Owning Businesses, Not Ticker Symbols: The Rule #1 Approach to Investing w/ Phil Town

[Music] Welcome to the Compound Commitment, where we focus on the small actions that compound over time. I'm your host, Mike Nilsson. Join me every Tuesday as we build the daily habits that support wealth, health, and happiness. [Music] Welcome to episode 20. [Music] Now most people who follow my journey know my background. How I started U District Physical Therapy, and how I eventually found my passion for real estate. But what I haven't really shared is the story of how I got into the stock market. With real estate, I felt comfortable. I felt like I understood it. And I looked at it just like I looked at any other business. How much money does it make? What are the expenses? And that determines what's left over at the end of the month. I could value a property or even my own therapy clinic based on the cash flows. But when I looked at the stock market, it felt completely different. It felt confusing. It was puts and calls, large cap, growth, momentum. And to me, it felt more like gambling than investing. So for years, I just avoided it. But after hearing the Jerry Seinfeld story about hanging your calendar on your wall and marking an X every day, I decided that I was going to study one Buffet for one year. And every day that I study one Buffet for at least 15 minutes, I earned the right to put an X on my calendar. I thought, "If I'm ever going to understand this, why not learn from one of the greatest investors of all time?" And what I discovered completely changed how I viewed the stock market. Warren didn't look at stocks as ticker symbols. He looked at them the exact same way I looked at real estate or even my PT clinic. Stocks were ownership in a business. And he used four simple filters, which we now call the four M's. First, the business has to have meaning. You have to be able to understand it. Second, it needs a moat, a durable competitive advantage, so you can reasonably project cash flows far into the future. Third, it needs great management. And the fourth, maybe just as important as all the others combined. You just can't buy it at any price. You need a margin of safety, because none of us are perfect and mistakes will happen. And through the process of studying more Buffet, I came across a book called Rule Number One. The title comes from one of Buffet's most famous quotes, which is, "There are two rules to investing. Rule number one, don't lose money. Rule number two is never forget Rule number one." In this book, Rule number one was the moment everything clicked for me. The author, Phil Town, took these ideas and explained them so clearly, so simply and so practically that I remember thinking, "Yes, this finally makes sense." And so I read the book multiple times, and I had that aha moment. The feeling of knowing this is how I think. Eventually, I attended one of Phil's weekend workshops, and I was blown away. Not just by the content, but by the generosity. Phil spent real time with us, former students volunteered their time to teach, and we even went to his house for a barbecue lunch. And after that experience, I knew I wanted to go deeper, and I enrolled in his six-month mentorship program. And so today, it's a huge honor to welcome someone who played a massive role in my investing journey. Phil Town is a best-selling author, investor, podcaster, and educator, who has helped hundreds of thousands of people learn how to invest with confidence, clarity, and discipline using the Rule Number One philosophy. And today, he's going to walk us through the four M's of investing. Here's Phil Town. Phil, welcome to the Compound Commitment. How you doing? Great, Mike. Really great. You have me on. I'm super glad to be here. I'd love to talk about all this investing that we do. You know, it's like investing this kind of like a. It's a career. Whether you're working at it or not, you sort of do it. And everybody I know that does what I do, they die with their boots on. It's like they never stop. It's so addictive, man. Well, I love it. You've helped me catch the bug as well. I read your book probably 15 years ago. And it was the first time I ever felt like I could understand what a stock is. Because you thought of it as a business. And as I read your book, I was thinking, I love this. And especially because you kind of follow the Warren Buffett tight philosophy. And I thought, why I want to do something where I tap dance to work every day. And so it's so cool to see how you're still doing it after all these years. Oh, yes. It's so much fun. And it's kind of. It's kind of the thing where I never stop learning. It's an amazing career. I happened onto an ex post that somebody put up. That was a video of Warren Buffett from about 1990. And I started watching it. And, you know, I've been studying Buffett my entire career. And you sort of get to a point where you hear him repeat himself, right? A lot because there's only so much you can say about this kind of investing. It's pretty simple stuff. So it kind of comes out in the same words. And then he said this thing, which was so. I hadn't heard this before. He said, you know, that thing about playing poker where if you sit down at a poker table and you're playing for 30 minutes and you don't know who the pansy is, or the pansy rather, hits you, right? And Buffett goes, well, that applies to investing. If you're invested in a company and it goes down 10%, and you don't know why, and you're uncomfortable, and then you're the pansy. And you don't know what you're doing. And I think that's just so phone about this whole thing. I never thought about the times when I've invested in something and it goes down and I suddenly wake up and go like, whoa, whoa, whoa, wait a second. I might not know enough about this after all, you know? And it's kind of like, oh, the market knows more than you do, dude. So wake up and go figure it out. So yeah, it's a great career. It's a lot of fun to do it, man. That's the best part. A lot of fun to do it. Well, you didn't start out as a stock market guy. You actually started out as a river guide. Is that correct? Yeah. When I turned 19, I was sort of an unhappy teenager. Maybe everybody who's 19 is an unhappy teenager. I don't know, but you're trying to feel like where you fit in, and I just didn't fit anywhere. And it was just that point in time when my dad said, man, you had to think about going in the military. So I did. I went in the military. I was in for about four years. And when I got out, so that's four years of living more or less in a sleeping bag. And then I got out and went into the river guide world. And I was at the down in the Grand Canyon doing whitewater trips for another 10 years. So that's about 14 years living out of a bag and sleeping on the ground a lot of the time. So that was the beginning of my apprenticeship to investing right there. Had nothing to do with investing at all. I had no idea what investing was. I really didn't even like rich people. I had an attitude from blue collar family and railroad workers and unions. You know, rich people were the people that were taking advantage of