Rule 1 states, "You can make 15 percent a year or more with very little risk, and that'll change the way you and your family live forever". Why might an investor decide too buy a stock? Perhaps, the following reasons would be compelling: the company has no debt; the company is cash rich, the company has strong earnings growth; the company is a family oriented business; and the company has an exciting product line.

Town hammers Gary Smith of Ciena for taking $41 million pay while shareholders lost 2/3 book value; Town condemns Jure Sola of Sanmina, who took home a $19 million bonus as shareholder value only grew 2 percent a year; Town forgives Scott McNealy of Sun Microsystem, whose stock dropped from $124 a share to $4; Town mocks Larry Johnson of Alberston, whose earnings per share for the last ten years has been zero; Town criticizes Peter Dolan of Bristol-Myers Squibb financial befuddlement, who took home $41 million while company stock dropped 50 percent.

Are we hearing too much hype? Why not criticize McNealy? McNealy failed too protect the mid range server market; McNealy failed to grasp that AMD chips would overtake Intel Xeon chips powering servers; the Risk chip did not allow Sun to defer fix asset costs and distribute costs to vendors; McNealy relied too much on government contracts and funding to keep his ship a float; and McNealy leadership floundered as the stock price plunged downward.

Large companies want monopoly status; they want a moat to protect competitors from taking away their castle; moats can be established by propriety information (secret), experience, and innovative opportunities posed by customer interest; focus on the moat that is hardest to cross; the key is finding business with wide moats, first. The following five indicators suggest a wide moat: return on investment, sales growth rate, earnings per share, Book Value per Share, and Free Cash Flow. 10% for 10 years in all five categories is the rule. Return on investment capital is the rate of return a business makes on cash it invests in itself every year. First, ROIC is the percentage return you get back from the cash you've plowed into the business. A solid ROIC is an indicator that the mangers of the business are on the side of its owners. Next, sales are the total dollars took in from selling product or services. Sales growth indicates expansion opportunities are being capitalized. Equity is what is left over, if machines, supplies, and real estate were sold off and debts paid off. Next, Cash growth tells the investor whether the businesses cash is growing with its profits. Investors like real cash growth. Cash in the bank. Dividends are not preferred to growth in earnings, capital improvements, and market expansion. A dividend is a "pay-out of extra cash the business can't use effectively for growth". In summary, consistent number is what rule 1 is looking for and this makes for a good entry.

The strength of Rule 1 is in question. Buffet taught, if the investor can not make investment that perform better than the bond market then he should keep his money in the bond market. Secondly, if the investor cannot beat the returns of a stock index, over the life of the stock market then why invest in single stocks? At best, the investor should rely on about 7 percent returns average by investing in an index. Town criticizes index investing stating a $10k investment between 2000 thru 2005 worth was $9k. Rule 1 investment returned $37k from a basket of (APOL, WAG, BBBY, SBUX, DELL, and TOL). $37 is a market time scenerio. It represents a perfect entry and exist strategy implementation. A highly unlike probability. Timing scenerios, if possible would make Town the richest man in collective investment history. Third, the biggest technical challenge for an investor is not entry into a stock but his exit strategy. Town brazed over the complexity of developing an effective exit strategy.

The Rule 1 assumption is that the stocks growth, earnings, and sales will continue to propel the stock upward year after year. The market rewards good companies by increased purchases. Companies emerge, inflect, and mature. Town believes he can identify companies that will dominate a sector and capture 90 percent of the sales in the sector. However, Town fails to tell the investor about the sheer pain associated during downturns, panics, and manias. Five years ago, Intel qualified as a profit zone stock: EPS reached 10 percent, it was cash rich, and mutual funds and institutional buyers liked the stock. Intel failed to defend against the advances of AMD. Consumers began preferring AMD chips realizing equivalent performance at cheaper prices. Rule 1 selection of Intel would have caused pain to the investor as they debate whether the intel, currently, had the capabilities to fend off AMD. Town instructs the investor too "sell when the business has ceased to be wonderful" and "when the market price is below the sticker price." The golden rule would be to put a stop lose on all the stocks purchased. Let the computer automatically execute the rule.

Efficient market theory is often disproved by Contrarian strategy. EMT is a popular academic explanation of the behavior of markets because the market can be converted into a mathematical behavioral model. EMT suggests that the stock market price is always perfectly rationale and inefficiencies are rapidly identified and profits soaked up. The investor irrational exuberance means that speculative vices will eventual be corrected and the market will return back to the mean in a last ditch effort to repent. The market seeks comfort.

Does MOS fend off all the risk? Margin of Safety makes sense: "A big part of the secret of getting rich buying business is knowing what they are worth." "The secret to making fantastic rate of return on our business buying is to be sure we're getting a dollar of value for only 50 cents." The stock stays on the watch price until its MOS is obtainable. MOS will make you money and prevent you from losing during a bubble. "MOS means you can buy a company cheap enough that you can sell it later without losing money-even if you were wrong to buy it in the first place." Town mentions but does not talk about institutional buyers and seller behavior. $14 out of $17 trillion in the stock market are owned by institutional buyers and the super rich reap 30-40 percent of the profits per year. As high energy prices cause market watchers to fear, large institution sell offs could start extending the pullback and even cause an economic downturn. MOS in this cause will not save equity and the investor must make a decision under extreme pressure whether to hold or sale. Hence, the stop lose, if put in place. Big drops of over 10 percent in a day will hammer stock loses because the number of buyer will be significantly less than the number of buyers.