Every investor dreams of finding that “perfect” company. The one with true staying power, smart leadership, and a real edge. But spotting a business that’s built to last takes more than just reading numbers. The real secret lies in understanding two Rule #1 essentials: economic moats and Return on Equity (ROE). These are the same principles that Warren Buffett and Charlie Munger have relied on for decades.
In this episode of the InvestED Podcast, Phil Town and Danielle Town break down what moats and ROE really mean for investors. Phil draws on years of hands-on experience to explain what makes a business stand the test of time. He shows how ROE helps measure a company’s strength and why keeping your investing simple is often the smartest move. Danielle brings the perspective of a learner, asking the questions every beginner wonders about. Together, they make these powerful ideas easy to understand and apply.
Moats and ROE are not just numbers on a page. These are signals of whether a company has lasting strength. They reveal if a business is led by people who know how to grow real value. Understanding these signals can help you invest with more confidence. Tune in to learn how to put these Rule #1 tools to work and sharpen your investing strategy.
Here are three reasons why you should listen to this episode:
Discover how Warren Buffett’s idea of an “economic moat” can help you find businesses with real advantages.
Learn why ROE is the top number for new investors and how to use it to make smart choices.
Get practical tips on building investing habits and simplifying decisions, so you can invest with more confidence.
Resources
Rule #1s "InvestED" Podcast and Website - Website | Apple Podcast | YouTube
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Danielle Town: Website | LinkedIn | Instagram | Facebook | YouTube | X (Twitter)
Rule One Investing and the Power of Intrinsic Characteristics
Rule #1 Investing is rooted in Buffett and Munger’s timeless rule: don’t lose money. This approach centers on a simple, focused checklist that keeps you disciplined.
The key is to understand a business deeply. Look for traits that give it a lasting edge and check that management is trustworthy. These principles help you ignore Wall Street noise and zero in on what matters most.
Intrinsic characteristics are what make a business last. They form a company’s “moat”, which is its real defense against competitors. When a strong moat meets honest leadership, businesses don’t just survive; they thrive. Sticking to this framework is the foundation of long-term investing success.
The Stages of Mastery in Investing
Investing isn’t something you master overnight. It’s a journey, like learning a sport or instrument, with its own ups and downs. Early mistakes are normal and help lay the groundwork for future growth.
Over time, what once seemed complex starts to make sense. With discipline, skills turn into habits, and investing feels more natural.
These stages show investors that progress comes in layers. Awareness, persistence, and practice transform confusion into competence. Decision-making becomes almost automatic.
Unconscious incompetence – You don’t realize how much you don’t know.
Conscious incompetence – You see your mistakes and the steep learning curve.
Conscious competence – With focus, good habits begin to form, and results improve.
Unconscious competence – Mastery takes over, and execution feels effortless.
Take your first step toward mastery by exploring Phil Town’s free online course on the foundations of Rule #1. Sign up to access practical lessons, tools, and exercises. These will help you build confidence and skill as an investor.
Habits and Investing as a Practice
Investing isn’t just about analyzing numbers. It’s also about creating routines that make good decisions second nature.
Just like daily habits, such as making your bed or choosing healthy meals, strong investing habits bring order to your day. They cut out clutter and free up your mind for what matters most. The less energy spent on small choices, the more you can focus on what matters.
Turning investing into a practice means turning intention into routine. Read the news with an investor’s eye. See every company as a chance to learn or invest.
Over time, these small habits add up. Consistency helps you stay calm, disciplined, and focused, even when markets get rocky.
Phil puts it simply: “This is a secret that you got to know. This is one of those secrets that Warren Buffett's had out in the public now for 50 years. But people gloss over it, because there's so many things you could think about when you're looking at a company.” His advice reminds us that the most powerful investing habits are often the simplest.
Return on Equity (ROE) and Why It Matters
Return on Equity (ROE) is a key metric for long-term investors. It measures how well a company uses shareholders’ money to generate profits.
When a business keeps ROE at 10% or higher, it’s a sign it’s creating real value. ROE also reveals if management is making wise decisions with company resources.
A strong ROE is more than just a number on a page. It’s proof that a business can stay profitable, defend its edge, and reward investors year after year.
What is Return on Equity in Investing?
ROE is calculated by dividing a company’s net income by its shareholder equity. This simple ratio shows how well a business turns invested capital into profit. Unlike complicated metrics, ROE is easy to understand and compare across companies.
As Phil explains, “So we got equity, which is: you take your assets, subtract your liabilities, you get your equity, what you own. And you’re dividing that into your earnings, which is your sales revenue minus your costs. What you’ve got left is profit, or earnings.” This step-by-step approach makes ROE accessible for any investor.
Understanding ROE helps investors look past surface numbers. High revenue doesn’t always mean efficiency, but a strong ROE shows if a company is truly generating returns for owners. That’s why Buffett and Munger rely on ROE as a core measure of business quality.
Why Consistent ROE is a Sign of Strong Businesses
One good year of high ROE doesn’t make a company worth your investment. What really sets great companies apart is their ability to keep ROE above 10% year after year. That consistency tells you the business has real advantages—the company's moat—and leaders who know how to protect it.
