Phil Town is a hedge fund manager and author of 3 New York Times best-selling investment books, Invested, Rule #1, and Payback Time. On the InvestED podcast, Phil and his daughter Danielle shine a light on the successful investing strategies that gurus like Warren Buffett have used for 80 years. Listen in for a great stock market education on basics, learn how to invest on your own, and follow along with real-time examples and investing tips from week to week. Subscribe and leave a review. Questions? Email questions@investedpodcast.com.
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Investing Q&A: Four Ms of Investing
Investing is one of the most morally charged and important things we can do. If we’re privileged enough to be among the few who have more money than is necessary to survive, we must be careful about how we allocate that excess capital. Ultimately, it could determine how the world works for our family for generations to come. So as you’re building your watchlist, keep in mind that you are buying businesses, NOT stocks.
For instance, although the marijuana industry is starting to grow, you would still have to ask yourself if it fits within your values if you were considering investing in a marijuana production company. Are you proud to own the business as if it were your own? These are all things you have to ask yourself while analyzing companies in any industry.
You also must consider the predictability of a company in the marijuana industry, since they are typically younger and therefore carry more risk. In these cases, there is typically less public information about those companies, making it harder to perform a proper analysis in your initial researching phase of investing.
The essence of Rule #1 is “don’t lose money,” but what that means in practical terms is to invest with certainty. Certainty comes from this: buying wonderful businesses at attractive prices. In Rule #1 investing, the word ‘wonderful’ actually encompasses four simple elements, which we call the Four Ms.
First, the company must have Meaning to you. This refers to understanding the industry, and if the industry has meaning to you, then you understand the environment in which the business competes.
The next M is Moat, which refers to the durability of the business—or the competitive advantage a company has over other companies in the same industry. Just as Moat protects a castle from attack, a durable competitive advantage protects a company.
The third M is Management. Rule #1 investors only support businesses that have a CEO who is service-oriented, passionate about their business, honest, and experienced. While you can make money from a business with just Meaning and Moat, when you add in good Management, you’re less likely to suffer through a period when a traitor is running the show poorly and costing you money.
Finally, the last of the Four Ms is Margin of Safety (MOS). MOS is essentially a large discount on the sticker price or intrinsic value—typically around 50% off.
Understanding how to determine a company’s true value is so critical to stockpiling. Investors have gotten very rich buying companies, but unless they were very lucky, they only got rich because they knew the value of those businesses first. That’s why today, Phil and Danielle answer fan questions regarding business analysis, and discuss why it’s important to invest in companies that reflect your personal values.
If you want to learn more about analyzing companies on your watchlist, download Phil’s Four Ms for Successful Investing Checklist: https://bit.ly/2FJNAuw
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