other people. That's kind of like, you know, it's like where I came from. What you would think would keep you from making money ever in your life, but somehow that didn't happen. So yeah, that's where I started right there. So what changed your sleeping under the stars and how do you get into putting on a car shirt and you get into the stock market world. I was leading a trip in the Grand Canyon with outward bound trustees. And these are all rich guys, right? So I thought I'd really mess with them. And they were in small boats, smaller apps with a big pile of gear on a two week trip. And they had to paddle the whole way down. And we had four or five of the boats. I think I remember it was four or five. And about midway through the trip, these six guys on my boat were getting tired. And they were in great shape. And every day they've got a paddle like 20 miles, you know, plus hike up into different places in the Grand Canyon. And we got to the biggest, baddest rapid on the river. This rapid called crystal that in those days we had a lot of high water and was probably running 45,000 cubic feet per second. And the water just goes across the river crashes. The river sort of goes across the canyon and crashes into the far wall. And then it goes over a big cliff, probably 35 feet, and then curls back on itself. So you don't see the cliff. What you see is this giant hole that sucks boats in and kills people. And so 44 trips in the Grand Canyon, I never got anywhere near that thing or nearer than I had to be. And here I go with these guys paddling. And man, they just didn't have the strength to get the boat out where it had to be. I made a mistake about putting the boat too far in the current. And we got caught and it took us to this hole. And instead of going into it, I thought it would just turn the boat and go straight to the other wall if we could get there. And we did right along the edge of this thing, hit that wall kind of went up and the boats sort of stood up and went around. Landed right side up and went around this cliff. And it was like no one knew you could even do that. We got down to the bottom of the rapid. We were hardly even wet. One of the guys jumped out of the water. boat and threw up. So I know he was pretty excited. And I was, you know, we tried to be the guide and everything and my knees were jelly, right? But I managed to get out of the boat. And this guy just gives me this huge bear hug and says, you saved my life. And I just popped out of him. Yes, I did. Right? Like that. It's kind of laughing. And he goes, oh man, I really owe you. And for the next week, every night he would talk to me about becoming an investor. And I'm like, look, man, I don't have any money. I make $4,000 a year. And I don't have any real interest in it. And he said, well, if you ever change your mind, you know, you want to come out to La Jolla, California, I've got a big house out there. You can stay. You can use one of my cars, hang out. You know, I just really owe you and I want to pay back. And so thanks very much into the trip. Nice guy, shake his hands here. I've done something other thing about it until that winter. And I tell you, Mike, I don't know. In my life, I've just had these things happen where you get to a certain point. And you just go, okay, that part is over. It was like, military is done. It just happened that that corn sided with this guy's offer for me to come and visit him that I just felt like I'm done being a river guide. I've been down here 10 years. My PTSD is going away. I got stuff out of the meditating. I just, I got off and become a meditation teacher and I was meditating in the canyon. And everything was, I don't know. I just got to a point where I was okay, time to move on. And right then I had this offer to come visit this guy. So it was cold and flagstaff Arizona, late October. I went and visited him and I stayed a couple weeks and then I packed up everything in my one little bag in my Volkswagen bus, threw it all in there and went to La Jolla and did an apprenticeship with this guy for a year. And that changed everything. I had no idea I'd be interested in this stuff at all. But I learned from him how Warren Buffett style investing is done. And then I went out on my own five years. I started with literally a thousand dollars five years later. I had about a million and a half. And then I kind of went off on my own. What's the difference between rule number one investing versus the Buffett style of investing? And how do you explain the two? Well Warren Buffett has gone through some changes over the course of his career. He started learning from Ben Graham who is the kind of the founder of this style of investing and the first hedge fund manager. And Graham managed a fund called Graham Newman while he was a professor at Columbia and did extremely well through the Depression and World War II. And in the early 1950s Warren went to his class at Columbia and then said, look, I really want to do this kind of investing. And Graham taught him to look for companies that were just what he called cigar butts and buy a bunch of them. And they were super cheap. You could buy companies for the cash that they had on their books. You could buy them for that. And Buffett did that for five or six, seven years. And then he met Charlie Munger. And Charlie said, Warren, you're going to have trouble growing this portfolio because we're going to run out of these kind of little companies. You really ought to think about looking for wonderful businesses at fair prices instead of just fair businesses at wonderful prices. And we're going to do better. And that's when Buffett started changing his view of things. But up until that point, he was doing a lot of companies at a super cheap price and he'd sell them when they get to intrinsic value. Instead, he shifted over and started doing companies that were what do we call like a franchise? They would have some sort of amazing intrinsic characteristics that protected them from competition. And he could buy them and hold them. And these companies were just long-term holds. They'd go up and then they'd go down 50% and then go back up some more and they'd go down. And that was and still is Warren's strategy. And of course, the more money you get under management, the harder it is to do anything else because you have so much money that it takes a really large company in order to move the needle at all. You know, he couldn't go back and do these little companies. They're only able to buy these big franchise companies. And they're just rare to be able to buy them. So what we do differently, we have the same exact strategy looking for those really rare opportunities where we've bought a company and sold. So every once in a while, we grab one and say, if we could get one a year, we're like, yeah, that's fantastic. Meanwhile, we have a big pile of cash that needs to work. And we noticed Warren doesn't talk about this much at all, but we noticed that he does a lot of options trading. And that option trading turns out he's one of the biggest options traders in the world. He does a lot of what are called put options where he's selling someone