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

by Peter Lynch

three negatives, four positives.

The unexpected can be very profitable if you’re buying or selling stocks.

In the course of my research I find something out of the ordinary in about one out of every ten calls. If I’m calling depressed companies, then in nine cases the details will confirm that the companies ought to be depressed, but in the tenth case, there’ll be some new cause for optimism that isn’t generally perceived.

You’re also strong enough to admit readily to adversity.

software. Of course, why shouldn’t they be upbeat? With so many competitors in software, you have to sound upbeat. If you appear to lack confidence, some other sweet-talker will win all the contracts.

When I visit a headquarters, what I’m really after is a feel for the place. The facts and figures can be gotten on the phone. I got positive feelings when I saw that Taco Bell’s headquarters was stuck behind a bowling alley. When I saw those executives operating out of that grim little bunker, I was thrilled. Obviously they weren’t wasting money on landscaping the

“When is the last time a fund manager or an analyst visited here?” If the answer is “two years ago, I think,” then I’m ecstatic. That was the case at

Rich earnings and a cheap headquarters is a great combination.

trompe l’oeil

informal gatherings.

I thought to myself: If I make money in Televideo, this guy is going to be worth $200 million. That

but if you can’t imagine how a company representative could ever get that rich, chances are you’re right.

Don Quixote,

I think if you decide that a certain amount you’ve invested in the stock market will always be invested in the stock market, you’ll save yourself a lot of mistimed moves and general agony. Some people automatically sell the “winners”—stocks that go up—and hold on to their “losers”—stocks that go down—which is about as sensible as pulling out the flowers and watering the weeds. Others automatically sell their losers and hold on to their winners, which doesn’t work out much better. Both strategies fail because they’re tied to the current movement of the stock price as an indicator of the company’s fundamental value. (It wasn’t that Taco Bell the company was in bad shape when the price was beaten down in 1972—only Taco Bell the stock. Taco Bell the company was doing well.) As we’ve seen, the current stock price tells us absolutely nothing about the future prospects of a company, and it occasionally moves in the opposite direction of the fundamentals. A better strategy, it seems to me, is to rotate in and out of stocks depending on what has happened to the price as it relates to the story. For instance, if a stalwart has gone up 40 percent—which is all I expected to get out of it—and nothing wonderful has happened with the company to make me think there are pleasant surprises ahead, I sell the stock and replace it with another stalwart I find attractive that hasn’t gone up. In the same situation, if you didn’t want to sell all of it, you could sell some of it.

The fast growers I keep as long as the earnings are growing and the expansion is continuing, and no impediments have come up. Every few months I check the story just as if I were hearing it for the first time. If between two fast growers I find that the price of one has increased 50 percent and the story begins to sound dubious, I’ll rotate out of that one and add to my position in the second fast grower whose price has declined or stayed the same, and where the story is sounding better.

To me, a price drop is an opportunity to load up on bargains from among your worst performers and your laggards that show promise.

If you can’t convince yourself “When I’m down 25 percent, I’m a buyer” and banish forever the fatal thought “When I’m down 25 percent, I’m a seller,” then you’ll never make a decent profit in stocks.

Show me a portfolio with 10 percent stops, and I’ll show you a portfolio that’s destined to lose exactly that amount. When

Stick around to see what happens—as long as the original story continues to make sense, or gets better—and you’ll be amazed at the results in several years.

However, there are two particular periods when great bargains are likely to be found.

If you can summon the courage and presence of mind to buy during these scary episodes when your stomach says “sell,” you’ll find opportunities that you wouldn’t have thought you’d ever see again.

payments. The Individual Retirement Account was one of the most beneficial inventions of the last decade—finally Americans were encouraged to save something free of tax—so what does the government do? It cancels the deduction for all but the modest wage earner.

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.

Sometime in the next month, year, or three years, the market will decline sharply.

Just because the price goes down doesn’t mean you’re wrong.

Buying a company with mediocre prospects just because the stock is cheap is a losing technique.

Selling an outstanding fast grower because its stock seems slightly overpriced is a losing technique.

By careful pruning and rotation based on fundamentals, you can improve your results. When stocks are out of line with reality and better alternatives exist, sell them and switch into something else.

When favorable cards turn up, add to your bet, and vice versa.

There is always something to worry about.