One Up On Wall Street: How To Use What You Already Know To Make Money In

by Peter Lynch

Only invest what you could afford to lose without that loss having any effect on your daily life in the foreseeable future.

(3) DO I HAVE THE PERSONAL QUALITIES IT TAKES TO SUCCEED?

This is the most important question of all. It seems to me the list of qualities ought to include patience, self-reliance, common sense, a tolerance for pain, open-mindedness, detachment, persistence, humility, flexibility, a willingness to do independent research, an equal w...

Things inside humans make them terrible stock market timers. The unwary investor continually passes in and out of three emotional states: concern, complacency, and capitulation. He’s concerned after the market has dropped or the economy has seemed to falter, which keeps him from buying good companies at bargain prices. Then after he buys at higher prices, he gets complacent because his stocks are going up. This is precisely the time he ought to be concerned enough to check the fundamentals, but he isn’t. Then finally, when his stocks fall on hard times and the prices fall to below what he paid, he capitulates and sells in a snit.

Recently I read that the price of an average stock fluctuates 50 percent in an average year. If that’s true, and apparently it’s been true throughout this century, then any share currently selling for $50 is likely to hit $60 and/or fall to $40 sometime in the next twelve months.

The trick is not to learn to trust your gut feelings, but rather to discipline yourself to ignore them. Stand by your stocks as long as the fundamental story of the company hasn’t changed.

Do what you want with this, but don’t expect me to bet on the cocktail party theory. I don’t believe in predicting markets. I believe in buying great companies—especially companies that are undervalued, and/or underappreciated.

What I hope you’ll remember most from this section are the following points: • Don’t overestimate the skill and wisdom of professionals. • Take advantage of what you already know. • Look for opportunities that haven’t yet been discovered and certified by Wall Street—companies that are “off the radar scope.” • Invest in a house before you invest in a stock. • Invest in companies, not in the stock market. • Ignore short-term fluctuations. • Large profits can be made in common stocks. • Large losses can be made in common stocks. • Predicting the economy is futile. • Predicting the short-term direction of the stock market is futile. • The long-term returns from stocks are both relatively predictable and also far superior to the long-term returns from bonds. • Keeping up with a company in which you own stock is like playing an endless stud-poker hand. • Common stocks aren’t for everyone, nor even for all phases of a person’s life. • The average person is exposed to interesting local companies and products years before the professionals. • Having an edge will help you make money in stocks. • In the stock market, one in the hand is worth ten in the bush.

The best place to begin looking for the tenbagger is close to home—if not in the backyard then down at the shopping mall, and especially wherever you happen to work.

The average person comes across a likely prospect two or three times a year—sometimes more.

All along the retail and wholesale chains, people who make things, sell things, clean things, or analyze things encounter numerous stockpicking opportunities.

You’re looking for a situation where the value of the assets per share exceeds the price per share of the stock. In such delightful instances you can truly buy a great deal of something for nothing. I’ve done it myself numerous times.

I could go on for the rest of the book about the edge that being in a business gives the average stockpicker. On top of that, there’s the consumer’s edge that’s helpful in picking out the winners from the newer and smaller fast-growing companies, especially in the retail trades.

It seems to me that this homework phase is just as important to your success in stocks as your previous vow to ignore the short-term gyrations of the market. Perhaps some people make money in stocks without doing any of the research I’ll describe, but why take unnecessary chances? Investing without research is like playing stud poker and never looking at the cards.

All you have to do is put as much effort into picking your stocks as you do into buying your groceries. Even if you already own stocks, it’s useful to go through the exercise, because it’s possible that some of these stocks will not and cannot live up to your expectations for them. That’s because there are different kinds of stocks, and there are limits to how each kind can perform. In developing the story you have to make certain initial distinctions.

If you’re considering a stock on the strength of some specific product that a company makes, the first thing to find out is: What effect will the success of the product have on the company’s bottom line?

The size of a company has a great deal to do with what you can expect to get out of the stock. How big is this company in which you’ve taken an interest? Specific products aside, big companies don’t have big stock moves.

Once I’ve established the size of the company relative to others in a particular industry, next I place it into one of six general categories: slow growers, stalwarts, fast growers, cyclicals, asset plays, and turnarounds.

Keeping track of the growth rates of industry is an industry in itself.

THE SLOW GROWERS

Usually these large and aging companies are expected to grow slightly faster than the gross national product.

When an industry at large slows down (as they always seem to do), most of the companies within the industry lose momentum as well.

Another sure sign of a slow grower is that it pays a generous and regular dividend. As I’ll discuss more fully in Chapter 13, companies pay generous dividends when they can’t dream up new ways to use the money to expand the business.

THE STALWARTS

are not exactly agile climbers, but they’re faster than slow growers.

When you traffic in stalwarts, you’re more or less in the foothills: 10 to 12 percent annual growth in earnings.

Stalwarts are stocks that I generally buy for a 30 to 50 percent gain, then sell and repeat the process with similar issues that haven’t yet appreciated.

In general, Bristol-Myers and Kellogg, Coca-Cola and MMM, Ralston Purina and Procter and Gamble, are good friends in a crisis. You know they won’t go bankrupt, and soon enough they will be reassessed and their value will be restored.

THE FAST GROWERS

These are among my favorite investments: small, aggressive new enterprises that grow at 20 to 25 percent a year. If you choose wisely, this is the land of the 10- to 40-baggers, and even the 200-baggers. With a small portfolio, one or two of these can make a career.

But for as long as they can keep it up, fast growers are the big winners in the stock market. I look for the ones that have good balance sheets and are making substantial profits. The trick is figuring out when they’ll stop growing, and how much to pay for the growth.

THE CYCLICALS

A cyclical is a company whose sales and profits rise and fall in regular if not compl...

Coming out of a recession and into a vigorous economy, the cyclicals flourish, and their stock prices tend to rise much faster than the prices of the stalwarts. This is understandable, since people buy new cars and take more airplane trips in a vigorous economy, and there’s greater demand for steel, chemicals, etc.

AirCanada & Suncore after covid.

Timing is everything in cyclicals, and you have to be able to detect the early signs that business is falling off or picking up.

TURNAROUNDS

These aren’t slow growers; these are no growers. These aren’t cyclicals that rebound; these are potential fatalities,

The best thing about investing in successful turnarounds is that of all the categories of stocks, their ups and downs are least related to the general market.

There’s the who-would-have-thunk-it kind of turnaround,

There’s the little-problem-we-didn’t-anticipate kind of turnaround,

in minor tragedy there’s major opportunity.

There’s the perfectly-good-company-inside-a-bankrupt-company kind of turnaround,

There’s the restructuring-to-maximize-shareholder-values kind of turnaround,

THE ASSET PLAYS

An asset play is any company that’s sitting on something valuable that you know about, but that the Wall Street crowd has overlooked. With so many analysts and corporate raiders snooping around, it doesn’t seem possible that there are any assets that Wall Street hasn’t noticed, but believe me, there are. The asset play is where the local edge can be used to greatest advantage.

Asset opportunities are everywhere. Sure they require a working knowledge of the company that owns the assets, but once that’s understood, all you need is patience.

Putting stocks in categories is the first step in developing the story. Now at least you know what kind of story it’s supposed to be. The next step is filling in the details that will help you guess how the story is going to turn out.

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.

(1) IT SOUNDS DULL—OR, EVEN BETTER, RIDICULOUS

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.