an insurance policy and saying, look, if your house burns down, I'll pay you off. Okay. In a sense, with a company, it's like, if your company price goes down below this point, I'll pay you an app price that we agreed on. And you can get out of it without having to go down as far as it it actually did or that might. And we started looking at that closer and closer about 15 years ago. And ever since then, we have been using capital that we can't deploy into a really rare, wonderful business that we could buy at a good price. We've been deploying that capital into these kinds of options trades. And I'm basically, we've done really, really well with it and have made it part of our overall strategy to not worry much about the upside returns to do to be very rule one oriented, which is our brand rule number one, which of course comes from Buffett. We stole it. mercilessly, which is there are two rules of investing rule number one, don't lose money, rule number two, don't forget rule number one. So there's one rule, don't lose money. And we decided given particularly that the nature of this market, the last, I don't know, almost a decade now, of just going to higher and higher and higher levels, far exceeding what we think are reasonable prices for things and being driven a lot by AI companies that are just, you know, shooting for the moon. And we just find it difficult to deploy a lot of capital in this market. So we're using a lot of that capital to do these trades. And it's, it's worked out really, really well. So that's the biggest difference. It's wrong. The same boat when it comes to looking at what does the company look like, what's a good business? And what does it look? What does the price look like when it's on sale? That's all the same. And then the differences are kind of how we use the cash in the meantime. I was hoping today you could walk us through the four M's because that was, that's what really stood out when I read your book was you're not buying a stock. When I read your book, you talked about your buying a business. And there's so many options out there. So which one do I choose? And how do you know if it's Randwell? And how do you know what the price is? What would be a fair price for this? So would you mind kind of walking us through these four M's? They're really simple. In fact, it's, they're so simple. It's kind of an amazing thing that, that they don't teach this at the universities. It's just really actually stunning that they don't teach us at the universities. And Charlie Margaret was asked about this once and why don't they teach this to somebody? He said, probably because it only takes a few days to learn it. And what do they do the rest of the semester? Yeah. But it is, it is that simple. I can teach you guys right now. It's we're looking at the four M's are meaning, moat management and margin of safety. And we think of meaning as really, how do you understand this business? What does it mean to you? How does it connect with your values? And have you gotten deep enough into it to understand what it is? Well, how do these guys make money? And do you like the way their management team works with their employees? You know, do you think that that's fair? Are they treating people well? Do they match up with your personal values? Because this is one of the great advantages of being an individual investor compared to, let's say, putting your money out into exchange rated funds or large mutual funds where you own everything in the market. There may be a lot of companies that you don't think are morally operated. And yet you're an owner, right? And we don't like that idea. So we like the idea of lining up our our sort of value system with what we own. So that's the first M. Now, once we understand a business, then we can think about the next couple. The next one is does it have an intrinsic characteristic, meaning it's built into the company. An intrinsic characteristic that protects it from competition because the nature of capitalism is essentially that if I see that you've built a business that's making you a lot of money and you're getting rich, I'm going to get interested in that. Like how are you doing that? If you're trying to house cleaning business and you're making a fortune and driving around in a big car, I'm interested. What are you doing? And I'm going to just go over there and do it in the neighborhood next door. So capitalism has this aspect of competition that drives down prices and undercuts profits. And so which is why we can we can end up with goods at very, very good prices compared to economic systems that are run by a central government. So okay, we've got this wonderful, we call this thing a moat. This wonderful thing that protects us from those hordes of competitors that want to come charging in and take our business. So what we're looking for is a business that's moat is still protecting the castle, right? We're really like that. And like one of the most obvious kinds of modes is a brand mode where you go there because you're willing to pay a dollar for the chocolate bar instead of the guy telling you, hey, you know, I'll sell you this no name chocolate bar for only 70 cents. You know, I'm going to go like, nah, I know what I'm going to get when I buy that one. And so you look for that kind of equality of protection against competition from a brand or secrets or you know, you don't want to switch off this thing because it's your dentist. You don't want to go back and get X-rays again. There's about five of these characteristics you're looking for. And if it's got one of those and it's solid, then you can go to the next step and really think, okay, if I want to buy into this, am I buying in with people I can trust? So the management team, are they honest? Do they have integrity? And you really can't know for sure until they come under some, you know, big problem in the business. And then you get to find out if they're actually as honest as you think they are. But you try to, you try to put your money with people who've got a good reputation. All right, so those those three things, if you get all those in a business, those are what we would call a wonderful business. That's a great business. Got a big moat run by really competent people. The business is simple, easy to understand. Okay, cool. Now all we got to do is buy it at a price that reflects the fact that we're not geniuses. We can make mistakes. Things can happen out of the blue. So we want to buy this thing when it's really cheap. And in order to do that, we have to be very, very patient. And this is what separates us and separates us kind of investing from what goes on at Wall Street, what virtually all other investors do is we basically make a list of wonderful companies we like. And then we figure out a price that we feel is very fair. And typically that price is about half of what it's worth. So we look at a margin of safety price. That's about 50% of the value of the business. And then we just wait and we've got that thing sitting there for years sometimes. And we know what we want to buy for and we keep adjusting the price as the earnings continue to grow. And inevitably