Library / Investment Tools

Date of review: February 2020
Book author: Michael E.Raynor and Mumtaz Ahmed
Вook published: 2013

The Three Rules: How Exceptional Companies Think by Michael E.Raynor and Mumtaz Ahmed (2013)

The book is not on the list of must-reads investment manuals, but I found it very useful. It fits into that part of investing that focuses on long-term compounders – companies that can generate 10x and more returns over decades by successfully reinvesting their profits.

What are the three rules

The book is based on the actual study by Deloitte Consultants who looked at about 25,000 companies over a 45-year period. They dug deep into 27 companies in 9 sectors to identify 2 key common patterns that helped those companies to generate exceptional performance:

  • Better before cheaper (focus on quality, not on price)

  • Revenue before cost (focus on growing volumes and prices to generate higher in the long-term, not on lowering costs).

The third rule is that there are no other rules, all else is secondary.

The only drawback I would point out is that the analysis of best performing companies primarily focused on returns on assets and paid less attention to shareholder returns. For an investor, starting from shareholder returns is the central part and the main goal of the analysis. A great investment does not equal a great company as many poor performing businesses delivered exceptional returns when they started to change.

Despite this, I recommend the book as a very useful collection of case studies which re-iterate the key conclusion.

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