One Up On Wall Street: How To Use What You Already Know To Make Money In The Market – Peter Lynch

Here are my comments on the book:

How do you one up Wall Street? Peter Lynch, American investor, mutual fund manager, and philanthropist who as the manager of the Magellan Fund at Fidelity Investments between 1977 and 1990 consistently averaged a 29.2% annual return which is more than double the S&P 500 market index, states that it all boils down to spending the necessary time to understanding what it is you’re investing in; he’s not the only proponent of this notion. In fact, the idea of understanding what you’re investing in goes back to what the great investor Benjamin Graham has stated in his book “The Intelligent Investor.” Even Warren Buffett himself states that he always stays within his “circle of competence.” Find a niche that you’re interested in and dive deep into the fountain of knowledge within that industry. Wealth is created through focused attention, rather than being opportunistic. Just as the saying goes, “The more you know, the more you grow” or, “The more you learn, the more you’ll earn.”

This book is essentially Peter Lynch’s playbook on investing. He guides you step-by-step on his thought processes, and the indicators of a good buy in companies. Despite the book being originally published in 1989, a lot of the principles addressed still holds true today as it’s a revised edition. For those of you who are interested in increasing your knowledge on investing in the stock market, this is a great book and I would highly recommend it to those with an intermediate understanding of the stock market. I wouldn’t necessarily recommend this book to those who are completely new to investing as the content can be overwhelming with the technical terms. Here are some of the points to the book:

 

1. Would you put your hard earned cash or invest it in a company that’s losing money? Most likely not. Having said that, when deciding whether or not to invest in a company, look at their bottom line; see if they’re making any money. It boggles my mind that on the day Snapchat went public on the NYSE, people bought shares of it despite Snapchat losing $514 million in 2016. Can their shares go up? Sure but I don’t see that happening consistently unless they start making a profit. “In spite of the instant gratification that surrounds me, I’ve continued to invest the old-fashioned way. I own stocks where results depend on ancient fundamentals: a successful company enters new markets, its earnings rise, and the share price follows along. Or a flawed company turns itself around. The typical big winner in the Lynch portfolio (I continue to pick my share of losers, too!) generally takes three to ten years or more to play out. Owing to the lack of earnings in dot.com land, most dot.coms can’t be rated using the standard price/earnings yardstick. In other words, there’s no ‘e’ in the all-important ‘p/e’ ratio. Without a ‘p/’ ratio to track, investors focus on the one bit of data that shows up everywhere: the stock price! To my mind, the stock price is the least useful information you can track, and it’s the most widely tracked. To me, this barrage of price tags sends the wrong message. If my favorite Internet company sells for $30 a share, and yours sells for $10, then people who focus on price would say that mine is the superior company. This is a dangerous delusion. What Mr. Market pays for a stock today or next week doesn’t tell you which company has the best chance to succeed two to three years down the information superhighway. If you can follow only one bit of data, follow the earnings—assuming the company in question has earnings. As you’ll see in this text, I subscribe to the crusty notion that sooner or later earnings make or break an investment in equities. What the stock price does today, tomorrow, or next week is only a distraction.

 

2. Just as billionaire Mark Cuban has stated in his book How to Win at the Sport of Business, you only need to be right once. You only need to hit that big grand slam one time. No one cares about your losses, people only care about your wins and that’s why you only need to be right once. This principle somewhat aligns with what Peter Lynch says about investing. Your investments don’t all have to be winners, at least 6 out of 10 do though. As long as you’re winning most of the times, you’re doing well. This goes along with my personal philosophy of winning your daily battles. Every day you’ll be faced with different challenges of life (health, finances, relationships, career, fulfillment, contribution, and etc). As long as you win the daily battle most of the time, doesn’t necessarily have to be by much, over time it’ll have a compound effect and you’ll get to where you want to be.My clunkers remind me of an important point: You don’t need to make money on every stock you pick. In my experience, six out of ten winners in a portfolio can produce a satisfying result. Why is this? Your losses are limited to the amount you invest in each stock (it can’t go lower than zero), while your gains have no absolute limit. Invest $1,000 in a clunker and in the worst case, maybe you lose $1,000. Invest $1,000 in a high achiever, and you could make $10,000, $15,000, $20,000, and beyond over several years. All you need for a lifetime of successful investing is a few big winners, and the pluses from those will overwhelm the minuses from the stocks that don’t work out.” He later states, People who succeed in the stock market also accept periodic losses, setbacks, and unexpected occurrences. Calamitous drops do not scare them out of the game. If they’ve done the proper homework on H & R Block and bought the stock, and suddenly the government simplifies the tax code (an unlikely prospect, granted) and Block’s business deteriorates, they accept the bad break and start looking for the next stock. They realize the stock market is not pure science, and not like chess, where the superior position always wins. If seven out of ten of my stocks perform as expected, then I’m delighted. If six out of ten of my stocks perform as expected, then I’m thankful. Six out of ten is all it takes to produce an enviable record on Wall Street.