that thing's going to go on sale. And inevitably it does. You just have to be really patient. And that patience is what is missing on Wall Street. They can't do that because they have people sitting right on their shoulder saying, Hey, I'm giving you my money. You better be out there investing it because I can sit and cash all by myself. That's gigantic advantage for so basically these four things are what Charlie and Warren taught us. You understand the business. You know it's got a big moat. It's got good management. You buy it with a margin of safety. And then that's it. You check it once every quarter or so and you're good to go. One of the things I loved about the book was I was so focused on the last M, the margin of safety or how do you find a cheap stock? And I never once really thought about the first M, which is, can I understand it or do I want to understand it? Does it have meaning to me? When you look at that piece, you know, I think about this AI boom that's happening right now. And I personally don't understand it. I'm having a difficult time with it. If I'm talking to you, are you suggesting that maybe I sit on the sidelines and look at something like a restaurant, a place where I eat lunch every day and that's where I should be looking at investing or is, would you say, well, if you want to understand AI, start checking out these businesses and start hopping on these conference calls. What would you say to someone that wants to be able to invest in something they don't understand? Well, the first thing is that if you don't understand the business, then it's, I mean, almost by definition, it's impossible to know what to pay for it because how are you going to figure out what the future of that business is without understanding it? And let me just say that one of the things that separates, I mean, the major thing that separates investing in businesses from investing in Bitcoin or gold, even real estate to a certain degree, bonds pretty much all other kinds of investments. Other than businesses, you hope to get it like a coupon return, right? So if you were by a bond, for example, you give $100,000 to the federal government, they give you a US treasury bond, and on it is a coupon. It says, we're going to pay you 4.5% for the next 10 years. Okay? So when you know what you're going to get, it's kind of fixed. When you look at something like gold, there's no coupon and there's no cash flow or Bitcoin, no cash flow at all, no coupon at all. Apicaso could be a great investment, probably, probably would be. But what's required with things like that that don't have some form of cash flow coming off of them is that you just expect someone will pay more for this later. You have no intrinsic value in the business that is creating more value in the business. So there's nothing in the Picasso that's making it worth more necessarily every year other than it gets older and maybe gets more rare. But there's nothing going on inside it. That's what makes businesses so different is that inside is a business machine that is growing all by itself. It's growing based on the capital that it has inside itself. And some of these companies are growing at 20% a year, year after year, after year after year. I mean, we don't even look at a business unless it's growing not for a long-term hold unless it's growing at at least 10% a year inside itself. Let's say all the market shut down tomorrow and you're in Bitcoin. I mean, you got to be a little worried about what's going on with your $100,000 per coin that you just paid. If you own gold and there's no market for gold, you got to be a little worried that gold, you know, like it did in the early 80s went from like wherever it was 800 back down to 400 while the markets are shut down kind of that could happen real estate. I mean, shoot, you know, if they've overbuilt real estate or nobody's got any money, you can't get a mortgage. What's that house worth that you were renting out? Whereas with a business, that thing could continue to do well. In fact, it might even do better in some recession. I mean, gosh, in 2008 when we had a recession, people stopped going to take house and they started getting burritos. So a business has this amazing quality of being able to grow internally. And so if the market shut down tomorrow and two years later, five years later, you know, we wake up and look at our portfolio of companies that we own, we would expect that those companies have all gotten more valuable just because they're creating more cash flow. So ultimately, trying to figure out what the value of a business is, is involving understanding what that cash flow looks like out into the future. And fortunately, we don't have to guess about how, you know, what's it look like in 20 years because we are going to understand that there is a certain amount of risk with projecting out into the future and he kind of cash flow based on a business. So you get out 15, 20 years and when you bring it back to what you pay for that today, it doesn't amount to a lot. So you got to look out five years to 10 years and say, do I have a pretty good understanding of where this thing will be in 10 years. In fact, will it be bigger? That's my first level question is, will it be bigger in producing more cash flow in five to 10 years? And if the answer is yes, and I can buy with a margin of safety, then I am very unlikely to lose money on that. Very unlikely. You know, give an example. In 2009, we put together our first class in Singapore and the students all picked stock. They picked individual stocks. And then we took all of the stocks from about 300 students and we just looked through them all, said, okay, we think these are the best 10 companies. And then we pushed those back to the students and they built a portfolio out of that. So we had just $100,000 paper portfolio and each stock got $10,000. And then we just tracked that thing into the future, right? So we tracked it to 2019. And out of those 10 companies, one of them lost 90% of its value over that period of time. That was Blackberry. They just disappeared off the face of the earth almost. So lost most of its value. Every single other business on the list was worth more in 10 years. So we made the first level of success, which is don't lose money. All right? So everyone, now several of them, like I think three of them only made a little, like $10,000 became $12,000 in 10 years. So 2%, 3% return, something like that. Just barely over the okay mark. Didn't lose any money. But several of them got really big on that list. And the result of having just a few really good companies resulted in a portfolio in 10 years that 100,000 became 1.2 million. And the compound of return is 29% per year. So it's a good example of Warren has said this so many times. If you took up like a punch card like it subway or something and you had to only get 20 punches on your card and every punch was one company you bought in your stock investing career, when you're at 20 you have to quit. You said if you did that you'd be very careful about punching that card, right? You'd be very careful about what you picked. And he said if you were