent per year just to tread water.
History shows none of these investment vehicles
achieve that consistently year-in and year-out.
However, if you become an educated investor, you can
achieve returns of 20 percent per year in the stock
market, and potentially more. A study was done which
showed if all you did was copy Warren Buffett's trades
for the past thirty years, you would have made more than
20 percent per year. Warren Buffett himself has said he
could make 50 percent per year if he wasn't forced to
invest the huge amounts of money Berkshire Hathaway
has so achieving an investment return of 20 to 25
percent a year seems realistic.
"Buffett says if you’re not going to learn to invest
properly, then buying a low-fee index that tracks the
market like t he S&P 500 is the next best
choice—acknowledging that you’ll get a market return of
maybe 7 percent on average. Basically, you’re betting
on America going up over time. That’s probably a good
bet because America has a durable competitive
advantage over other nations."
– Phil Town

The Month
Month#3
#3––Vote with with
3 – Vote youryourey
money
12-Month
Plan
Identify how you currently vote
with your money by the
decisions you make. Then think
about the missions you'd like to
support in the future instead.
Right at the outset of your personal investment program,
you should create some space for your "Investing
Program" office. If you don't have any physical space
available to dedicate to this task, you can fill a box with
all your investing materials. That way whenever you take
out that box, you signal to your brain that you're now
focusing on your investment activities.
Put in the box or into your space:
n Books about investing – like Rule #1, Payback Time
and The Education of a Value Investor.
n Photos that inspire or motivate you.
n Any talismans or other objects that remind you of
your values and goals.
n Maybe even a scented candle and a lighter so
whenever you open that box you can create an
inviting atmosphere.
You also need to acknowledge right at the outset that the
number of corporations and publicly listed companies
you can invest in is huge. There are thousands of
companies you can invest in. You need a philosophy or
strategy for narrowing the field a little.
"I decided to look for the few companies I could find that I
really love, corporations that are wonderful in the sense
that they share my values and they walk my talk. I
wanted to support the Andrew Carnegies, Steve
Jobses, and Oprah Winfreys of the world. They were not
driven only by greed. They weren’t perfect; they were
driven by the personal desire to be the best, to create the
best product, to invest their lives in making the best thing
they could. It’s not idealistic to say so."
– Danielle Town
The first step in finding good companies to invest in is to
figure out their "Story". For any company, their Story will
be a blend of how the business got started, who runs it
Invested – Page 3
now, what protects them against competition and what So where do you start? Warren Buffet suggests that you
values they stand for and enshrine. Later on, you can use your "Circle of Competence" to decide on one or two
also factor in the market value of the business and industries which you should focus on to find businesses
decide on a price you'd be willing to buy at as well. that you really like and understand. Imagine three circles
Articulating the Story of any companies you are that look like this:
researching is helpful because it helps you stay focused
on the most important issues. It blends your personal
take with the cold hard numbers involved.
Understanding the Story of a company is the first step in
deciding whether or not you should invest in it.
The #4 – 3
Month #3 Start doing
– Vote research
with yourey
12-Month
Plan
The first principle of value
investing is to do research.
Start reading business news
and company filings. Start
doing and keep doing research.
The prevailing theory of stock markets is called the Then select one industry which lies at the intersection of
Efficient Market Hypothesis or EMH. EMH states that a those three circles for you and start doing your research
stock's price is always rational and fully reflects all to find a company or companies within that industry that
are doing things which impresses you.
available information at any given time. Therefore, the
market price of a stock is exactly the same as its Look at:
underlying value and there is a 50 percent chance the
n The annual reports (Form 10-Ks) which the
price will go up and a 50 percent chance it will go down.
companies file with the Securities and Exchange
By contrast, the value investing mindset championed by Commission (SEC).
Warren Buffett, Charlie Munger, Phil Town and others
n The quarterly reports (Form 10-Qs) which public
suggests the markets are not highly efficient at all. To
companies file every quarter along with calls with
take advantage of that fact, the value investing
analysts which are recorded and transcribed.
approach is:
n Business newspapers like the Wall Street Journal or
2 the Financial Times.
n Warren Buffett's letters which he writes every year to
Find a Wait for a Berkshire shareholders. He has written these letters
business you recession or an for about forty years now and they contain a
1 really like and event to reduce comprehensive and practical education in the
understand its price principles of value investing.
