At Value Investor Academy we follow the Warren Buffett style of value investing. We believe in Buffett’s 4 key principles or rules for investing in a stock. As Buffett puts it “We want the business to be (1) one that we can understand, (2) with favorable long-term prospects, (3) operated by honest and competent people, and (4) available at a very attractive price”.
Phil Town follows very much the same principles although with slightly different names. Town says he only invests in a stock if it meets the four M’s.
- Meaning
- Moat
- Management
- Margin of Safety.
In Rule #1 Investing, Town described a method to find stocks that have meaning to him. He conducts the following exercise which he credits Jim Collins with creating.
Step 1: Draw three circles that intersect in the middle.
Step 2: Label the circles “Passion”, “Talent” and “Money”.
Step 3: In the circle labelled “Passion” write down everything you are passionate about.
These are the things you love to do or the things that you would do if you had more time or money. Your passions could be travelling, playing golf, creating music, painting, watching movies or just about anything that you look forward to doing or wish you could do more often.
Step 4: In the circle labelled “Talent” write down anything you are talented at.
These are the things that you are good at whether they be in your spare time or for work. Maybe you are good at planning trips, booking flights and hotels. Or perhaps you are a talented painter or golfer. Maybe you are just damn good at watching movies. I find this circle to be the hardest to fill because many of us are too modest to say we are talented at something. It can be easier to ask a friend or family member what they think you are good at.
Step 5: In the circle labelled “Money” write down the things that you make money from doing or spend money on.
Using the above examples it’s possible you work as a travel agent or spend money on flights and hotels. You might spend money on art supplies. Maybe you have a Spotify subscription to listen to music. If you play golf you likely have a set of clubs and balls. If you enjoy movies chances are you have a Netflix subscription.
Step 6: Look for anything that appears in more than one circle.
Things that appear in more than one circle are industries you likely understand, therefore they probably have meaning to you. If these industries have meaning to you there’s a chance that you understand them more than the average person. If you understand them more than the average person then you may have what Peter Lynch calls an “edge.”
Step 7: Look for companies that fit into those industries which have meaning to you.
if travelling fits into more than one circle for you, there’s a good chance you have flown on many different airlines. Maybe you know which ones provide the best service. Maybe you have stayed at many hotels and understand which offer the best value for money and keep customers coming back. Or maybe you have a preferred booking agent or website.
Here is a list of companies I found which fit into the travel industry.
| Flight Centre Travel (FLT.AX) | Webjet (WEB.AX) | Helloworld Travel (HLM.AX) |
| Marriott International (MAR) | Hilton Hotels (HLT) | Expedia Group (EXPE) |
| Booking Holdings (BKNG) | Airbnb (ABNB) | American Airlines (AAL) |
| Delta (DAL) | Royal Caribbean (RCL) | Norwegian (NCLH) |
| Carnival (CCL) | Qantas Airways (QAN.AX) | International Consolidated Airlines Group (IAG.L) |
I found all the above companies in about ten minutes. If the travel industry was something that I understood and had meaning to me these companies would be a great place for me to start.
Important
Please be aware that I am not recommending that you go out and buy stock in the companies which you find. These are just companies that may have meaning to you. Finding these companies is just the beginning. Warren Buffett doesn’t invest in a company just because he understands it. Phil Town doesn’t invest in a company just because it has meaning to him. Buffett has 3 more rules which need to be met before he invests in a stock. It must have favorable long-term prospects, be operated by honest and competent people, and be available at a very attractive price. Phil Town also required the stock to have a moat, suitable management and a margin of safety.
If you want to learn more about Phil Town’s investing process check out his book Rule #1 Investing. ( affiliate link).
0 Comments