very careful about what you picked, I could tell you, there'll be three of those companies that will become home runs and you will become very wealthy on those three. What would you say to the student that brought the Blackberry stock idea to you and saying, "Hey, I think this has a mode." I remember when I got my first Blackberry, I was so excited, it was the first time I could do email on my phone. I thought it was so great. How do you know what is actually a mode or maybe it's a mode of the time, but it's actually breached later on? They had a beautiful castle. So research and motion owned the company and they had this beautiful castle of a device sitting on your hip that would beep you when there was something going on from the office and the offices were standardized on them all around the country. And so you have to understand the difference between a technology company and a consumer company where the product doesn't change. It's like it stays the same. Whereas a technology company by definition is one where the company has to produce the next generation of product that will kill the old generation of product. So that's called creative destruction. And so technology companies live on creative destruction, always trying to stay ahead of some guy in a garage who's coming up with something absolutely amazing, right? So technology has its own issues. And if a student was to say, "I really like Blackberry," I can see that it has this big moat that's used all over the world. And then you have to say, "Okay, is there any possibility that they would have to change the product in order to keep it competitive?" And you're like, "Yeah, sure." Because every year they have to come out with a new design and keep it better and better. Could somebody just blow it away? And the student might go, "I know this industry well enough to know what's on the horizon." And there's nothing on the horizon. Now, if they were really deep in the industry, then they would see the iPhone, not just on the horizon. Blackberry was still doing pretty good even after the iPhone shipped. Now, if at that point you haven't seen the writing on the wall for Blackberry, then you're just not paying attention. Because Blackberry saw the writing on the wall. And the problem that they had was that in order to shift to this iPhone competitor, which they could have done. They saw it plenty early. They could have made the shift. But in order to do that, they would have to destroy their own business. And they're not willing to do that. And so sometimes in technology companies, the guys who are managing the business are going to run into a problem where they have this impossible choice. If they don't adopt the new technology, it's going to wipe out the old technology. But if they do adopt the new technology, they're wiping out the old technology themselves. And that's a real dilemma. It's called the innovators dilemma. It's just a real good recent example. Was the company developing these large language models, but they were doing it kind of underground. And since they decided to not integrate that quality with their search, the guys who were doing that left the company. And when they said, well, we're going to build out this thing, whether you want it to or not. And that ultimately in 2022 forced their hand. They had to start developing a large language model. And in, you know, to give them credit, once they woke up to the fact that they couldn't stall it off any longer, they used all that cash flow and have come on like gangbusters. And that is a real dilemma for a lot of companies and Blackberry didn't handle it well. And as a result, they got smoked. So if you're going to invest in technology, you have to be careful about the company that you are investing in or the company you own is the way we think of it. Getting caught in this dilemma where there's new technology coming along and they can't adopt it without hurting themselves. If you see that, then you probably need to get out of that business. But obviously you have to know a lot more about a lot more things to do that than you have to, let's say, when you're investing in burritos. I'm a burrito guy. These other things are hard for sure. And I say that having bought into technology, you know, I'm not uncomfortable with technology. I've invested in a lot of technology companies, but I'm very aware that there's a lifetime and there's the innovators dilemma. And if you keep those two things in mind, I think you can do really well with it. Well, it seems like with the technology companies, the management part of the forearms might be the most important piece as we talk about vision and being able to change course. It also seems like the most difficult for me to wrap my arms around and really get a feel for it. You know, I'm good with the numbers. And so the margin of safety I can do, all the calculations. Obviously, if something has meaning to me, I would know how have you approached the management piece? And you have any good words of wisdom of how we can find out if they have a strong management team. I really wish I could tell you for sure. I mean, I've been investing in technology all the way back into the 1980s when I put money into a company that Jonas Salk was the chairman of and it was a biotech company. And I got up to speed on it. And really the issue in that company is absolutely was management. The technology was good, but the management was struggling to, I guess, do the right things, make the right choices with it. And they went through, I think, three CEOs before they finally got it together. And, and then it took off. If I hadn't been on the board of that company, I probably wouldn't have stayed with the investment. So being close to the inside of the company was a huge advantage on an early stage technology company. Like that one was, and I ended up staying in that stock for 40 years. So it was it worked out all right. But had I been on the outside of that looking in, I don't think I would have stayed in it. Looking at a business and you see that there's super qualified people who are running things. They have great reputations. But the heart and soul of the company stepped away in favor of professional managers. And when that has happened in the past, it's been a big red flag. Sometimes people who are mercenaries are going to do what's good for them, as opposed to what's good for the long term view of the company. So I look at that as a red flag. Sometimes ironically, it's the guys that have been running the company can't seem to make the decision because of again, the innovators dilemma. So if you go over to Microsoft, those guys were just the hottest thing until they weren't. And then they went sideways for like 10, 12 years of dead money in the stock market until the dollar came in and took over and then revived them and bought some companies and made it all, made it all work again. So I think you're absolutely right, Mike. It's the management team is super important. I mean, look at IBM. The management teams in IBM have had a mixed bag of credit. They've been around for a long, long time. Big blue was of course super, super important in the