hey guys I'm Phil town from rule number one investing and today what I want to talk about are eight simple steps that you need to take to build your wealth these are eight really important steps that come down to us from the best investors in the world
If you look at the wealthiest people in America most of them I mean the obviously the easiest way to get rich is
to just be born into the right family right but most of us don't have that opportunity if we look at people who've
made it on their own they almost have all gone through these eight steps so whether you're a brand new investor or you're really a seasoned investor they hold true for pretty much everybody so the first thing you're going to do is you're going to find a business you like now I want you to hear the word business you know I invest in stocks I also invest in businesses because I think about stocks like that right so it doesn't matter whether it's public or private we buy businesses now stocks are just little parts of a business
so when I say business I mean all of the stuff that encompasses the industries like real estate private companies public companies all of those I think of as businesses okay now where do we start well we focus on industries that we already have some capability of understanding things that were you know places we're spending money places where we have worked in the past hobbies that we have you know places that we read about passions that we have maybe we focus on industries we understand and we stink we just stay really close to this idea that you have to be capable of understanding this business
If you're going to be an owner of the business and again when we buy just a few shares of stock just a little slice of the business we've got to look at it as if we just bought the whole thing and treat it like that treat it like we own the entire business now how do you know which business to get into well you're going to focus on the VA well these are three M's and then the most important M of all the fourth one which is margin of safety that I'll get to in a second but these first three M's are understanding the business the meaning of the business how does this connect with your own value system is so important you've got to put money into things that you like
things you're interested in things that connect to your values because you guys two reasons number one it'll make you a more focused investor number two and focused is good and number two is that you're going to be voting your values for what's in the world 20 years from now with your money that's more important
in any vote that you can cast so look at businesses that you liked you want to see in the world that's the meaning of the business the mode of the business as we've discussed a lot is just that durable intrinsic characteristics that protects it from competition it's some kind of you know water around the castle that says hey you can't attack me because of you know I have railroad tracks that go from Long Beach to Chicago so you can't build new railroad tracks and so you can't attack my business so we're looking for some kind of a moat the third thing is we want a really good management team look for people that you believe you can trust and there's always a lot of subjectivity here
Warren Buffett says he just looked for people he feels comfortable having as a brother-in-law or a sister-in-law so look for management that is has integrity number one and number two has talent and the way you do that is you just dig into the letters these guys are writing to their shareholders research their background most of these big managers have gotten articles written about them in Wired 2.0 fortune Forbes Wall Street Journal just the power of Google here can be amazing all right so many moat management will find us a really good company then the fourth thing is margin of safety all right now that takes us to the second big issue is how do you find the value of this business because at the end of the day we're buying a business and we know because of just as Charlie Munger says the vicissitudes of life right the ups and downs of life can just change the the nature of the business down the road and so we need to get into this business with a margin of safety so in order to do that we're going to calculate the sticker price and we're going to do a payback time
evaluation in other words these are two different ways to arrive at value and then be sure that we set the value and then buy it at a say at a margin of safety price far below that value now how do you do a sticker price and how do you do a payback time from free cash flow got calculators on the website that will help you guys do that for free go to rule one investing.com just check out the free resources section there's great calculators in there for you to use so valuing the business that gets us to the fourth M which is margin of safety okay now you've got an idea what the business is worth you know you want to buy it at
how off of that price that's the margin of safety price so the third thing you're going to do is you're going to put this business on a watch list and you're going to watch it until the price of that business goes below the margin of safety price now this brings us to one of these single most important things you need to know about this kind of investing this kind of investing requires that you do very very little all right we want you to be lazy to the point of sloth in other words be patient be excessively patient be so patient that you almost never do anything now to
put this in context Warren Buffett at Berkshire Hathaway is investing over one hundred and twenty billion dollars and I was just at a meeting with Charlie Munger yesterday
where he was talking about his annual report at The Daily Journal and Charlie said that typically they only buy one or two things a year a year with 120 billion dollars so the best investors in the world are saying that the key thing to do a really good job of investing is to know the value of the business as a business be able to buy it at a discount to that and in order to do that simply be patient and wait for the market to fluctuate and bring you that business at that discounted price the major mistake most people make is they just try to buy it right now and that's where you get leveled to just you know five to six percent per year we want 25 percent a year and to do that you got to be patient
all right fourth when the price gets to where you want it to be right so let's say you think this thing is worth $50
you want to buy it for 25 here comes a big recession and down come the prices of all the stocks and here's your great company available at $25 what do you do now well let me tell you what you do now is you control your fear because I'm telling you when that stock goes from $50 to $25 there's going to be a lot of people who are afraid of owning anything in the market they don't know where it's going to stop going down and you know
