Book Review: Payback Time
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Town’s investing philosophy is very much based on the success of Warren Buffett’s endeavors. The strategy taught in this book involves value investing over the long-term.
He shows no respect for the mutual fund industry and reluctantly mentions index funds for investors who simply want to take the easy way out. Therefore, stocks are his weapon choice for revenge. Against who or what? I’m not too sure.
These are the highlights of the book:
- The Three M’s. Meaning. Moat. Management. Town stresses that we are not dealing with stocks but we are meddling with businesses. So, we would like to invest in a business that 1) is simple and understandable to the investor, 2) has a competitive advantage versus those in the same industry, and 3) has stellar cast in management to keep the business running as it should.
- The Big Five Numbers plus Debt. After finding the right companies, we want to find the value of that company through return on invested capital, earnings growth, sales growth, equity growth, cash growth and debt. This was the formula taught in Town’s previous book, Rule #1, to find value of a company.
- Stockpile at the right prices. As Town puts it, the key to growing wealth through stocks is stockpiling – hoarding shares at an optimal discount price. It represents a refined and picky version of dollar-cost averaging. He throws a bunch of different nicknames for numbers (Sticker Price, Margin of Safety Price, Payback Time) but they all point to a set price-point criteria for buying stock that yields a low-risk, profitable investment.
Instructional Investing is Hard to Find
Payback Time is written in a great instructional format that teaches the reader what to look for and how to look for it. In my opinion, the most valuable content is the set of parameters that Town uses to identify a good investing opportunity. Along with guidelines to find the right company, he tells you when you should buy and when to sell.
Town gives a complete example of how to enforce the strategies that he teaches. To top it off, he touches upon the various investment vehicles that would maximize earnings and advises on making routine contributions – which is the best way to begin saving to invest.
Town’s value calculations include data research from many years ago. He likes to look at the trends of a company’s core financials dating back up to 10 years before. While historical numbers tell how a business became what it is today, I’ve always been skeptical as to how it translates into future performance – especially in the fast-paced, volatile age that we live in now.
He also wrote a section on trending and the use of technical indicators to pick out the right times to buy and sell. Again, technical analysis was invented to time the market, which is something I wouldn’t attempt. Instead, I prefer his price indicators over such hooey. If the stock’s price has reached its value without significant potential for growth, sell it. If the stock’s price reaches a significant discount to value, buy it.
Overview
This book definitely encompasses the investment mentality that any stock investor should have. Town stresses that we are investing in a business of which we are looking to become part-owners. Therefore, we must start from the perspective of a owner, not just an investor.
I am someone who is starting to jump into individual stocks rather than simply relying on index funds. Payback Time is just the book to learn more about sound long-term investing with stocks, which has greater potential for higher returns compared to diversified funds.
For anyone looking to become more active in building a stock portfolio, Payback Time
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