revolution of mainframe computers. And then in the development of the PC, they managed to make that shift. You know, say they'd been every kind of hardware company going all along and continue to build this giant moat of having all the banks in the world based on their hardware. But they started missing the boat when Microsoft came out with Windows MT and they started having distributor servers and they just didn't catch up with that. And their leaders were salespeople. So for basically two generations of leaders, they had sales people running the business. And those salespeople did not make the right decisions technologically. And as a result, IBM is just now starting to try to figure out its way back into the leadership of the technology world. And think about it. I mean, they had AI advertised on TV. Do you remember ever seeing Bob Dylan trying to talk to this machine that's writing songs or something? And it never really happened. It never really came together. And then out of the blue, here comes Sam Altman and Chad G.P.T. and then all the swarms of the unwashed come charging across and IBM becomes irrelevant again. And now they're trying to fight their way back. You see the same thing over at Intel where they just tried to be too much. They tried to be the chip manufacturer and the chip designer and Nvidia has handed them their rear end in video and combination with Taiwan semiconductor. So if you're going to play in that game, yes, management is massively important. And since you're not going to be on the inside looking looking out, you're on the outside looking in, you're not going to know what the insiders know. And therefore you have to be you have to be willing to just exit by with a big margin of safety. And when that thinks like when we think of a margin of safety, think about you're buying this thing at 50% of intrinsic value and probably it was at intrinsic value. And then something happened. And now it's not. And so you buy in, it goes back to intrinsic value in two or three years. You've doubled your money or making 25% a year. You look real seriously at that as a future sale. If if any red flags start to pop up, then you just exit that trade. And that's very different than holding a restaurant Mexican grill. through an E. coli problem, right, or something like that, where you know they're going to come out on the other end, you know they got good management and they're going to figure it out. That's a lot easier to just hold onto that than sitting in a net scape while Microsoft comes in and kills it, you know. That's super helpful. You know, I love that idea of find a business that has meaning to you and make sure it has a mode. You can do your due diligence on the management, but I think everyone's listening and saying, well, how do I know if it's on sale and we don't have to get in the weaves on this, but I know you have at least a few formulas for how to be able to determine the intrinsic value of a business. Would you just kind of go over that and, you know, how our listeners could kind of figure out what the value of something like a restaurant would be? We have three different ways we look at value. One of those is just your basic business school, discounted cash flow, sort of view of the business and that's that is some sophistication to it. So let's just leave that on the table like, okay, we're going to have to learn about that one someday. The one that I love and is so simple doesn't even try to figure out what the intrinsic value is. All it does is say, if I could buy this the way I would buy a piece of real estate, then I would be getting a pretty good deal. So if I could go, let's say down the street from where I live and buy a house that's in good shape and I could rent that house out for let's say $30,000 a year. Let's say $3,000 a month. So $36,000 a year. And I know I've got to pay $4,000 in home insurance. I've got to pay $4,000 in taxes. So that's $8,000. I probably ought to put aside a couple thousand every year for future maintenance, you know, replacing the refrigerator every 10 years or whatever, right, do some roof work. And I'm going to rent it myself. So I don't have a property management issue. I've got $10,000 out of the 36. I know I'm going to spend. I'm going to put $26,000 into my pocket before taxes. So I'm looking at that business and I'm going to say, all right, as a business, this little house, as a business, I'm going to make $26,000 a year. So unless we're going to put a mother-in-law unit in, we're stuck with this is the house. It rents for $3,000 and it's going to go up at, I don't know, two to four percent a year. Okay, that's our business. What should I pay for that? Well, I could tell you personally, if I could buy that house where I'm paying $260,000 or about 10 times the owner earnings that are coming in on that house, I would do that deal because here, I've got $260,000 cash. I could put it in the bank and I make a half a percent in a savings account. I could put it into a bond and I'm making four. Heck, man, I'll put it in this house. It's not going anywhere. It's a good neighborhood and I can make 10 percent on that plus a little bit more each year. And so down the road, let's say it's 4 percent a year increases. Okay, well, I know that at 4 percent a year, at about 15 to 20 years, I'll be making double what I'm making now. And that's okay with me because the house is going to have some value beyond that. So that's it. When we look at a business, we just go, if I could buy this thing for 10 times the owner earnings, which are more or less, you could say EBITDA earnings before interest taxes and depreciation or a ballpark of free cash flow in that ballpark, right? Some place in there at 10 times that I want to do that deal. That's a good deal. And then this business, because businesses will sell for double that all the time. So that doesn't have one way to kind of get at it that you don't have to figure out what's the growth rate. All you got to know is, is this going to be bigger in 10 years? And if the answer is, yeah, absolutely. It's going to have 4,000 restaurants instead of 2,000 restaurants. It's going to be bigger in 10 years. I can have a high degree of confidence. If that goes on sale for some reason, then yeah, I can buy that and make sense out of it. Okay. So if the audience is anything like I was, I'm digging the meaning. I can find a business that has meaning to me and with the moat. I'm probably smart enough to be able to read them and do some research on management. And I know how to value the business. But all my favorite businesses that have meaning and have a margin, don't have a margin of safety. So why would a great business go on sale? You know, like, why would anything be at half price? Really good question. The answer is that it shouldn't go on sale because it's a really wonderful business and everybody knows it's a really wonderful business. So what the heck is going on? I mean, you talk to a professor at Harvard Business School and he's going to tell you the market's pretty much rational. It's not going to put a great business on sale. Professional fund managers that control 85% of the