Stock Options Say I want to hire Mr. Slick to be my CEO, and the stock price is at $30 a share. I give Slick an option to buy 1 million shares of the business at $30. If he can get the stock to go up to $40, he'll make $10 million. He has no downside risk since he didn't pay anything for the options. (Those options will, of course, also come with a nice fat paycheck, since he can't be certain he can make the stock go up, other things in the world being influential.) Nice deal. Especially since Slick knows that 4 percent inflation might move the stock up to $40 in seven years if he does nothing but maintain the status quo. Sweet. Except for the owners, us. We get screwed. A million-share piece of our pie went to this guy for nothing. Our "return" means nothing if it only keeps pace with inflation.

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."