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

by Peter Lynch

savings-and-loans

a cheap stock can always get cheaper.

Speaking of long-term gains, in eleven years’ worth of luncheon and dinner speeches, I’ve asked for a show of hands: “How many of you are long-term investors in stocks?” To date, the vote is unanimous—everybody’s a long-term investor, including day traders in the audience who took a couple of hours off. Long-term investing has gotten so popular, it’s easier to admit you’re a crack addict than to admit you’re a short-term investor.

Have the day traders given Mr. Market the shakes?

People are wondering: How can the S&P 500 be up 20 percent and my stocks are down? The answer is that a few big stocks in the S&P 500 are propping up the averages.

foolish to bet we’ve seen the last of the bears, which is why it’s important not to buy stocks or stock mutual funds with money you’ll need to spend in the next twelve months to pay college bills, wedding bills, or whatever. You don’t want to be forced to sell in a losing market to raise cash. When you’re a long-term investor, time is on your side.

(a 35 percent drop in two days can do that),

perking along, and our banks were solvent, so the fundamentals

As a very successful investor once said: “The bearish argument always sounds more intelligent.”

develop a run

Looking back on it, I realize there was less risk of losing all one’s money in the stock market of the 1950s than at any time before or since.

This taught me not only that it’s difficult to predict markets, but also that small investors tend to be pessimistic and optimistic at precisely the wrong times, so it’s self-defeating to try to invest in good markets and get out of bad ones.

In helping D. George Sullivan find his ball, I was helping myself find a career. I’m not the only caddy who learned that the quickest route to the boardroom was through the locker room of a club like Brae Burn. If you wanted an education in stocks, the golf course was the next best thing to being on the floor of a major exchange.

Logic is the subject that’s helped me the most in picking stocks, if only because it taught me to identify the peculiar illogic of Wall Street.

go-go

I also found it difficult to integrate the efficient-market hypothesis (that everything in the stock market is “known” and prices are always “rational”) with the random-walk hypothesis (that the ups and downs of the market are irrational and entirely unpredictable).

Will Rogers

lucky break

nailed up

well-scrubbed

but it turns out they may have made a better deal than the buyers who got the island.

The real return on Treasury bills, known as the most conservative and sensible of all places to put money, has been nil. That’s right. Zippo.

There’s a logical explanation for this. In stocks you’ve got the company’s growth on your side. You’re a partner in a prosperous and expanding business. In bonds, you’re nothing more than the nearest source of spare change. When you lend money to somebody, the best you can hope for is to get it back, plus interest.

Glance at a list of the original Dow Jones industrials from 1896. Who’s ever heard of American Cotton Oil, Distilling and Cattle Feeding, Laclede Gas, U.S. Leather Preferred? These once-famous stocks must have vanished long ago.

Paramount Famous Lasky and Remington Typewriter;

The point is that fortunes change, there’s no assurance that major companies won’t become minor, and there’s no such thing as a can’t-miss blue chip.

Buy the right stocks at the wrong price at the wrong time and you’ll suffer great losses. Look what happened in the 1972–74 market break, when conservative issues such as Bristol-Myers fell from $9 to $4, Teledyne from $11 to $3, and McDonald’s from $15 to $4.

fly-by...

But with the possible exception of the very short-term bonds and bond funds, bonds can be risky, too.

Here, rising interest rates will force you to accept one of two unpleasant choices: suffer with the low yield until the bonds mature, or sell the bonds at a substantial discount to face value.

Try holding on to a 30-year bond with a 6 percent coupon during a period of raging inflation, and see what happens to the value of the bond.

But that doesn’t protect the value of their shares in the bond fund when interest rates rise and the bond market collapses.

bundling board,

was precisely the moment at which the overvalued market made buying stocks more wager than investment.

For two decades after the Crash, stocks were regarded as gambling by a majority of the population, and this impression wasn’t fully revised until the late 1960s when stocks once again were embraced as investments, but in an overvalued market that made most stocks very risky.

Historically, stocks are embraced as investments or dismissed as gambles in routine and circular fashion, and usually at the wrong times. Stocks are most likely to be ...

stud poker game.

miracles happen just often enough to keep the losers losing.

flush. They accept their fate and go on to the next hand, confident that their basic method will reward them over time.

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.

Con Ed wasn’t all that risky to those who had continued to monitor the fundamentals. The big winners come from the so-called high-risk categories, but the risks have more to do with the investors than with the categories.

since a house, after all, is the one good investment that almost everyone manages to make.

Because of leverage, if you buy a $100,000 house for 20 percent down and the value of the house increases by five percent a year, you are making a 25 percent return on your down payment, and the interest on the loan is tax-deductible. Do that well in the stock market and eventually you’d be worth more than Boone Pickens.

Houses, like stocks, are most likely to be profitable when they’re held for a long period of time. Unlike stocks, houses are likely to be owned by the same person for a number of years—seven, I think, is the average. Compare

dry rot,

banana peel,

patience, self-reliance, common sense, a tolerance for pain, open-mindedness, detachment, persistence, humility, flexibility, a willingness to do independent research, an equal willingness to admit to mistakes, and the ability to ignore general panic.

It’s also important to be able to make decisions without complete or perfect information. Things are almost never clear on Wall Street, or when they are, then it’s too late to profit from them.

borne out

sentiment via the newsletters, at the end of 1972, when stocks were about to tumble, optimism was at an all-time high, with only 15 percent of the advisors bearish.