neither do i neither do you so when that stock goes to $25 the challenge is going to be for you is to be able to buy when other people are afraid but this is the giant secret that Buffett has been telling everybody for 50 years
you buy on fear you sell on greed and everybody goes oh yeah yeah you buy on fear you sell on greed you're okay but when the fear starts it affects us too so the critical thing is you are capable of understanding the business you see it as a business it's got a big moat great management you know the margin of safety price and then you buy it when it gets into the margin of safety price
I was on CNBC in 2009 and I said look I'm stepping in and buying this stock right now because everything's on sale they said well aren't you worried about the market continue to go down I said yeah you need to go down double where it is right now but these things are on sale and I'm buying them on sale now because we don't know what the future is what we know is we can buy this great business on sale do it then and you don't do it a little bit that's another terrible mistake so this fourth point is that you're going to buy when it goes on sale and you're going to load up the dang truck okay it's not here's how Buffett says it when it's raining gold you don't hold out a symbol you hold out a bucket so you load up the truck believe me on this because I've done it and it's so horrible you get it right the things on sale and you only put in a little because you got caught up in the fear you load up the truck okay
fifth start acting as soon as you own this thing start acting like the owner of that business because you are the owner of that business whether you own one share or you like Buffett and you own the entire thing you're the owner of that business so you're going to treat that business as an owner and deal with the emotions of ownership the fear the greed the things that are happening with that as part of what you're going to go through as an owner and this is why you're not going to own 50 stocks you're going to own five or ten as a novice let's try to do 10 okay Charlie Munger 3 he likes 3 stocks ok now what are you going to do as an owner you're going to do what a business owner would do that's it that's it the simple thing you've got great people running your business so you're going to do you're going to read reports from your CEO
you're going to listen to your CEO every quarter tell you how things are going you're going to follow the news you're going to pay attention to that business and if something starts to happen to the moat or something starts to happen to the management or something is changing in the industry then maybe you exit that business okay but first before you do that you go to step six which is you want more of it we call this stockpiling I wrote about it in payback time about adding more at ever graded prices now when you do this you're going to be dealing with the emotional rule of investment trust me on this the emotional rule of investment says oh every time I buy that stock it goes down but that's good stockpiling loves the emotional rule of investing if it only were true that every time I buy a stock it goes down
I would buy it with ten dollars and not get ready to load up the truck every step of the way down so what you're going to do is you can control the emotional investing by just remembering it isn't you making these things happen you know the value of this business you know it's massively on sale so you're buying five-dollar bills excuse me you're buying ten dollar bills for five dollars awesome and now you can buy more ten dollar bills for three dollars so what are you going to do you're going to snap up more of it of course you're going to get a great price and you're going to dollar-cost average into this thing but you're going to dollar-cost average with a brain not just buying it all over the place hoping you get an average price it's good no we're going to buy it with the first price being on sale and ever bigger on sale as we go down so we end up with a really really great basis in this company then you're going to watch those big five numbers
okay the big five numbers will tell you that that company still has its moat as long as those big five numbers are good forget about the market price except just to buy more the big five numbers of course are the four growth rates for earnings growth sales growth book value growth and cash flow growth plus return on equity return on invested capital I would almost add one more check the debt watch the debt you're the owner of this business if they start loading up debt that's a red flag okay so you're going to treat it just like you own it seventh seven roots seven or eight is cool now you own businesses now what you're going to inevitably sell the business we don't want to sell right but there's three times when you sell you're going to sell when you need the money you got to have to have to do at some point you need money
when you're retired you're going to sell when the fundamentals change that means those big five numbers start to go south on you it means something's changing in this business and if you can't figure out what it is they can't tell you what it is then it's probably time to leave because the investment is starting to turn like the moats getting broken and third you sell when the price gets stupidly too high so we sell on greed so we will clear it out when the price gets too high well above the sticker price like at least 20% or more above sticker then you can buy it back when it comes back down and finally the eighth step this is awesome the eighth step is really simple once you've done these seven steps then you just repeat those seven steps over and over and over again until you've built up true wealth and you're living very comfortably for
the rest of your life that's how you do it and when you break it down to these eight simple steps investing on your own it just doesn't be that scary right immediate once I've learned this even though I started with very little money once I learned it it wasn't scary anymore I had a good game plan that I could follow and those seven steps are fabulous with that eight step is to just you know Washington repeat so if you follow these correctly these eight steps are going to put you on a path to more wealth than you can possibly imagine and that's the truth if you give yourself time to let this work out you're going to be richer than you could ever believe and you're going to change generations in your family we call that generational wealth and it's incredible so now what I'd love to do is hear from you guys what do you plan to invest in to build your wealth what are you thinking about about these steps if you started any of these steps yet and how's your progress
