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

by Peter Lynch

IF IT’S GONE DOWN THIS MUCH ALREADY, IT CAN’T GO MUCH LOWER

There’s simply no rule that tells you how low a stock can go in principle.

YOU CAN ALWAYS TELL WHEN A STOCK’S HIT BOTTOM

Bottom fishing is a popular investor pastime, but it’s usually the fisherman who gets hooked. Trying to catch the bottom on a falling stock is like trying to catch a falling knife. It’s normally a good idea to wait until the knife hits the ground and sticks, then vibrates for a while and settles down before you try to grab it. Grabbing a rapidly falling stock results in painful surprises, because inevitably you grab it in the wrong place.

IF IT’S GONE THIS HIGH ALREADY, HOW CAN IT POSSIBLY GO HIGHER?

Right you are, unless of course you are talking about a Philip Morris or a Subaru. That Philip Morris is one of the greatest stocks of all time is obvious from the chart on page 262. I’ve already mentioned how Subaru could have made us all millionaires, if we’d bought the stock instead of the car.

The point is, there’s no arbitrary limit to how high a stock can go, and if the story is still good, the earnings continue to improve, and the fundamentals haven’t changed, “can’t go much higher” is a terrible reason to snub a stock. Shame on all those experts who advise clients to sell automatically after they double their money. You’ll never get a tenbagger doing that.

Frankly, I’ve never been able to predict which stocks will go up tenfold, or which will go up fivefold. I try to stick with them as long as the story’s intact, hoping to be pleasantly surprised. The success of a company isn’t the surprise, but what the shares bring often is.

IT’S ONLY $3 A SHARE: WHAT CAN I LOSE?

The point is that a lousy cheap stock is just as risky as a lousy expensive stock if it goes down. If you’d invested $1,000 in a $43 stock or a $3 stock and each fell to zero, you’d have lost exactly the same amount. No matter where you buy in, the ultimate downside of picking the wrong stock is always the identical 100 percent.

EVENTUALLY THEY ALWAYS COME BACK

IT’S ALWAYS DARKEST BEFORE THE DAWN

WHEN IT REBOUNDS TO $10, I’LL SELL

Whenever I’m tempted to fall for this one, I remind myself that unless I’m confident enough in the company to buy more shares, I ought to be selling immediately.

WHAT ME WORRY? CONSERVATIVE STOCKS DON’T FLUCTUATE MUCH

Companies are dynamic, and prospects change. There simply isn’t a stock you can own that you can afford to ignore.

IT’S TAKING TOO LONG FOR ANYTHINGTO EVER HAPPEN

Here’s something else that’s certain to occur: If you give up on a stock because you’re tired of waiting for something wonderful to happen, then something wonderful will begin to happen the day after you g...

If all’s right with the company, and whatever attracted me in the first place hasn’t changed, then I’m confident that sooner or later my patience will be rewarded.

This going nowhere for several years, which I call the “EKG of a rock,” is actually a favorable omen. Whenever I see the EKG of a rock on the chart of a stock to which I’m already attracted, I take it as a strong hint that the next major move may be up.

LOOK AT ALL THE MONEY I’VE LOST: I DIDN’T BUY IT!

Regarding somebody else’s gains as your own personal losses is not a productive attitude for investing in the stock market. In fact, it can only lead to total madness. The more stocks you learn about, the more winners you realize that you’ve missed, and soon enough you’re blaming yourself for losses in the billions and trillions. If you get out of stocks entirely and the market goes up 100 points in a day, you’ll be waking up and muttering: “I’ve just suffered a $110 billion setback.”

I MISSED THAT ONE, I’LL CATCH THE NEXT ONE

The trouble is, the “next” one rarely works, as we’ve already shown.

THE STOCK’S GONE UP, SO I MUST BE RIGHT, OR . . . THE STOCK’S GONE DOWN SO I MUST BE WRONG

A stock’s going up or down after you buy it only tells you that there was somebody who was willing to pay more—or less—for the identical merchandise.

Actually I do know a few things about options. I know that the large potential return is attractive to many small investors who are dissatisfied with getting rich slow.

Another nasty thing about options is that they are very expensive. They may not seem expensive, until you realize that you have to buy four or five sets of them to cover stock for a year. You’re literally buying time here, and the more time you buy, the higher the premium you have to pay for it.

The worst thing of all is that buying an option has nothing to do with owning a share of a company. When a company grows and prospers, all the shareholders benefit, but options are a zero-sum game. For every dollar that’s won in the market there’s a dollar that’s lost, and a tiny minority does all the winning.

For instance, if you figured out that Polaroid was overpriced at $140 a share, you could have shorted 1,000 shares for an immediate $140,000 credit to your account. Then you could have waited for the price to drop to $14, jumped in and bought back the same 1,000 shares for $14,000, and gone home $126,000 richer.

This demonstrates that the market, like individual stocks, can move in the opposite direction of the fundamentals over the short term,

Small investors are capable of handling all sorts of markets, as long as they own good merchandise.

Now if we don’t have 150-million-share days, people think something is wrong. I know I do my part to contribute to the cause, because I buy and sell every day. But my biggest winners continue to be stocks I’ve held for three and even four years.

If there is a Monday effect, I think I know why. Investors can’t talk to companies for two days over the weekend. All of the usual sources of fundamental news are shut down, giving people sixty hours to worry about the yen sell-off, the yen bid-up, the flooding in the Nile River, the damage to the Brazilian coffee crop, the progress of the killer bees, or other horrors and cataclysms reported in the Sunday papers. The weekend is also when people have time to read the gloomy long-term forecasts of economists who write guest columns on the op-ed pages. Unless you’re careful to sleep late and ignore the general business news, so many fears and suspicions can build up on weekends that by Monday morning you’re ready to sell all your stocks. That, it seems to me, is the principal cause of the Monday effect. (By late Monday you’ve had a chance to call a company or two and find out that they haven’t gone out of business, which is why stocks rebound the rest of the week.)

When a raider comes in to buy out a solid and prosperous enterprise, it’s the shareholders who get robbed. Maybe it looks like a good deal to the shareholders today, but they’re giving away their stake in the future growth.

Frequent follies notwithstanding, I continue to be optimistic about America, Americans, and investing in general. When you invest in stocks, you have to have a basic faith in human nature, in capitalism, in the country at large, and in future prosperity in general. So far, nothing’s been strong enough to shake me out of it.

If you take anything with you at all from this last section, I hope you’ll remember the following: • Sometime in the next month, year, or three years, the market will decline sharply. • Market declines are great opportunities to buy stocks in companies you like. Corrections—Wall Street’s definition of going down a lot—push outstanding companies to bargain prices. • Trying to predict the direction of the market over one year, or even two years, is impossible. • To come out ahead you don’t have to be right all the time, or even a majority of the time. • The biggest winners are surprises to me, and takeovers are even more surprising. It takes years, not months, to produce big results. • Different categories of stocks have different risks and rewards. • You can make serious money by compounding a series of 20–30 percent gains in stalwarts. • Stock prices often move in opposite directions from the fundamentals but long term, the direction and sustainability of profits will prevail. • Just because a company is doing poorly doesn’t mean it can’t do worse. • Just because the price goes up doesn’t mean you’re right. • Just because the price goes down doesn’t mean you’re wrong. • Stalwarts with heavy institutional ownership and lots of Wall Street coverage that have outperformed the market and are overpriced are due for a rest or a decline. • Buying a company with mediocre prospects just because the stock is cheap is a losing technique. • Selling an outstanding fast grower because i...

I’m always fully invested. It’s a great feeling to be caught with your pants up. Besides, I can’t rush back to buy more stocks.