Hold onto your Buy stock in
stock forever that business 3
as normality when others Value Investing
returns are selling
4

The
12-Month
MonthMonth
#5 – Moats & management
#2 – Know mber
Plan Identify three companies from
your research which have a
moat and strong management.
Learn how to calculate their
growth rate going forward.
Warren Buffett and Charlie Munger make it clear they
consider most companies to be "too hard" to understand
and therefore to invest in. They always look for
companies which have a moat (a sustainable
competitive advantage) and competent management.
In particular, Charlie Munger has a checklist which he
runs through for any investment he is researching:
1
þ Is this company inside my
personal Circle of Competence?
Do I þ Are any of the gurus I follow
understand buying this company's stock?
the
þ Do I understand the company's
company?
plans, challenges and opportunities?
þ What is my level of confidence
about my research?
2
þ How hard is it for other
companies to compete?
What is the þ What are the Big Four Rates:
company's • Net income
moat? • Book value
• Sales revenues
• Operating cash
þ What is the Windage Growth
Rate – the forecast growth rate going
forward for the next few years?
þ Does the company have cash
reserves if it loses money for years?
3
þ Does the CEO have integrity and
discuss things candidly?
Do I like the þ Do management talk to investors
managers when trouble occurs?
of the
þ
company? How happy are the company's
employees and suppliers?
þ Does the company have or plan to
take on debt?
4 family members will view wealth as evil while others will
þ What is the margin of safety on
Can I buy an investment at the moment?
stock at a
reasonable þ Can I buy stock in the company
price? at a reasonable price?
As is made plain by the checklist, the key to value
investing is to find a business you like and understand
and then evaluate the people running the company. If
the company gets a tick in those two areas, you then
determine whether the business has a moat – an
intrinsic competitive advantage which is sustainable.
Moats typically come in one of six varieties:
1. A well-known brand name – like Coca-Cola or
Harley-Davidson for example.
2. High switching costs – if customers decide to switch
away from the company.
3. Network effects – where the more users there are,
the better. (Facebook for example).
4. A toll bridge – where a company has a monopoly or a
near monopoly in its industry.
5. Intellectual property or trade secrets – proprietary
information and know-how.
6. Price – where a company is the lowest-cost producer
and can drop prices lower and still make money.
You want to evaluate how intrinsic and durable the
company's moat is before you make a decision to invest
in it or not.
Invested – Page 4
The
12-Month
Month #6 – #2
Month Circle of competence
– Know mber
Plan
Clarify to yourself what your
personal circle of competence
is. Also face head on your
preconceptions about
money & financial freedom.
Whether you realize it or not, your family will have a
tradition about finances, wealth and money. Some
view money positively and with an abundance mindset.
To face your own preconceptions about wealth:
1. Clarify how wealth is viewed inside your own family –
and acknowledge it openly.
2. Be thankful for those traditions – and all of the
experiences which brought those traditions to life.
3. Transform your mindset moving forward – into one
of abundance rather than fear. Visualize yourself as
a successful investor and create a new tradition you
want to apply moving forward.
The simple dynamic is you'll be more successful as an
investor if you view wealth as a positive force for good in
your life and for your family. The better you feel about
being an educated investor, the more energy you will put
into acting as one.
To become more competent as an educated investor
this month, do two things:
1. Put together a wishlist – of companies you find
interesting investment opportunities. Remember,
these should be companies which offer products and
services you understand and which have
management you admire and a viable moat.
Companies which are outside your area of expertise
or which have no moat or strong management go
into your "Too hard" folder. Put together your wishlist
of great companies.
2. Try some "fantasy investing" – write down on a piece
of paper how you would allocate the money if
someone gave you $1 million to invest today. Run a
paper portfolio for a while to build your confidence
and learn how to make decisions. Track your
portfolio and allow for transaction fees.

While you're doing your on-paper investing, you should
also open a brokerage account with a stock brokerage
company like Interactive Brokers, TD, Ameritrade,
TradeStation, Schwab or Scottrade. This is similar to a
checking account but the money you put into this
account can be used to purchase stock. You will be able
to open a brokerage account online.