If you look at the wealthiest people in America most of them I mean the obviously the easiest way to get rich is
to just be born into the right family right but most of us don't have that opportunity if we look at people who've
made it on their own they almost have all gone through these eight steps so whether you're a brand new investor or you're really a seasoned investor they hold true for pretty much everybody so the first thing you're going to do is you're going to find a business you like now I want you to hear the word business you know I invest in stocks I also invest in businesses because I think about stocks like that right so it doesn't matter whether it's public or private we buy businesses now stocks are just little parts of a business
so when I say business I mean all of the stuff that encompasses the industries like real estate private companies public companies all of those I think of as businesses okay now where do we start well we focus on industries that we already have some capability of understanding things that were you know places we're spending money places where we have worked in the past hobbies that we have you know places that we read about passions that we have maybe we focus on industries we understand and we stink we just stay really close to this idea that you have to be capable of understanding this business
If you're going to be an owner of the business and again when we buy just a few shares of stock just a little slice of the business we've got to look at it as if we just bought the whole thing and treat it like that treat it like we own the entire business now how do you know which business to get into well you're going to focus on the VA well these are three M's and then the most important M of all the fourth one which is margin of safety that I'll get to in a second but these first three M's are understanding the business the meaning of the business how does this connect with your own value system is so important you've got to put money into things that you like
things you're interested in things that connect to your values because you guys two reasons number one it'll make you a more focused investor number two and focused is good and number two is that you're going to be voting your values for what's in the world 20 years from now with your money that's more important
in any vote that you can cast so look at businesses that you liked you want to see in the world that's the meaning of the business the mode of the business as we've discussed a lot is just that durable intrinsic characteristics that protects it from competition it's some kind of you know water around the castle that says hey you can't attack me because of you know I have railroad tracks that go from Long Beach to Chicago so you can't build new railroad tracks and so you can't attack my business so we're looking for some kind of a moat the third thing is we want a really good management team look for people that you believe you can trust and there's always a lot of subjectivity here
Warren Buffett says he just looked for people he feels comfortable having as a brother-in-law or a sister-in-law so look for management that is has integrity number one and number two has talent and the way you do that is you just dig into the letters these guys are writing to their shareholders research their background most of these big managers have gotten articles written about them in Wired 2.0 fortune Forbes Wall Street Journal just the power of Google here can be amazing all right so many moat management will find us a really good company then the fourth thing is margin of safety all right now that takes us to the second big issue is how do you find the value of this business because at the end of the day we're buying a business and we know because of just as Charlie Munger says the vicissitudes of life right the ups and downs of life can just change the the nature of the business down the road and so we need to get into this business with a margin of safety so in order to do that we're going to calculate the sticker price and we're going to do a payback time
evaluation in other words these are two different ways to arrive at value and then be sure that we set the value and then buy it at a say at a margin of safety price far below that value now how do you do a sticker price and how do you do a payback time from free cash flow got calculators on the website that will help you guys do that for free go to rule one investing.com just check out the free resources section there's great calculators in there for you to use so valuing the business that gets us to the fourth M which is margin of safety okay now you've got an idea what the business is worth you know you want to buy it at
how off of that price that's the margin of safety price so the third thing you're going to do is you're going to put this business on a watch list and you're going to watch it until the price of that business goes below the margin of safety price now this brings us to one of these single most important things you need to know about this kind of investing this kind of investing requires that you do very very little all right we want you to be lazy to the point of sloth in other words be patient be excessively patient be so patient that you almost never do anything now to
put this in context Warren Buffett at Berkshire Hathaway is investing over one hundred and twenty billion dollars and I was just at a meeting with Charlie Munger yesterday
where he was talking about his annual report at The Daily Journal and Charlie said that typically they only buy one or two things a year a year with 120 billion dollars so the best investors in the world are saying that the key thing to do a really good job of investing is to know the value of the business as a business be able to buy it at a discount to that and in order to do that simply be patient and wait for the market to fluctuate and bring you that business at that discounted price the major mistake most people make is they just try to buy it right now and that's where you get leveled to just you know five to six percent per year we want 25 percent a year and to do that you got to be patient
all right fourth when the price gets to where you want it to be right so let's say you think this thing is worth $50
you want to buy it for 25 here comes a big recession and down come the prices of all the stocks and here's your great company available at $25 what do you do now well let me tell you what you do now is you control your fear because I'm telling you when that stock goes from $50 to $25 there's going to be a lot of people who are afraid of owning anything in the market they don't know where it's going to stop going down and you know
