Here’s my favorite part of the book:
How do you earn more through the stock market? According to Peter Lynch, American investor, and mutual fund manager of the Magellan Fund at Fidelity Investments between 1977 and 1990 where he averaged a 29.2% annual return consistently which is more than double the S&P 500 market index and making it the best performing mutual fund in the world, states that it all begins with learning, hence the title of his book “Learn to Earn.” Just as it’s the case with anything else, mastery and deep knowledge is the key to success. However, with investing in the stock market, knowledge alone isn’t sufficient; another crucial component to your success is your ability to control your emotions (especially during a bear market).
This is a good book for beginners who are interested in learning more about the stock market and how it works. It’s a little bit different from other books on investing where they focus mainly on the technical aspects of investing. In this book, Peter divides the book up in to four chapters where he opens it up with an in-depth look at the origins of the stock market and how it all started. The second chapter is where he dives deep into the basics of investing (probably the most useful chapter of the book in my opinion). In the third chapter, he addresses the life of a company. He then finishes the book off with a chapter on the highlights of how certain individuals got rich through the creation of their company; Microsoft, Home Depot, and Levi’s to name a few.
Check out the book here:
Here are some of the points to the book:
1. Start investing now. With regards to investing, time is your best friend. “Many people wait until they are in their thirties, forties, and fifties to start saving money. It dawns on them that they’re not getting any younger, and soon enough they’ll need extra cash for retirement so they can afford a cabin on the lake or a trip around the world. The trouble is, by the time they realize they ought to be investing, they’ve lost valuable years when stocks could have been working in their favor. Their money could have been piling up. Instead, they spend what they have as if there’s no tomorrow. Many of their expenses are unavoidable. They’ve got children to support, doctor bills, tuition bills, insurance bills, home repair bills, you name it. If there’s nothing left over, there’s not much they can do about it. But often enough, there is something left over, and still they don’t invest it. They use it to pay the tab at fancy restaurants, or to make the down payment on the most expensive car in the showroom. Before they know it, they’re heading off into the sunset with nothing into investments that will pay off in the future. The more you salt away now, while you’re on the parental dole, the better off you’ll be when you move away and your expenses shoot up. Whether it’s ten dollars a month, one hundred dollars a month, or five hundred dollars a month, save whatever amount you can afford, on a regular basis.” He later states, “Warren Buffett, America’s second-richest person at present count, got there by saving money and later putting it into stocks. He started out the way a lot of kids do, delivering newspapers. He held on to every dollar he could, and at an early age he understood the future value of money. To him, a $400 TV set he saw in the store wasn’t really a $400 purchase. He always thought about how much that $400 would be worth twenty years later, if he invested it instead of spending it. This sort of thinking kept him from wasting his money on items he didn’t need. If you start saving and investing early enough, you’ll get to the point where your money is supporting you. It’s like having a rich aunt or uncle who sends you all the cash you’ll need for the rest of your life, and you never even have to send a thank-you note or visit them on their birthdays. This is what most people hope for, a chance to have financial independence where they’re free to go places and do what they want, while their money stays home and goes to work. But it will never happen unless you get in the habit of saving and investing and putting aside a certain amount every month, at a young age.”
