To the Editors:
After reading Wayne Thorp’s article on Rule #1, I am confused [“The Rule #1 Approach to Finding Wonderful Companies,” October 2007 AAII Journal]. There seems to be a disconnect between the conservative don’t-lose-money philosophy espoused by Mr. Town and the fantastic returns he claims to have achieved ($1,000 to $1 million in five years). He tripled or quadrupled his money annually. In finance, reward is generally tied to risk. His results indicate a high-risk, high-reward philosophy—not one that seeks to prevent losses. Perhaps he addresses this discrepancy in his book. But for readers who haven’t read the book, it would have been enlightening to address that issue. Even your own backtesting doesn’t produce those kind of results.
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The Rule #1 philosophy is sound—really just generally a rehash of Warren Buffett and Ben Graham. It’s just a question of whether Town achieved his returns with it and whether he’s truly in their class. I would have rather had that question answered first before launching into a screen of the Rule #1 philosophy.
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