Rule #1

Buy one business. Use the Three Tools. And for the next days, weeks, or even months, you must check those Tools every day at some point. It isn't necessary to check the market as soon as it opens. Just commit to checking the Three Tools each day. A time will come when one of the three shows a negative signal — a sign to get out. Usually the price starts to go sideways, and then either the MACD or Stochastics gives a negative signal. You then carefully watch for the third Tool to go negative. When it does, you go back to your online brokerage account and sell all of your stock in that wonderful business. Then you wait for those three indicators to tell you the big guys are going back in.

If it's okay to own a stock that's at Sticker Price, why not skip the whole MOS thing and just buy at Sticker? Because MOS means what it says: It's a Margin of Safety against having the wrong Sticker Price, among other wrong things that can happen. And if we have the right Sticker Price, we get to ride the big rise up from MOS to Sticker. On that ride we hope to see our returns go far above the 15-percent target. Once we catch that ride up, we can stay with a stock as long as it continues to accelerate up to and through the Sticker Price, but from that point on, (1) it's unlikely it will continue the same rate of return for us; and (2) there are bound to be other Rule #1 businesses available at MOS if we're willing to look. Why accept 15 percent if you can continually pick up 20 percent or more with a little extra homework?

You'll watch these potential buys, and as they come back into favor, you can consider purchasing them and dumping others that have ceased to be at attractive prices or have fallen out of institutional favor. At any one time you should keep your money focused on between one and five specific businesses that you understand well and are still priced at Sticker or below.

How many businesses should you own? Mr. Buffett has about 30, but then he also has $60 billion he's investing. If you have up to $10,000, you should own one business. If you have up to $20,000, you can get two. Max it out at five or so. Granted, in time you'll be tracking 30 or 40 on your Watch List. These companies should be in different parts of the market and meet all Rule #1 criteria, but are either not available at an MOS Price or not getting Mr. Market interested enough to attract the institutional buyers, who would then push the price up and get the Tools to say "get in."

Diversification The idea gets a lot of play on TV, but it's usually badly done and vastly overrated. You already know how I feel about diversifying in the market. It's for the ignorant, which you no longer are, so you're not going to diversify by buying 50 stocks. Dumb. And you're not going to diversify by buying one mutual fund made up of 100 stocks. Dumb. Dumb. You're going to focus your money on a few businesses that have Meaning to you. Do not buy some tech biz you don't understand so that you're "diversified" and if tech goes up you'll make money.

Here are the 3 guidelines for taking on debt. Only consider taking on debt (or keeping it) if: 1. You're an experienced and successful Rule #1 investor. 2. The interest rate on the debt is less than 33 percent of your expected rate of return. For example, if you expect over 21 percent, you can borrow at 7 percent. 3. The total debt that you carry (not including your house and car) can be paid off in less than one year of savings from your income after you pay for all your monthly stuff.

There's good debt as a Rule #1 investor, too. If you can borrow money at 4 percent and you're an experienced Rule #1 investor who can compound money at a consistently high rate of return, say 16 percent, it makes sense to borrow. If we can pay 4 percent and make 16 percent, we're using leverage to accelerate the overall rate of return on all of our money.

The first barrier to success is bad debt. Yes, there's good debt and bad debt. Good debt is money you borrow at a low rate of interest, with which you make a high rate of return. This idea goes by the name of OPM (other people's money) or leverage. An obvious example is the money you borrow to buy an apartment complex. The debt is covered by the rental income — or it will be in a few years. Bad debt, by contrast, is consumer debt money you borrow at a high interest rate to buy things that don't produce income or grow in value. Things like cars, refrigerators, clothing, and trips to Europe.

The order of analysis for the Big Five: 1. ROIC - if 10% or better, go on to ... 2. Equity — if 10% or better, go on to ... 3. EPS — if 10% or better, go on to ... 4. Sales — if 10% or better, go on to ... 5. Cash - if 10% or better, go on to ... Management and MOS.