When you see return on equity steadily growing, it’s a sign that management is putting capital to work wisely and building long-term value. That track record reassures investors that the company is resilient and getting stronger over time. For beginners, looking for a consistent ROE above 10% is one way to spot a business worth digging into.
Pitfalls of Using ROE and How to Avoid Them
Return on equity can fool you if you don’t dig deeper. A company loaded with debt can make its ROE look fantastic on paper, but that’s just smoke and mirrors. Debt can juice returns in the short run, but it piles on risk—and when the economy slows down, that risk comes crashing back on shareholders.
Take the airline industry as an example. Airlines often run with huge amounts of debt, which can make their ROE look solid during boom times. But the moment travel slows down—like we saw in 2020—that debt becomes a massive weight, and investors get crushed.
That’s why Rule #1 Investing looks for companies with little or no debt.. When debt isn’t propping up the numbers, ROE shows you the company’s real ability to create value. Investors who understand this don’t chase the flashy numbers—they focus on businesses that are built to last.
Ready to build your skills even further? Explore the Rule #1 Virtual Investing Workshop, where you’ll learn key concepts. Get hands-on practice with guidance from expert coaches.
Durable Advantages and the Role of Leadership
A company’s moat is its shield against competition. Durable advantages protect profits from being chipped away by competitors. These advantages include brand loyalty, switching costs, exclusive access, and strong pricing power.
As Phil puts it, “A wonderful business is one that creates great return on equity and has no debt. That's a wonderful business. Now, if you want to have the greatest business on the planet, it not only does that but it also grows.” In other words, the best companies not only defend their position but also grow stronger over time.
These moats are what allow a company to deliver strong returns for decades, not just a few years. But even the best moat isn’t enough without strong leadership.
Great managers use capital wisely, reinvest for growth, and avoid reckless spending. Poor leadership can waste resources and weaken the very advantages that make a company special. That’s why judging management’s integrity is just as important as studying the numbers.
Building Wealth with Simplicity
The lesson from this episode is clear: successful investing isn’t about chasing every trend or mastering complex ratios. It’s about focusing on companies with real, lasting strengths and using ROE as a steady guide. Trusting management to grow value responsibly is just as important.
Simplicity, practiced with discipline, is what sets great investors apart. By sticking to a few timeless principles, anyone can build habits that lead to smarter decisions, calmer investing, and lasting wealth.
Expert Advice & Powerful Quotes
“Rule number one, don't lose money. Rule number two, don't forget rule number one.”
“The reason that our ideas have not spread faster is they're too simple. The professional classes can't justify their existence. If that's all, I have to say, it's all so obvious and so simple.”
“This is a secret that you got to know. This is one of those secrets that Warren Buffett's had out in the public now for 50 years. But people gloss over it, because there's so many things you could think about when you're looking at a company.”
“A wonderful business is one that creates great return on equity and has no debt. That's a wonderful business. Now, if you want to have the greatest business on the planet, it not only does that but it also grows.”
“So we got equity, which is: you take your assets, subtract your liabilities, you get your equity, what you own. And you’re dividing that into your earnings, which is your sales revenue minus your costs. What you’ve got left is profit, or earnings.”
Danielle Town – Attorney, Author & Investing Advocate
Danielle Town is a best-selling author, attorney, and passionate advocate for empowering new investors. She has a background in law and a deep curiosity about financial independence. Danielle is dedicated to demystifying investing for anyone seeking financial control. She co-authored Invested, sharing her journey learning value investing with her father, Phil Town. Danielle believes anyone can build confidence in investing by focusing on clarity, patience, and wisdom.
Through her writing, podcasting, and teaching, Danielle helps others cut through the noise of the market. She guides people in developing sound investing habits that last. Her approach encourages aligning money choices with personal values and long-term goals. Danielle shows that investing is a lifelong practice, built on steady learning and self-awareness. She inspires anyone to take the first step and make smart, values-driven decisions.
📌 Expertise: Value Investing · Financial Education · Personal Finance · Mindful Money Management
🔗 Connect: Website | LinkedIn | Instagram | Facebook | YouTube | X (Twitter)
Investing with Discipline and Clarity
When the market feels noisy or uncertain, it’s natural to question your choices. Rule #1 Investing isn’t about jumping on trends or making snap decisions. It’s about sticking to proven principles, being patient, and having the discipline to invest in what you truly understand.
Listen to the Full Episode – In this episode of the InvestED Podcast, Phil Town and Danielle Town dive deep into the core principles inspired by Charlie Munger. They walk through how to truly understand a business and insist on a margin of safety. Their conversation reminds us that real investing success comes from focusing on fundamentals, staying patient, and committing to what works.
Reflect on Your Own Process – Take a moment to think about how you choose investments. Are you guided by a real understanding of the business, or do emotions and market noise influence your decisions? Phil and Danielle encourage you to build self-awareness and know your limits. Staying within your circle of competence is key to disciplined, confident investing.
Explore More – Visit Rule #1 for more episodes and resources on building your investing discipline. Discover workshops, tools, and stories that support your journey to becoming a mindful and successful Rule #1 investor.
With patience and principle-driven discipline, investing becomes more than chasing returns. It turns into a journey of learning, self-mastery, and true financial empowerment. This is how you build wealth that lasts.
