If you’ve followed my site long enough, you’ll know I’m a fan of Rule one investing. In many ways, it’s similar to value investing. So this begs the question, Rule one investing vs value investing? Here’s what’s different!
Both Rule One investing and Value Investing have their origins in books (in fact, I highly recommend both of these books as part of my best personal finance books post!)
Rule One Investing vs Value Investing: The Basics
Both rule one and value investing are investing philosophies. Both are designed to help you get a great company, at a great price. However, they are slightly different!
Rule One Investing
Rule One is the younger of the two philosophies. The philosophy was set out by Phil Town, author of the book Rule #1. In his book, he laid out his philosophy for buying a great stock at a great price.
The name of Rule #1 comes from a famous Warren Buffett quote:
There are only two rules when investing. Rule #1- don’t lose money, rule #2- don’t forget rule #1
Phil Town is quite open that his philosophy isn’t entirely brand new (his book only came out in March 2006!) He is quite open that his book is merely a continuation of value investing as laid out by Benjamin Graham.
Phil Town lays out the way you can replicate his success- taking $1000 and turning it into $1 million in five years.
Town preaches his ‘updated’ version on value investing. Arguing that several of the points made by Graham in 1946 are now irrelevant in our modern markets.
However, Town also preaches many other standard value investing tactics such as investing over many decades, buying under intrinsic value and other such tactics.
However, Town makes a bold statement in many regards. By following his teachings, and those of Benjamin Graham, you can build your own mini-Berkshire Hathaway by investing 15 mins per week!
Since the publishing of his first book, Town has gone on to write two other books, including Payback Time and Invested.
Both of his subsequent books go on to re-enforce what he has said previously and clarify the points he’s made before. He has also used his subsequent books to add further to his ‘update’ on value investing.
Value Investing
Value invetsing is what Rule One Investing is based of. Although many others tried before, Benjamin Graham was the one who ultimately made value investing mainstream.
In his book Intelligent Investor (and subsequently his book Securities Analysis), he laid out how an investor can calculate the true value of a company and how to find undervalued stocks!
Despite being published in 1946, most major investors since its publishing have been called value investors in some sense of the word. This includes Warren Buffett, Ray Dalio and Carl Icahn!
In fact, Benjamin Graham taught Warren Buffett the concept of value investing! Using this knowledge, he took a small amount of money, and over the course of several decades, turned it into a fortune!
The whole premise behind value investing is to buy a great company at a great price- much the same as rule one. However, Benjamin Graham goes into excruciating detail on how you can calculate the value of stock and find its intrinsic value.
Just as with rule one, value investing focuses on buying great companies, time and time again. Not just over the period of a few years, but over a period of several decades!
The main way to do value investing is to stay rational. That is to say, that value investors shouldn’t allow their emotions to get the better of them. And to show this, Benjamin Graham is quite clever…
In his book, Benjamin Graham talks about Mr Market. Mr Market comes to shareholder’s doors and quotes them prices for stocks. Some days, they are reasonable, but most days they are absurdly expensive.
This simulates emotion. If you are constantly buying when those prices are absurd, you’re never going to beat the market. But, if you can remove your emotions from the market, you can!
Warren Buffett and Charlie Munger have slightly altered value investing for the modern day. Originally, value investing stated that the company should be a ‘cigar butt‘ (a company far, far below its intrinsic value!)
But now, they have changed it to be “a company that is significantly below its intrinsic value”.
Rule one investing vs value investing: The differences
- Rule one is an ‘updated’ value investing. According to Town, there are parts of value investing that are no longer relevant in today’s markets. In his books, Town states that when value investing was written, bonds were a good investment, now they are not!
- Rule one is perhaps a little unrealistic. Despite my love for it, I have to admit that it is a little unrealistic. There are almost no companies which fit into the Rule One criteria.
- Rule One alters the price criteria. Although Buffett and Munger have altered the price criteria, they have not given a specific number. Rule One on the other hand does. Rule One states that a company should be selling at only half its intrinsic value! (Essentially buying $10 for $5!)
Rule one investing vs value investing: Summary
Both Rule One and Value investing are inherently similar. Whilst Value investing is the original investing philosophy (of the two anyway!), Rule One seeks to ‘modernize’ it.
Rule One and Value investing have both changed somewhat since their inception. For Rule One, they have spent their subsequent books clarifying their earlier books, whilst adding new content that Phil has learned since.
But for value, they have had to drop their favoring of bonds, not to mention their price criteria!
Value investing is also a little more realistic when compared to Rule One. It’s quite easy to find so-called “cigar butt” stocks on the open market. But to find a great company on a half price sale? That’s almost impossible!
Thibault’s views
As I said at the beginning, I am a huge fan of Rule One investing. However I don’t follow every part of it. I haven’t even followed it for most of my investing career!
Had you asked me the question of “Rule one investing vs value investing?” when I started out, I would have responded defiantly with “Value investing!”
But, as I got older, this was no longer the case. I started to see the minuscule flaws in value investing, and naturally avoided them. Thus, I became a Rule One investor, before I really knew about Rule one investing.
This all happened in 2010, with me reading Rule #1 in 2011/12.
No, I’m not bashing value investing- most of my strongest stock positions came out of my trust of value investing. If you are starting out and the market is right, try Rule One. But anything else, and I’d rather stick with value investing!
Rule one investing vs value investing: which one do you follow? Tell me in the comments!