money in the stock market, they're not going to sell something for a hundred dollars if it's worth 200. From the point of view of a professor at Harvard, they won't do that. But in the last 20 years, three Nobel prizes have been given to behavioral economists who have proven that in fact, they will do that. The market is irrational from time to time. And as a result of the emotion that's in the market, just because these people are human beings, they get emotional, they get caught up in things, somebody yells fire in a crowded theater. They want to get out the door before anybody else, even if there's no fire, they're just going to get out the door. And then somebody sees them running for the door, and they're going to get out of the door because they know Bob is really good at smelling smoke until they run with him. And so you start this stampede to the exit. And for no good reason whatsoever, just a rumor, all of a sudden the theater is emptied in the stock market. That means that thing got sold off and it went on sale. So the thing that puts those things on sale, it causes irrational long-term decisions by Wall Street experts. We call an event. So we've been talking about businesses, they had E. coli poisoning in a couple of their restaurants and it happened over about a three-week period in a different places. And then they fixed it. But the stock went down by 60% and it stayed down for like two years. You could buy through on sale any day for about two years. And there was nothing wrong with the company. It was back to making money. It was fabulous. All it was was front page headlines, scaring Wall Street investors. You know when the well blew up in the Gulf of Mexico, you see all of the Wall Street fund managers rushing to the door to get out of this gulf of Mexico oil theater because one company had a blowout and they sold off all of the companies that had anything to do with drilling oil in the Gulf of Mexico. It was like, what is going on? It's like nothing wrong with any of the rest of these businesses. But on Wall Street they understand that when somebody big starts running for the door over something that happened like a blown well, it's just better just get out. So they just get out and they create this on sale moment. I mean we've got one coming you guys. I mean it's one of the ways that I judge whether the market is about to crumble into some horrible drop from 40% down is watching what Berkshire Hathaway is doing with its money. And right now they have, at least in my experience, they have approximately 15 times more cash on hand than they have ever had in the history of Berkshire Hathaway. And Buffett is famous for having cash on hand. It's now $358 billion. I think there's only 25 companies in the world that would cost more than $358 billion. So Buffett's got enough money sitting there in his company to buy virtually every company in the world at least once except for 25 of them. So that's a huge load of cash. And every time that I've seen that man getting cash within a year or two the market crumbles. And I've followed that pretty religiously over the years. And I'll tell you what, it's made me wealthy. I'm a Confederate cloner of Warren Buffett. And I don't mind admitting it when that man is like stack and cash. I start stack and cash. And it really has turned out well. So yeah, these events put things on sale. If we haven't had a big event market-wide in 10 years, one is on the way. We just don't know what it's going to be. I mean, over 140 years of the stock market is hardly ever goes more than 10 years without some kind of major crash. And we're well down that road right now. So we're looking at, you know, where's that black swan coming from that's going to blow up this market and send it toppling. And when that happens, then the event that has caused that will have almost nothing to do with all the companies we want to own. It's just the economy overheated, the fed tighten rates, there's a Warren Venezuelan who knows, right? Something sets it off and all of a sudden the great business of the world go down 40 or 50 percent along with all the crapping ones. So if you know the difference between a good business and a bad one, it's a field day and you load up the truck and then you forget about it. You're done. You're done. And then you just sit there. And that's that is phenomenal way to invest. It makes life easy. Well, 10 years ago I was lucky enough to go down with one of my best friends, Craig. We flew to Atlanta and we did your weekend workshop and I was blown away with how hard you worked us. I mean, you get up in the morning. One day we worked through lunch because you were teaching so much. You were kind enough to have us over to your house and for a barbecue, we got to watch someone ride a horse and do these awesome jumps. And I thought it was so valuable that I ended up doing your six-month mentorship program and I actually got to speak to your brother on the phone a few times. But the reason I mentioned it to this is because I've always loved burritos. And I've been tracking the business. I was reading the 10 Ks and studying the management. And I just was waiting for this thing to go on sale. And then it finally did with the Eccol, I think. And so I got to see firsthand the value of patience. And so so thankful that you had us over, that you have these opportunities. I heard that you have one coming up here in March. And I would love for you to tell our listeners what you do in the workshop and how people can find out about it. Yeah, holy smokes. It's going to be a great workshop. We do it complimentary. We do it once a year, usually. So we're going to do one in March. So we've got one coming up in two months. We sort of just decide to do it. And pile in 300 of our best friends. So it's like first come, first serve in the door. And we bring in our coaches who are all former students who have studied this stuff for years. And have shown us that they've got a really good portfolio, many of whom would become their own hedge fund managers. And they come and teach for a weekend for nothing. And we all do this. And it's just really, really fun to do. We don't sell anything. You know how these workshops will get you in the door and you know at a good price or something. And all I do is sell you on to some upsell thing for the weekend. We don't do any of that. It's all teaching hands on with coaches, looking over your shoulder. And it's phenomenally fun. And it feels like a family gathering. And I'm really really happy. You went to it, Mike. It's like super fun to do. And then we get you out the door after three days of this understanding the absolute basics. And you will have been those three days become one of the better investors on the planet. We've had tons of people tell us it was better than their MBA program. We just started doing this NPS score. Like it basically answered one question. Would you want a scale of one to 10? Tell your friends to go to this class or to eat this candy bar or to use this software. And if you've got a net promoter score of over 50, you're at one of the best products in the world, right? I mean Harvard Business