Writing from My Favorite Investors
Phil Town’s Practice
Well, I’m still sick, and still in bed, but am alive and generally ok. I never thought the illness would go this long, but I’m learning that I must adjust my expectations with this thing. It’s been a rough go. September is a blur, and this is is the first day I’ve been able to look at a computer screen for more than two minutes without getting dizzy and feeling like my brain is swelling. I’m grateful to be able to finally review and put this piece up, and excited to send you more soon, so let’s get to it.
This is the first in a series of pieces written by guest investors reflecting on their practices. I’m so happy to begin with the person who always be my favorite investor: my dad, Phil Town. He has been a Buffett-style investor for 40 years and has written three New York Times bestselling books: two on his own – Rule #1 and Payback Time – and one with me – Invested. He teaches and writes about investing, all while managing his own fund. I send a huge thank you to him for stepping in when I need some help and taking the time to write this piece. You can learn more about him at his website, and by the way, if you’ve never taken his weekend workshop because of the travel required, I hear it’s now entirely online.
Written by Phil Town
Table of Contents
1. My Practice
2. The Well-Trod Path
1. My Practice
Until Danielle told me that she thought of her investing work as a ‘practice,’ I’d never considered investing in that light.
For the last 40 years, it’s always just been something I love to do. However, her idea that investing is a practice is exactly right.Investing is one of those passions that people who get into it (1) never tire of, and (2) never master completely.
My heroes are still going at it every day – Charlie is 96 and Warren is 89 – practicing investing.A couple of years ago when Warren bought Apple stock, Charlie said that Warren just keeps learning and keeps getting better.And Apple is up about 500% from where Warren bought it.
When I thought about a practice in the past, I thought of a kind of scheduled day, a process of knowing where the time goes and making the most of it.If that is what a practice is all about, then I can tell you that I don’t have one.I make every attempt at keeping my calendar empty and living day by day.
Today, I understand that an investing practice does not necessarily mean carefully scheduled time and a routine day. I do, in fact, have a practice.What that means to me is that I practice following a well-trod path, I practice having a special kind of discipline and I practice having the faith that staying on this path will take me where I want to go.
2. The Well-Trod Path
Knowing how to get on that well-trod path is the key. Charlie makes it easy for us and Danielle and I have expounded ad nauseum on the four simple questions posed by Charlie that take us to the path: Can I understand this business? Is it durable? Do I trust the CEO? Can I buy it on sale?
Bill Ackman, one of the best hedge fund managers in the world and a big fan of this sort of investing, gave his analysts a paperweight with eight principles that create a checklist which, I believe, answer Charlie’s questions. [Note from Danielle: Watching Ackman’s short interview, which I linked to just there, is useful to understand the way my dad presents Ackman’s imagined responses below.]
Charlie asks, “Can I understand this business?” Ackman answers, “Yes, because it is simple and predictable.”Then Charlie asks, “Is it durable?” And Ackman answers, “Yes, if it has free cash flow, a high return on capital, a dominant market position with large barriers to entry, no debt and limited exposure to outside risk.”Charlie goes on with, “Do I trust the CEO?” Ackman says, “Yes, because management is excellent and has good governance.”Charlie then asks the big question, “Is it on sale?” and Ackman doesn’t have a principle for ‘on sale’ probably because at his shop it is such an obvious principle that no one needs to be reminded.
The reason I’m expounding on Charlie’s questions and Ackman’s principles is that these are all that is necessary to take me directly onto the correct path.If I practice these, I am on my way to successful investing.
I practice these with the simple task of reading.I read 10Ks, a few news sources, a lot of books and I gleefully grab other great investors’ portfolio every quarter and read about those companies.
However, as necessary as these questions and principles are to my practice, they are not sufficient. There is something more that is required.Discipline.Oh my, scary word, that connotes a lot of hard work but a certain kind of discipline is necessary.The right kind of discipline is the soul of a great investing practice.Thankfully, given that I am not a very disciplined person, it is not the sort of discipline you’re thinking of – you know, the run-ten-miles-before-breakfast sort of discipline. What I do is the easiest sort of discipline possible.It is the discipline of doing nothing for great, long periods of time and then taking decisive action.
Francis Chou, a great investor from Canada, once said he’d wait ten years between buying companies if he had to, and then he’d load up the truck.This is the discipline of a practice that Buffett describes as, “Laziness bordering on sloth.” Charlie says that his great success comes from being “passive-aggressive” – doing absolutely nothing most of the time and then, when the time is right, doing everything all at once. Three years ago, Warren wrote that every ten years or so we get an economic storm that briefly rains gold and when that happens, we have to go outside with a bucket not a thimble.Three years later, he’s accumulated a ‘bucket’ of over $140 billion and is patiently waiting for it to start raining. Three years of doing not much. Remember, this is a guy who is 89 with an equally patient partner who is 96. How does a 93 year old man have the discipline to just patiently wait for three years? Three years could literally be an eternity.
The great secret to my practice has been the discipline to wait for an opportunity that fits Charlie’s list and then the decisiveness to jump in with both feet. I once waited for a couple of years without doing anything and then quickly put all of Danielle’s college money into one investment.If it had failed, she might be a proud graduate of the University of Wyoming instead of Wellesley, Oxford and NYU Law. Nothing wrong with UW but you get my point.This is the discipline of extremes – extreme patience and then extreme decisiveness.
And then there is faith. Not the faith we learn about in religions, but a faith born of the knowledge that this investing strategy, according to perhaps the best investor in the world today, Li Lu of Himalaya Capital, is the only investing strategy that produces investing success over long periods of time. In fact, Li Lu argues that this investing strategy is the only actual investing strategy there is – that the rest of what people call investing is just gambling by another name. Our extreme – even fanatical, if you will – faith in this path comes from knowing that this path has taken investors where they want to go for over 90 years and that the vast majority of successful long-term investors, those who crush the market, have walked this very path.
This is the kind of faith you get when you grow up in a family of successful investors. You get faith in the practice just from watching your uncle and your dad and your cousin all succeed by practicing the family investing strategy. You can’t help but have faith in it. It’s like that for me with this practice.I’ve been in it for 40 years now and from that mountain of age and experience I can see this path so clearly, where it starts, where it leads, what it takes to stay on it and what happens when you do. That gives me a kind of unquestioning faith that allows me to tell you that if you follow a practice similar to mine or Danielle’s or Warren’s or Charlie’s or that of a thousand other investors on this path and if you stay disciplined and have faith in the path, you will get where you want to go.
So, here’s my practice:
- Live life day by day
- Answer Charlie’s four questions by reading a lot
- Discipline myself to be patient and then decisive
- Keep the faith that comes from 90 years of experience
Now go play!