If you track your fantasy stock investments in something
like an Excel spreadsheet, you can update the value of
your paper portfolio as often as you like. Keeping track of
how you do on this warm-up exercise will ideally boost
your self confidence that you are learning more about
value investing all the time.
The Month #7 #2
Month – Look for bargains
– Know mber
12-Month
Plan Choose three companies you like
and calculate their Ten Cap price
and Payback Time. Apply Warren
Buffett's calculation of Owner
Earnings to price a company.
The fourth item on Charlie Munger's checklist was to buy
stock at a price that makes sense and has a margin of
safety. There are three ways to calculate pricing:
1. Ten Cap – whether the total return on your
investment will be 10 percent or more every year.
You calculate the amount of cash the owner can take
out of the business without any problems and
multiply that by ten. The higher the cap rate is, the
higher your rate of return is and the more the
business is worth.
To use this, you need to get an accurate picture of
what the true "owner earnings" for the company is.
The formula for calculating that is:
Net income
+ Deprecation and Amortization
+ Net Change: Accounts Receivable
+ Net Change: Accounts Payable
+ Income Tax
+ Asset Maintenance Capital Expenditure
= OWNER EARNINGS
2. Payback Time – the number of years it would take to
get your whole purchase price back. A payback time
of eight years or less is a sensible price for a private
company while for a public company, a payback time
of sixteen years or less is preferred. The formula for
payback time calculations is:
Total Purchase Price
- Free cash flow in year 1
- Free cash flow in future years (compounded)
= PAYBACK PERIOD
Note that you have to factor in how you project the
free cash flow will grow in the future. Use the
Windage Growth Rate which reflects the potential
variability in the actual growth rate.
3. Free cash flow – which is a very direct and
unambiguous way to value the company. The
formula for free cash flow is:
Net cash provided by operating activities
+ Purchases of property or equipment
+ Any other capital expenditures for growth
= FREE CASH FLOW
"There is one major difference between my two small
investments and an investment in stocks. Stocks
provide you minute-to-minute valuations for your
holdings, whereas I have yet to see a quotation for either
my farm or the New York real estate. It should be an
enormous advantage for investors in stocks to have
those wildly fluctuating valuations placed on their
holdings—and for some investors, it is. After all, if a
moody fellow with a farm bordering my property yelled
out a price every day to me at which he would either buy
my farm or sell me his—and those prices varied widely
over short periods of time depending on his mental
state—how in the world could I be other than benefitted
by his erratic behavior? If his daily shout-out was
ridiculously low, and I had some spare cash, I would buy
his farm. If the number he yelled was absurdly high, I
could either sell to him or just go on farming."
– Warren Buffett
Invested – Page 5
Month
Month#8#2
– Margin
– Knowofmber
safety
The
12-Month
Plan Calculate the Margin of Safety
price for each of the three
companies you've chosen.
Use that to decide on a buy
price you'd be happy with.
Being able to value a company three different ways is
very useful. By comparing those three data points you
have calculated for each company, you can then decide
on a buy price which incorporates a healthy margin of
safety.
Both the Ten Cap and the Payback Time approaches to
valuation have a margin of safety automatically built in.
To include a healthy margin of safety for a valuation
using the free cash flow approach, you can incorporate a
discounted cash flow analysis.
A workable margin of safety formula is:
1
Calculate what the company's Earnings Per Share
will be 10 years from now. This is done by
mutlipying today's earnings per share by the
windage growth rate, repeated ten times.
2
Calculate the company's market value in 10 years
time as a multiple of per share earnings.
3
Divide that future market value by 4 to get what
today's market value should be. Use that to
determine what the sticker price of shares
should be at the current time.
4
Divide the company's sticker price
by 2 to come up with your margin of
safety buy price today.

Notably, these three pricing methods will sometimes
give dramatically different results. That's to be expected
because each measures different things, but as a
general rule-of-thumb:
n Payback time is often the most accurate and useful
because it is based on free cash flow generated by
the company. It also factors in the potential of the
business to grow that free cash flow.
n If you can buy a public company at ten times owner's
earnings or less, you're probably getting a very good
deal. It won't require future growth to be successful.
n The margin of safety calculation gives you a very
conservative public company value.
It is also worth noting these calculations of the present
value of a company use only basic algebra. You can do
the same with an Excel worksheet if you are
experienced enough and familiar with the software.
