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

by Peter Lynch

What you want, then, is a relatively high profit-margin in a long-term stock that you plan to hold through good times and bad, and a relatively low profit-margin in a successful turnaround.

The percentage of institutional ownership. The lower the better.

Whether insiders are buying and whether the company itself is buying back its own shares. Both are positive signs.

The record of earnings growth to date and whether the earnings are sporadic or consistent. (The only category where earnings may no...

• Understand the nature of the companies you own and the specific reasons for holding the stock. (“It is really going up!” doesn’t count.) • By putting your stocks into categories you’ll have a better idea of what to expect from them. • Big companies have small moves, small companies have big moves. • Consider the size of a company if you expect it to profit from a specific product. • Look for small companies that are already profitable and have proven that their concept can be replicated. • Be suspicious of companies with growth rates of 50 to 100 percent a year. • Avoid hot stocks in hot industries. • Distrust diversifications, which usually turn out to be diworseifications. • Long shots almost never pay off. • It’s better to miss the first move in a stock and wait to see if a company’s plans are working out.

Invest in simple companies that appear dull, mundane, out of favor, and haven’t caught the fancy of Wall Street. • Moderately fast growers (20 to 25 percent) in nongrowth industries are ideal investments.

of bank debt. • Companies that have no debt can’t go bankrupt. • Managerial ability may be important, but it’s quite difficult to assess. Base your purchases on the company’s prospects, not on the president’s resume or speaking ability. • A lot of money can be made when a troubled company turns around. • Carefully consider the price-earnings ratio. If the stock is grossly overpriced, even if everything else goes right, you won’t make any money. • Find a story line to follow as a way of monitoring a company’s progress. • Look for companies that consistently buy back their own shares. • Study the dividend record of a company over the years and also how its earnings have fared in past recessions. • Look for companies with little or no institutional ownership.

• When in doubt, tune in later. • Invest at least as much time and effort in choosing a new stock as you would in choosing a new refrigerator.

What’s wrong with high expectations? If you expect to make 30 percent year after year, you’re more likely to get frustrated at stocks for defying you, and your impatience may cause you to abandon your investments at precisely the wrong moment. Or worse, you may take unnecessary risks in the pursuit of illusory payoffs. It’s only by sticking to a strategy through good years and bad that you’ll maximize your long-term gains.

Slow growers are low-risk, low-gain because they’re not expected to do much and the stocks are usually priced accordingly. Stalwarts are low-risk, moderate gain.

Cyclicals may be low-risk and high-gain or high-risk and low-gain, depending on how adept you are at anticipating cycles. If you are right, you can get your tenbaggers here, and if you are wrong, you can lose 80–90 percent.

Meanwhile, additional tenbaggers are likely to come from fast growers or from turnarounds—both high-risk, high-gain categories.

in designing your portfolio you might throw in a couple of stalwarts just to moderate the thrills and chills of owning four fast growers and four turnarounds. Again, the key is knowledgeable buying. You don’t want to buy an overvalued stalwart and thus add to the very risk you’re trying to moderate.

Younger investors with a lifetime of wage-earning ahead of them can afford to take more chances on tenbaggers than can older investors who must live off the income from their investments. Younger investors have more years in which they can experiment and make mistakes before they find the great stocks that make investing careers.

I want to discuss selling as it relates to portfolio management. I’m constantly rechecking stocks and rechecking stories, adding and subtracting to my investments as things change. But I don’t go into cash—except

My idea is to stay in the market forever, and to rotate stocks depending on the fundamental situations.

Get out of situations in which the fundamentals are worse and the price has increased, and into situations in which the fundamentals are better and the price is down.

A price drop in a good stock is only a tragedy if you sell at that price and never buy more. To me, a price drop is an opportunity to load up on bargains from among your worst performers and your laggards that show promise.

It’s uncanny how stop orders seem to guarantee that the stock will drop 10 percent, the shares are sold, and instead of protecting against a loss, the investor has turned losing into a foregone conclusion. You would have lost Taco Bell ten times over with stop orders!

When you put in a stop, you’re admitting that you’re going to sell the stock for less than it’s worth today.

There’s simply no way to rely on stops as protection on the downside, nor on artificial objectives as goals on the upside. If I’d believed in “Sell when it’s a double,” I would never have benefited from a single big winner, and I wouldn’t have been given the opportunity to write a book.