neither do i neither do you so when that stock goes to $25 the challenge is going to be for you is to be able to buy when other people are afraid but this is the giant secret that Buffett has been telling everybody for 50 years
you buy on fear you sell on greed and everybody goes oh yeah yeah you buy on fear you sell on greed you're okay but when the fear starts it affects us too so the critical thing is you are capable of understanding the business you see it as a business it's got a big moat great management you know the margin of safety price and then you buy it when it gets into the margin of safety price
I was on CNBC in 2009 and I said look I'm stepping in and buying this stock right now because everything's on sale they said well aren't you worried about the market continue to go down I said yeah you need to go down double where it is right now but these things are on sale and I'm buying them on sale now because we don't know what the future is what we know is we can buy this great business on sale do it then and you don't do it a little bit that's another terrible mistake so this fourth point is that you're going to buy when it goes on sale and you're going to load up the dang truck okay it's not here's how Buffett says it when it's raining gold you don't hold out a symbol you hold out a bucket so you load up the truck believe me on this because I've done it and it's so horrible you get it right the things on sale and you only put in a little because you got caught up in the fear you load up the truck okay
fifth start acting as soon as you own this thing start acting like the owner of that business because you are the owner of that business whether you own one share or you like Buffett and you own the entire thing you're the owner of that business so you're going to treat that business as an owner and deal with the emotions of ownership the fear the greed the things that are happening with that as part of what you're going to go through as an owner and this is why you're not going to own 50 stocks you're going to own five or ten as a novice let's try to do 10 okay Charlie Munger 3 he likes 3 stocks ok now what are you going to do as an owner you're going to do what a business owner would do that's it that's it the simple thing you've got great people running your business so you're going to do you're going to read reports from your CEO
you're going to listen to your CEO every quarter tell you how things are going you're going to follow the news you're going to pay attention to that business and if something starts to happen to the moat or something starts to happen to the management or something is changing in the industry then maybe you exit that business okay but first before you do that you go to step six which is you want more of it we call this stockpiling I wrote about it in payback time about adding more at ever graded prices now when you do this you're going to be dealing with the emotional rule of investment trust me on this the emotional rule of investment says oh every time I buy that stock it goes down but that's good stockpiling loves the emotional rule of investing if it only were true that every time I buy a stock it goes down
I would buy it with ten dollars and not get ready to load up the truck every step of the way down so what you're going to do is you can control the emotional investing by just remembering it isn't you making these things happen you know the value of this business you know it's massively on sale so you're buying five-dollar bills excuse me you're buying ten dollar bills for five dollars awesome and now you can buy more ten dollar bills for three dollars so what are you going to do you're going to snap up more of it of course you're going to get a great price and you're going to dollar-cost average into this thing but you're going to dollar-cost average with a brain not just buying it all over the place hoping you get an average price it's good no we're going to buy it with the first price being on sale and ever bigger on sale as we go down so we end up with a really really great basis in this company then you're going to watch those big five numbers
okay the big five numbers will tell you that that company still has its moat as long as those big five numbers are good forget about the market price except just to buy more the big five numbers of course are the four growth rates for earnings growth sales growth book value growth and cash flow growth plus return on equity return on invested capital I would almost add one more check the debt watch the debt you're the owner of this business if they start loading up debt that's a red flag okay so you're going to treat it just like you own it seventh seven roots seven or eight is cool now you own businesses now what you're going to inevitably sell the business we don't want to sell right but there's three times when you sell you're going to sell when you need the money you got to have to have to do at some point you need money
when you're retired you're going to sell when the fundamentals change that means those big five numbers start to go south on you it means something's changing in this business and if you can't figure out what it is they can't tell you what it is then it's probably time to leave because the investment is starting to turn like the moats getting broken and third you sell when the price gets stupidly too high so we sell on greed so we will clear it out when the price gets too high well above the sticker price like at least 20% or more above sticker then you can buy it back when it comes back down and finally the eighth step this is awesome the eighth step is really simple once you've done these seven steps then you just repeat those seven steps over and over and over again until you've built up true wealth and you're living very comfortably for
the rest of your life that's how you do it and when you break it down to these eight simple steps investing on your own it just doesn't be that scary right immediate once I've learned this even though I started with very little money once I learned it it wasn't scary anymore I had a good game plan that I could follow and those seven steps are fabulous with that eight step is to just you know Washington repeat so if you follow these correctly these eight steps are going to put you on a path to more wealth than you can possibly imagine and that's the truth if you give yourself time to let this work out you're going to be richer than you could ever believe and you're going to change generations in your family we call that generational wealth and it's incredible so now what I'd love to do is hear from you guys what do you plan to invest in to build your wealth what are you thinking about about these steps if you started any of these steps yet and how's your progress