Excel has inbuilt formulas for "Present Value" and
"Future Value" which work very well. The ability to be
able to do your own calculations to arrive at the price
you're willing to pay today is invaluable.
"‘Margin of Safety.’ Buffett says that those are the three
most important words in investing. We only buy when
the price gives us a Margin of Safety. The Margin of
Safety is a price below the company’s value that will
protect us from most mistakes. Not all. But most.”
– Phil Town
Put together a checklist of the items you need to
research before you will consider investing in a
company. Doing this will help you avoid confirmation
bias where you only look for data which confirms your
preconceptions about a company. To avoid that and
other mistakes, force yourself to go right through your
checklist first. It's also useful if you add to your checklist
items that have tripped up other investors so you can
learn from their mistakes.
"In spite of the rocketing stock market, some economists
and investors, including me, think the United States may
soon enter into another recession and market decline.
Unlike what most people think, this situation could
actually create a great opportunity to buy wonderful
companies at attractive prices."
– Phil Town
The Month #9 – Stories
12-Month
Plan
For the three companies you
have been researching, write
their Story and their Inverted
Stories. Try to figure out why
you should not buy them.
If you're considering investing in a company, you first
should sit down and write up their story:
• Write a short overview of the company
• State the company's mission and why you like it
• Analyze their moat and how it protects them
• Talk about who their competitors are
• Examine the management and their integrity/talent
• Calculate Ten Cap, Payback and Free Cash Flow
• Analyze whether it has a Margin of Safety
• Describe event which puts this company on sale
• Evaluate if that event will change soon
• Come up with three reasons why you should buy
Once you go through that exercise and come up with
three reasons to buy, you then invert the story. You take
those three reasons to buy and see if you can prove the
opposite is in fact true. If you can rebut those inversions,
that will also help you avoid confirmation bias.
"It is in the nature of things, as Jacobi knew, that many
hard problems are best solved only when they are
addressed backward."
– Charlie Munger, commencement address to the
class of 1986 at the Harvard Business School
Note that as you work to develop your reasons to buy
and then prove or disprove your inversions, it may
become too hard to be certain. As soon as that happens,
the investment proposal should go into the "Too Hard"
list. Be prepared to allocate investments to that list at the
drop of a hat or in other words as soon as uncertainty
creeps in. But if, after the inversion you end up becoming
more certain about your analysis of the company, it then
goes on your wishlist of wonderful companies to buy.
You then sit back and wait until the price is right.
Invested – Page 6
"Doing the inversion was more painful than I thought.
Playing devil’s advocate on a company I love was like
cross-examining my best friend—it’s emotionally
terrible, but I also know exactly where to find her weak
spots. In the process of working on my fear of buying, I
had become emotionally attached to my favorite
companies, and that was a sign that the inversion
process was vital to protect me from an irrationally
exuberant decision. A company that survives an
inversion has passed its cross-examination and made it
into my “Buy It” pile."
– Danielle Town
While you're getting good at this, you should keep
running your paper portfolio to increase your confidence
in your growing investment acumen. Add investments in
companies which pass the story and inverted story tests
and see how they perform.
Another thing you might consider is to buy a very small
position – say about $200 worth of shares – in a
company you're considering for a much larger future
investment. Buying a few shares will let you see how you
emotionally handle it.
"Often, I’ll buy a small position in a company I’m
interested in, because as soon as I own some of it, I start
to understand it in a completely different way than when
it was just theoretical. All of a sudden, my name is on the
line for that company, and it’s real. My reaction to owning
a few shares lets me know if I want to keep going with
buying more of it, or if I should stop and wait. I know
other value investors who do the same thing.”
– Phil Town
The one thing you want to avoid doing is checking stock
prices every day. All that will do is make you stressed
and frustrated that you didn't manage to buy at the very
bottom and sell at the very top. Admittedly, if there's a
market meltdown you might want to buy more shares in
the companies on your wishlist but if that happens, you
will hear about it from the general media.
"It doesn’t matter what minor price variations are
happening if you want to own that company. If you know
you have a Margin of Safety and you want to buy it, that’s
all you need to know. As long as it’s on sale, the actual
moment-to-moment price doesn’t matter."
