Investing in Rule #1 Stocks is a strategy popularized by river-rafting guide turned investor Phil Town, who learned Warren Buffett’s principles of investing from a client whose life he saved from a whitewater disaster.  Having used the principles he learned to turn $1000 into $1 million in 5 years, Phil then wrote about his technique in the above-named New York Times bestseller – Rule #1: The Simple Strategy for Successful Investing in Only 15 Minutes a Week! by Phil Town.

In essence, Phil’s strategy combines value investing with technical analysis as it seeks to buy stock of great companies that are undervalued (i.e. cheap), but only when the price begins to rise.  In his easy to read book, Phil shows readers how to decipher the often complex and bewildering ocean of numbers to find those that are important.  Most importantly, Phil leads the reader step-by-step through the simple but necessary math to find inexpensive stocks that have high value in a very engaging style.

Phil Town’s Rule #1 formula essentially is 1) Make a list of wonderful businesses (‘wonderful’ is very specific), 2) Determine its value (know that ‘value’ is different from price), 3) Buy it at 50 percent off (when market fluctuations have beaten the price down).

This concept of ‘value investing’ has also been advocated by Joel
Greenblatt in his book “The Big Secret for the Small Investor”, who says “the secret to successful investing is to figure out the value of something and then – pay a lot less!”

For details on how to create your own list, read Phil’s book!

Those who wish an even simpler method of finding undervalued stocks may wish to consider VectorVest, a stock analysis and portfolio management program that analyzes over 18,300 stocks daily for Value, Safety and Timing.  With regards to value, VectorVest reports not only a calculated absolute value of the stock (which may be compared to the stock price), but also the relative value (on a scale of 0 to 2).

As explained by VectorVest, Relative Value (RV) is an indicator of long-term price appreciation potential, and is far superior to a simple comparison of Price and Value because it is computed from an analysis of projected price appreciation three years out, AAA Corporate Bond Rates, and risk. RV solves the riddle of whether it is preferable to buy High growth, High P/E stocks, or Low growth, Low P/E stocks. VectorVest favors the purchase of stocks with RV ratings above 1.00.

In keeping with Phil Town’s strategy of buying great companies undervalued in price, I use the Unisearch in VectorVest to find stocks with an RV >1.4 (which implies that they have long-term price appreciation potential).

Since the majority of the stocks follow the broad markets, it is prudent to wait for an up-turn in the markets before buying any stocks. Remember a broad market sell-off, and make undervalued stocks of great companies even more undervalued.  If you’re new to the world of investing and trading, read How to Learn Investing and Trading before buying any stocks.

The accompanying graphic shows the performance of the top 10 high VST stocks of all S&P500 stocks whose RV was greater than 1.4 on the day of search. Performance shown from the first trading day of 2014 and from 10/15/2014 (the recent October 2014 market low) until the market close on 1/2/2015.  As is evident from the results, the top 10 stocks outperformed the index by a wide margin (Annualized returns of 27.86% vs. 12.35% for the year, and 84.51% vs. 48.58% since the recent October 2014 downturn respectively).

For more information on ‘VectorVest Watchlists’, check out VectorVest Watchlists under the ‘What to Trade’ tab.

Next Steps

To evaluate the sheer simplicity of this program to find high relative value stocks with the minimum of effort, accept VectorVest’s offer of a 5-week trial of the full and complete VectorVest system.