School has like a 60. We have a net promoter score averaging 85 on these courses. It's just off the chart. So people love the course. And so hey, you got to get signed up for it. We're just starting to promote the course right now. So I would jump in there if you can. We have a link for your podcast and should be able to click on that. If that hasn't taken you to where you need to go, shoot a note to support at rule one investing.com. So support at rule one investing.com. Just an email to him and say, Hey, I'm interested in the March course. What do I got to do? And what are they going to learn during that weekend? Are you going to be going over option strategies or are you going over the four M's that we talked about today? Oh, no, that's day one. By the end of day one, you are already starting to find your own first business on your own day two. You're going to demonstrate by delivering about a 10 minute presentation that you have learned enough about this company. You could go to a hedge fund conference and make that presentation. You'll do that by day two. And somebody in that class is going to win $1,000 for the best presentation. Somebody else's get second place for 500, third place gets 300. So we're going to reward you for making the effort. And you'll get to hear a bunch of these presentations from other students and I'll give you some great ideas to invest in. And then we take all of those companies that you guys found and create that portfolio that I talked about, right? Back in 2009, we do the same thing at every class. And so we create a portfolio of 10 companies. We'll have that available for you before you leave the class. And there's a good place for you to start your watch list and start digging in our companies that we've already vetted. We'll put those on a list and kind of tell you what we think would be out of the price stat, what the good points are, what the bad points are, what you should be watching for. And then it gets really fun. We show you how to start making cash flow. And fortunately, within a couple of weeks, by doing some very, very cool options trades that we have learned from Buffett and that we can teach you guys. By the end of the class, you will have learned to be a long-term investor with the four M's are how to use them, how to use our tools to search things out, how to use the guru filing. So you know what your mentors are going to be buying. We teach you what 40 mentors you have to be looking at to follow their investing. And then we teach you how to create cash flow. And if you only starting with five or six hundred bucks, they'll all of that in three days. Believe me, it's in the deep end of the pool. And you probably start off thinking, yeah, I can do this by by the end of the first day, you might be thinking, oh my god, I can't. Was that kind of your experience? Was it like this big overload? It was such a roller coaster. Like I said, my buddy Craig and I, we went the first day. We were so excited. And then when we found out, we had a presentation. We were so nervous, but it was amazing to have so many coaches and former students that were just their volunteering their time, walking this juice stuff. And it really was cool by the end of the second day. I was so tired because even during the lunch breaks, you're thinking about your talking about it. And I did feel really equipped at the end of the three days to be able to really go out and, and you know, I just felt more educated and more confident. So yeah, I thought it was great. Yeah. Phil, thank you so much for coming on the podcast for people that want to learn more about you. Listen to your podcast or find you online. Where can they find Phil Town? Sure, you can just go to rule one investing dot com. Are you L E O any investing dot com or search Phil Town and come right up. Everything's there. Podcast is invested. And yeah, Mike, we got to have you on there at some point. You want to come over and do our podcast? It will be a huge honor. I'd love to be able to go more in depth on my story because it really was an awesome experience and learned a ton from you. So thank you so much for your mentorship and for everything you do for this investing community. Great investing community. Phil Town's work has been a huge blessing in my life. And I highly encourage you to check out his books. Listen to his podcast. And if you ever have the opportunity to attend one of his workshops, I know you'll get a ton out of it because Phil has a gift for taking something that feels complex and intimidating and making it simple, practical and empowering. I'm incredibly grateful for his generosity, his teachings, and the impact he's had on the way I think about investing. Not a speculation, but as owning great businesses with discipline and patience. And I hope you join me next week where I'm excited to introduce you to another one of my mentors, but from a completely different chapter of my life. During my years as director of performance at Gonzaga University, I leaned heavily on the work of Dr. Gary Gray. Gary is a physical therapist, athletic trainer, and a personal trainer. But more than anything, he understands movement at a level I've never seen before. I used to call him the Michael Jordan movement, but now that I got to know him better, he actually likes to be called the John Stockton movement because he just loves the way John played the game. But the most important thing Gary ever taught me had nothing to do with muscles, joints, or biomechanics. He taught me about the human spirit. He understands how to connect with people, how to truly see people, and how to love people for who they are, not just what they do. And what I'm really excited about is that instead of talking about the three planes of motion and movement, Gary and I are going to talk about the three dimensions of happiness. He's going to walk us through a powerful process that applies far beyond health or fitness. If you're someone who's yearning to understand principles, how life works, and how to live with more meaning and alignment, I think you're going to absolutely love this conversation. And until next week, keep compounding. 10 Capital is a group comprised of investment professionals registered with high-tower advisors LLC, an SEC registered investment advisor. Registration as an investment advisor does not imply a certain level of skill of training. Some investment professionals may also be registered with high-tower securities LLC, member FINRA and SIPC. Advisory services are offered through high-tower advisors LLC. Securities are offered through high-tower securities LLC. This is not an offer to buy or sell securities nor should anything contain herein be construed as a recommendation or advice of any kind. Consult with an appropriately credentialed professional before making any financial investment tax or legal decision. No investment process is free of risk and there is no guarantee that any investment process or investment opportunities will be profitable or suitable for all investors. Past performance is neither indicative nor guarantee a future results. 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