 

3. Invest in simple businesses rather than complex ones. This point goes back to understanding or knowing what you’re investing in. The more complex the business is and how they derive their income and payout expenses the more difficult it is to understand. Again, knowing how a business operates is essential to being a successful investor. Getting the story on a company is a lot easier if you understand the basic business. That’s why I’d rather invest in panty hose than in communications satellites, or in motel chains than in fiber optics. The simpler it is, the better I like it. When somebody says, ‘Any idiot could run this joint,’ that’s a plus as far as I’m concerned, because sooner or later any idiot probably is going to be running it. If it’s a choice between owning stock in a fine company with excellent management in a highly competitive and complex industry, or a humdrum company with mediocre management in a simpleminded industry with no competition, I’d take the latter. For one thing, it’s easier to follow. During a lifetime of eating donuts or buying tires, I’ve developed a feel for the product line that I’ll never have with laser beams or microprocessors. ‘Any idiot can run this business’ is one characteristic of the perfect company, the kind of stock I dream about. The perfect stock would be attached to the perfect company, and the perfect company has to be engaged in a perfectly simple business, and the perfectly simple business ought to have a perfectly boring name. The more boring it is, the better. Automatic Data Processing is a good start. But Automatic Data Processing isn’t as boring as Bob Evans Farms. What could be duller than a stock named Bob Evans? It puts you to sleep just thinking about it, which is one reason it’s been such a great prospect. But even Bob Evans Farms won’t win the prize for the best name you could give to a stock, and neither will Shoney’s or Crown, Cork, and Seal. None of these has a chance against Pep Boys—Manny, Moe, and Jack. Pep Boys—Manny, Moe, and Jack is the most promising name I’ve ever heard. It’s better than dull, it’s ridiculous. Who wants to put money into a company that sounds like the Three Stooges? What Wall Street analyst or portfolio manager in his right mind would recommend a stock called Pep Boys—Manny, Moe, and Jack—unless of course the Street already realizes how profitable it is, and by then it’s up tenfold already.

 

4. Be weary of hype. Hype is created by the mass of people yet the mass of people aren’t very well informed. Who do you want your financial advice from? The mass of people who generally aren’t financially knowledgeable or those who have wealth and financial knowledge? I’ll pick the latter. This is partially why recessions happen. Uninformed people all jump on the bandwagon and create a bubble that then one day pops. This is why when someone tells me that the only way to make money is in a certain industry or that you’d be crazy to not invest in XYZ, I’m finding a way to short (bet against) them. Another stock I’d avoid is a stock in a company that’s been touted as the next IBM, the next McDonald’s, the next Intel, or the next Disney, etc. In my experience the next of something almost never is—on Broadway, the best-seller list, the National Basketball Association, or Wall Street. How many times have you heard that some player is supposed to be the next Willie Mays, or that some novel is supposed to be the next Moby Dick, only to find that the first is cut from the team, and the second is quietly remaindered? In stocks there’s a similar curse. In fact, when people tout a stock as the next of something, it often marks the end of prosperity not only for the imitator but also for the original to which it is being compared. When other computer companies were called the ‘next IBM,’ you could have guessed that IBM would go through some terrible times, and it has. Today most computer companies are trying not to become the next IBM, which may mean better times ahead for that beleaguered firm.

 

5. Be cautious of companies with a lot of debt. In fact, you may want to try to avoid investing in companies with a lot it. Debt is a double-edged sword as it can be leveraged to create wealth. However, the flip side is that it can also hurt the debt owner if the money’s not utilized effectively. If I’m not mistaken, one of the criteria Warren Buffett looks out for is companies with a debt-to-equity ratio of less than 0.5. “This debt-to-equity ratio is easy to determine. Looking at Ford’s balance sheet from the 1987 annual report, you see that the total stockholder’s equity is $18.492 billion. A few lines above that, you see that the long-term debt is $1.7 billion. (There’s also short-term debt, but in these thumbnail evaluations I ignore that, as I’ve said. If there’s enough cash—see line 2—to cover short-term debt, then you don’t have to worry about short-term debt.) A normal corporate balance sheet has 75 percent equity and 25 percent debt. Ford’s equity-to-debt ratio is a whopping $18 billion to $1.7 billion, or 91 percent equity and less than 10 percent debt. That’s a very strong balance sheet. An even stronger balance sheet might have 1 percent debt and 99 percent equity. A weak balance sheet, on the other hand, might have 80 percent debt and 20 percent equity.

 

By Ryan Timothy Lee

 

Thank you for reading! Please share this post with someone who you think will benefit from it. Also, join my Facebook group here, to receive exclusive content and updates on posts. If you have any book requests or recommendations, I’d love to hear them out so please let me know through an e-mail at bookstakeaway@gmail.com.

 

My rating:
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Check out the book here:
Amazon US
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Amazon UK

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