My take on Rule 1 Investing by Phil Town I call the Zenscore. In his book Rule #1: The Simple Strategy for Successful Investing in Only 15 Minutes a Week! (no affiliate) he writes about his investing philosophy which centers around four key principles he refers to as the Four M’s: Meaning, Moat, Management and Margin of Safety. More about this is in his book, website and youtube channel. Highly recommended.
The Zenscore is my take on it along with a scoring system. It’s a work in progress. The aim is to find a fantastic company with a great track record to invest in for at least 10 year. The expected average yearly return is at least 15%. With an investment of 100 USD and a yearly return of 15%, 100 USD will have increased to 405 USD in 10 years time because of interest-on-interest or compound interest. This is a great return.
Compound interest is the 8th wonder of the world. He who understands it, earns it; he who doesn’t, pays it– Albert Einstein
By calculating different historic growth rates a future price (10 years forward) can be estimated. This price is then used to calculate what the company (stock) is worth today. Basically dividing by four which is the same as expecting a annual growth rate of 15%. To have a margin, in case something goes wrong, a Margin of Safety (MoS) of 50% is recommended. It’s quite hard to find companies on “sale”. So the plan is to analyze companies. If they qualify (a high Zenscore) they are put on my watchlist and if they go on sale I buy.
The foundation is the 1 year, the average 5 year and the average 10 year growth rate in the ROIC (Return Of Invested Capital), Sales Growth Rate, EPS (Earnings per share) Growth Rate, Equity Growth Rate and Cash Growth Rate.
These 5 categories are essential for the companies future growth. For me to consider analyzing companies further I require at least an average 10 year growth rate of 5% in all these categories. Otherwise it will be disqualified.
The point system is divided as follows:
Moat: 2,0 / 2,0
Management: 2,0 / 2,0
Statistics: 5,0 / 5,0
Dividend: 0,5 / 0,5
Debt: 0,5 / 0,5
Maximum Zenscore = 10 points.
This one is very subjective. There is a need to assess the companies edge and brand, it’s competitors and which world markets it’s exposed to. Future growth potential and saturation of the markets. The statistics help us here as well as a lot of reading. Sometimes I don’t have enough time to investigate and will probably have to deduct points if I don’t know enough.
It’s important with a hands-on and visionary leader with experience. The CEO is assessed as follows:
0,5 points for being the CEO for at least 3 years or 1 year as CEO and 3 years in other positions in the same company.
0,5 points for owning stocks worth at least 1/4 of his/her yearly salary. Owning stocks suggests faith in the company.
0,5 points for not getting paid in stocks. The CEO shouldn’t be motivated to do stock buybacks.
0,5 points for writing about problems or potential problems in the Shareholder letter.
ROIC (Return Of Invested Capital)
Sales Growth Rate
EPS (Earnings per share) Growth Rate
Equity Growth Rate
Cash Growth Rate
A growth rate of 5% is acceptable. Above 10% is good. Above 15% is very good. 0,5 points for each category if growth rate is above 5%, 1 point if above 10%. I will mainly look at the 10 year average. I drop in the 5 year average and 1 year average suggest that the growth rate is dropping.
I prefer companies that keep their profit, invest it themselves and grow it further. Therefore I prefer companies who only pay a maximum dividend of 50% of their profit. A payout ratio above 50% suggest they don’t have anywhere to invest the money. 0 – 50% payout ratio gives 0,5 points.
The long-term debt is divided by the free cash flow. If below 3 the debt can be paid within 3 years which is acceptable and gives 0,5 points. Some debt could be good if the company needs capital to grow faster, especially when the interest rates are low.
All in all a total of 10 points. I haven’t included points for the fourth M: meaning.
Every business is about something. Make sure you know what that something is. What does this business mean? What does it do? And does it match your values? This M is about understanding the business enough to know you like it for the long haul. [Reading: Annual reports and 10K on the business website.]– Phil Town
I grew up in the in the 80s and have since then experienced the dawn of the Personal computer, the cell phone, the smartphone and many other technical innovations. I’ve been through the IT bubble 2001 and the financial crash 2008. We are currently in a-once-in-a-lifetime pandemic and in what I believe to be the early stages a new world currency – Bitcoin.
My main investing interest is in Tech and automation companies, Blockchain, cryptocurrencies and hard assets like precious metals (gold and silver). Things that can scale without much increased costs like software and games. However new companies or companies with no profits can not be assessed. I’m also looking for boring companies that sell things we always need.
I hope the Zenscore will find me a couple of fantastic companies to put on my watchlist and from them hopefully a few gems will go on sale. The Zenscore might not be perfect and may need some tweaking but time will tell.