– Phil Town

Month #2
Month #10– –Know
Portfolios
mber
The
12-Month
Plan Pick your favorite company and
write your wishlist to put
together your very own "antifragile
portfolio". Have a plan for
how and when to invest.
The conventional approach to putting together an
investment portfolio is to "diversify, diversify, diversify".
That is, invest in a wide range of businesses in different
industries so if one goes down, that loss may be offset by
another stock which is appreciating in price. The
problem with that is when a major market meltdown
comes along, nothing is rising to offset the falls across
the board.
A better idea is to try and put together what has been
termed an "antifragile portfolio" instead. This is a
portfolio which benefits from and is made stronger by
adverse events. This kind of portfolio will be made up of
just a few wonderful companies with durable moats.
They will flourish during down times for lots of reasons.
"Companies with a durable Moat do not just withstand or
barely eke through market chaos; wonderful companies
generally benefit from Events. If there is inflation, their
Moat protects them from competition and they can raise
their prices as their costs of labor and material rise. If
there is deflation, their Moat keeps customers coming
back, and that protects them from having to lower their
price. Even better, the companies with the biggest
Moats have the highest profit margins, and can use
major downturns to eliminate their weaker competition
through mergers, acquisitions, price wars, and other
aggressive tactics. Great businesses emerge from
recessions and chaos stronger and with more control of
their market niche. As owners, we get the benefit of that,
as their stock prices will eventually follow the increase in
their market share and cash flow."
– Danielle Town
It should be noted that Warren Buffett has said that his
aim is to be ready to run outside carrying a washtub
when it's raining gold. In other words, he is perfectly
content to stay in cash so he has investing funds
available whenever a recession or another major market
event hits. He then buys a portfolio of wonderful
companies at sale prices that he can sell for huge profits
when things go back to normal.
So what's the best way to assemble an antifragile
portfolio? A suggested approach is:
1. Resist the urge to invest just because you have
funds available. Keep doing your homework.
Analyze companies and maintain a wishlist of 10 - 12
wonderful companies you'd love to buy.
2. When one of the companies on your wishlist goes on
sale, be prepared to invest up to 10 percent of your
available funds in that stock.
3. If everything is on sale, pick your favorite company
and load up on that first. Then pick your next favorite
and do the same. And so on.
4. Once you decide to buy, divide the total investment
you want to make in any stock into four tranches:
n Buy your first tranche of 25 percent.
n If the stock goes down by another 10 percent, buy
your second tranche of 25 percent.
n Another 10 percent drop and you buy your third
tranche of 25 percent.
n Wait until you think the price is about to go up and
then buy your last tranche of 25 percent.
Buying in this way helps you address the emotions you
will feel because you'll be buying when everyone else
seems to be running away from the market. It can be
unnerving to be going against the tide and you might be
thinking maybe your analysis is wrong. This approach
also allows you to take advantage of price fluctuations to
some extent rather than trying to predict the bottom.
"If you’re nervous because you don’t like the idea of the
stock price going down after you bought the company,
your intuition might be telling you that you don’t
understand the business well enough to own it. Pay
attention to that voice inside and revisit your Story and
inversion until you know you know. But if you know why
the price is dropping and you’re confident in your buy
price and you’re still nervous, perhaps on some level
you still feel that the price has something to do with the
value. Just remember: it doesn’t. Price is just what you
paid. That’s all. It has nothing to do with the value.”
– Phil Town
Invested – Page 7
Month
Month#11 When mber
#2 – Know to sell
The
12-Month
Plan
Set up your systems to keep
tracking the performance of
the companies you like on an
ongoing basis. Be ready to move
when the time is right.
"The right time to sell a company is never."
– Warren Buffett
While what Warren Buffett says is correct if you've
bought a wonderful company at a great price, the reality
is Buffett also sells companies. To be a genuine Rule#1
investor, at some point you're also going to need to sell
and take your profit. Like Buffett, you sell when the Story
changes.
Specifically, you'd sell a company:
When it loses its moat – perhaps by a new idea
n
coming along in the marketplace which changes the
paradigm and delivers consumers far more value.
n When new management come along – that you don't
have faith in.
n When the company is acquired or merges with a
different entity.
In reality, Warren Buffett was really saying "Never sell as
long as the Story says the same".
"For many companies, their Story will change due to
new technology. For others, they won’t be touched.