2. You don’t have to be anyone “special” to invest in companies through the stock market. In fact, most owners of businesses are regular people who’ve got jobs. If you’re scared to start, sign up for a stock market simulator where you can get some practice. “More than 50 million Americans have discovered the fun and profit in owning stocks. That’s one out of five. These aren’t all whizbangs who drive Rolls-Royces like the people you see on Lifestyles of the Rich and Famous . Most of these shareholders are regular folks with regular jobs: teachers, bus drivers, doctors, carpenters, students, your friends and relatives, the neighbors in the next apartment or down the block. You don’t have to be a millionaire, or even a thousandaire, to get started investing in stocks. Even if you have no money to invest, because you’re out of a job or you’re too young to have risk. People who train to be pilots are put into flight simulators, where they can learn from their mistakes without crashing a real plane. You can create your own investment simulator and learn from your mistakes without losing real money. A lot of investors who might have benefited from this sort of training had to learn the hard way, instead. You don’t have to be a math whiz to be a successful investor in stocks. You don’t have to be an accountant, although learning the basics of accounting may help.” He later states, “You don’t have to be a Phi Beta Kappa or a member of the National Honor Society or Mensa. If you can read and do fifth-grade arithmetic, you have the basic skills. The next thing you need is a plan. The stock market is one place where being young gives you a big advantage over the old folks. Your parents or your grandparents may know more about stocks than you do—most likely, they’ve learned the hard way, by making all—time.“
3. Set and forget. When it comes to investing, you’ll reap the biggest gains through long term investing as opposed to active day to day trading. “Twenty years or longer is the right time frame. That’s long enough for stocks to rebound from the nastiest corrections on record, and it’s long enough for the profits to pile up. Eleven percent a year in total return is what stocks have produced in the past. Nobody can predict the future, but after twenty years at 11, an investment of $10,000 is magically transformed into $80,623. To get that 11 percent, you have to pledge your loyalty to stocks for better or for worse—this is a marriage we’re talking about, a marriage between your money and your investments. You can be a genius at analyzing which companies to buy, but unless you have the patience and the courage to hold on to the shares, you’re an odds-on favorite to become a mediocre investor. It’s not always brainpower that separates good investors from bad; often, it’s discipline. Stick with your stocks no matter what, ignore all the ‘smart advice’ that tells you to do otherwise, and ‘act like a dumb mule.’ That was the advice given fifty years ago by a former stockbroker, Fred Schwed, in his classic book Where Are the Customers’ Yachts? and it still applies today. People are always looking around for the secret formula for winning on Wall Street, when all along, it’s staring them in the face: Buy shares in solid companies with earning power and don’t let go of them without a good reason. The stock price going down is not a good reason.“
4. Here are Peter’s top 9 pieces of advice when it comes to buying funds:
1. You can buy mutual funds directly from the companies that manage them, such as Dreyfus, Fidelity, and Scudder. You can also buy them through a stockbroker, although a broker may not be able to sell you the fund you want.
2. Brokers have to make a living, and they sometimes get a bigger commission for selling the firm’s own products. Convincing you to buy one of the in-house mutual funds may be in their best interest, but not necessarily in yours. Whenever a broker recommends anything, always find out what’s in it for the broker. Ask him or her to provide information on the full range of what’s available. There might be a fund that’s similar to the one the broker is recommending but that has a better record overall.
3. If you’re a long-term investor, ignore all the bond funds and hybrid funds (those invest in a mixture of stocks and bonds) and go for the pure stock funds. Stocks have outperformed bonds in eight of the nine decades in this century (bonds ran a close second in the 1980s, but stocks still did slightly better). In the first half of the 1990s, stocks once again are way ahead of bonds. If you’re not 100 percent invested in stocks, you’re shortchanging yourself in the long run.
4. Picking the right fund isn’t any easier than picking the right auto mechanic, but with a fund, at least you’ve got the record of past performance to guide you. Unless you interview dozens of customers, there’s no simple way of telling whether an auto mechanic is good, bad, or indifferent, but you can find out easily which of these ratings applies to a fund. It all boils down to the annual return. A fund that returned 18 percent a year over the past decade has done better than a similar fund with similar objectives that returned 14 percent. But before you invest in a fund on the strength of its record, make sure the manager who compiled the great record is still in charge.
5. Over time, it’s been more profitable to invest in small companies than in large companies. The successful small companies of today will become the Wal-Marts, Home Depots, and Microsofts of tomorrow. It’s no wonder then that funds that invest in small companies (the so-called small caps) have beaten out the ‘large cap’ funds by a substantial margin. (‘Cap’ is short for ‘market capitalization’—the total number of shares issued by a company multiplied by the current share price.) A couple of Wal-Marts is all they need to outperform the competition. That one stock is up more than two-hundred-and-fifty-fold in twenty years. Since small-cap stocks are generally more volatile than large-cap stocks, a small-cap fund will give you more extreme ups and downs than other types of funds. But if you have a strong stomach and can take the bumps and stay on the ride, you’ll likely do better in small caps.