Your job is to stay on top of it. Bill Gates once suggested
to Buffett that he buy a computer (and by extension
computer companies) because ‘they’re going to change
everything.’ Buffett replied, ‘Will they change the way
people chew gum?’ Some businesses are much more
exposed to a Moat breach than others.”
– Phil Town
You also use the concept of "basis reduction" to protect
you from the ups and downs of the market. As
companies pay you dividends, that pays down the
amount of capital you have invested in them. If you hold
some stocks long enough, they will pay you back your
original investment in its entirety. That means you then

have no risk of ownership and everything they provide
from that point on will be a no-risk gain for you.
Of course, if one of your stocks goes ballistic and
reaches a crazy price in the marketplace, you can sell,
lock in your profits and then put that company back on
your wishlist to buy again if it ever goes down. You
always have that flexibility with your investments.
In order for to know whether the Story has changed
enough to make you sell one of your companies, there
are a few things you should keep doing:
n Always read the annual report (the 10-K) and the
analysts briefings for all companies you own stock in.
n Review everything that happens at their annual
shareholders' meetings. View them live online or in
person if possible.
n Set up e-mail alerts for any articles published in the
business press which mentions your companies by
name.
n Keep up your knowledge about competitors and the
industry by reading the Wall Street Journal, Barron's,
Fortune and Forbes.
n Keep track of what any gurus you follow are doing by
reading through their 13-F filings with the SEC each
quarter.
"Keep track of the difference between price and value.
As Warren says, ‘A simple rule dictates my buying: Be
fearful when others are greedy, and be greedy when
others are fearful.’* He means we buy on the Events and
we sell when the price gets too high."
– Phil Town
© Copyright 2018 All Rights Reserved Summaries.Com
The
12-Month
MonthMonth
#12 –#2
Pause andmber
– Know celebrate
Plan You've come a long way in the past
12 months as you've moved
towards becoming an educated
investor. Pause, take stock and
celebrate progress.
Once you start investing in companies, you'll start
noticing that the investment universe is much bigger
than you realized. You'll also get faster and more
confident in your skills to research any potential
investment opportunity. As you internalize more
knowledge about the world of investments, you will
naturally expand your horizons. and your interests.
To keep your investment activities growing steadily, use
this checklist:
þ Always maintain a wishlist of 10 or so
wonderful companies that you would buy if they
become available at the right price.
þ Study the annual and quarterly reports and
investor updates for all the companies on your
wishlist. Know what's happening with them.
þ For all the companies in your current
investment portfolio, analyze their Story once a
quarter. Invert it. Pick up on any changes which
may be happening in the background.
Recalculate your three buy prices for each stock
using updated numbers.
þ Watch the market-wide indicators like the
Shiller P/E and Buffett Indicator. You don't need to
follow them all the time but have a general view of
what they are saying at the present time.
Invested – Page 8
þ Read more books about value investing.
Start with Poor Charlie's Almanack and then learn
about other value investors and how they think.
þ Do your ongoing research. Read the Wall
Street Journal every day. Read other materials
from the business press.
"I was watching the live stream of Warren Buffett's
annual meeting in Omaha during the time Danielle and I
were working on this book. He and Charlie Munger were
taking questions from the audience, and one question
was what they’d like their legacy to be. Buffett answered
he’d like to be thought of as a good teacher. Warren
Buffett is, of course, one of the wealthiest men in the
world, a self-made man who started his investing career
with $100, and a man who has given away more money
to charity than anyone in the world—and yet here he
was, telling us that none of that success matters to him
as much as teaching us how to properly invest and be
better people. I think he chose his legacy well. In my
view, he and Charlie are among the most influential
teachers in the last hundred years and, if judged by the
financial impact of their teaching, perhaps the most
important teachers of the modern era."
– Phil Town
"There is an old saying that if you want to master
something, teach it. I’d add that if you really, really, really
want to master it, try to teach it to your really smart kid.
What Warren and Charlie have done is revolutionary;
they’ve created a strategy that, if carefully followed, can
make anyone wealthy. The Rule #1 investing strategy
can make it possible for your family members to become
rich from stock investing. Those of us who have followed
that strategy owe a generational debt of gratitude to the
grandfathers, Warren and Charlie, who gave us this
wisdom."
– Phil Town