6. Why take a chance on a rookie fund, when you can invest in a veteran fund that’s been around through several seasons and has turned in an all-star performance? A list of funds that have stayed on top over many years can be found in financial magazines such as Barron’s and Forbes. Twice a year, Barron’s publishes a complete roundup of funds, with the details provided by Lipper Analytical, a high-quality research company run by a prominent fund watcher, Michael Lipper. The Wall Street Journal publishes a similar roundup four times a year. If you want more information about a particular fund, you can get it from Morningstar, a company that tracks thousands of funds and issues a monthly report. Morningstar ranks all these funds for safety, rates their performance, and tells who the manager is and what stocks are in the portfolio. It’s the best one-stop source in existence today.
7. It doesn’t pay to be a fund jumper. Some investors make a hobby of switching from one fund to another, hopping to the bandwagon of the latest hot performer. This is more trouble than it’s worth. Studies have shown that top-ranked funds from one year rarely repeat their performance the next. Trying to catch the winner is a fool’s errand in which you are likely to end up with a loser. You’re better off picking a fund with an excellent long-term record and sticking with it.
8. In addition to taking the annual expenses out of the shareholders’ assets, some funds charge an entry fee, called a load. These days, the average load is 3 to 4 percent. That means whenever you invest in a fund with a load, you lose 3 to 4 percent of your money right off the bat. For all the funds that charge an entry fee, there are just as many that don’t. These are the no-loads. As it turns out, the no-loads perform just as well, on average, as the funds with loads. This is one case where paying a cover charge doesn’t necessarily get you into a classier joint. The longer you stay in a fund, the less important the load becomes. After ten or fifteen years, if the fund does well, you’ll forget you ever paid the 3 or 4 percent load to get into it. The annual expenses deserve closer attention than the load, because those are taken out of the fund every year. Funds that keep their expenses to a minimum (less than 1 percent) have a built-in advantage over funds that run a bigger tab (2 percent or more). The manager of a high-cost fund is working at a disadvantage. Every year, he or she has to outperform the manager of a low-cost fund by 0.5 to 1.5 percent to produce the same results.
9. The vast majority of funds employ managers whose goal it is to beat the so-called market averages. That’s why you’re paying these managers—to pick stocks that do better than the average stock. But fund managers often fail to beat the averages—in some years more than half the funds do worse. One of the reasons they do worse is that fees and expenses are subtracted from a fund’s performance. Some investors have given up trying to pick a fund that beats the averages, which has proven to be a difficult task. Instead, they choose a fund that is guaranteed to match the average, no matter what. This kind of fund is called an index fund. It doesn’t need a manager. It runs on automatic pilot. It simply buys all the stocks in a particular index and holds on to them. There is no fuss, no experts to pay, no management fees to speak of, no commissions for getting into and out of different stocks, and no decisions to make. For instance, an S&P 500 Index fund buys all five hundred stocks in the Standard & Poor’s 500 stock index. This S&P 500 Index is a well-known market average, so when you invest in such a fund, you’ll always get an average result, which based on recent performance will be a better result than you’d get in many of the managed funds. Or, if you decide to invest in a ‘small cap’ fund to take advantage of the big potential payoffs from small companies, you can buy a fund that tracks a small-stock index, such as the Russell 2,000. That way, your money will be spread out among the two thousand stocks in the Russell Index. Another possibility is to put some of your money into an S&P 500 Index fund to get the gains from the larger companies, and the rest in a small-stock index fund to get the gains from the smaller companies. That way, you’ll never have to read another article about how to pick a winning mutual fund, and you’ll end up doing better than some of the people who study the situation very carefully, and then put themselves into funds that fail to beat the averages.
By Ryan Timothy Lee
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