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

by Peter Lynch

This is investing, where the smart money isn’t so smart, and the dumb money isn’t really as dumb as it thinks. Dumb money is only dumb when it listens to the smart money.

The mutual fund is a wonderful invention for people who have neither the time nor the inclination to test their wits against the stock market, as well as for people with small amounts of money to invest who seek diversification.

Why wait for the

Merrill Lynch restaurant expert to recommend Dunkin’ Donuts when you’ve already seen eight new franchises opening up in your area? The Merrill Lynch restaurant analyst isn’t going to notice Dunkin’ Donuts (for reasons I’ll soon explain) until the stock has quintupled from $2 to $10, and you noticed it when the stock was at $2.

Finding the promising company is only the first step. The next step is doing the research.

In centuries past, people hearing the rooster crow as the sun came up decided that the crowing caused the sunrise. It sounds silly now, but every day the experts confuse cause and effect on Wall Street in offering some new explanation for why the market goes up: hemlines are up, a certain conference wins the Super Bowl, the Japanese are unhappy, a trendline has been broken, Republicans will win the election, stocks are “oversold,” etc. When I hear theories like these, I always remember the rooster.

Mister Johnson believed that you invest in stocks not to preserve capital, but to make money. Then you take your profits and invest in more stocks, and make even more money.

if a stock is down but the fundamentals are positive, it’s best to hold on and even better to buy more.)

No wonder so many pension-fund managers fail to beat the market averages. When you ask a bank to handle your investments, mediocrity is all you’re going to get in a majority of the cases.

The bigger the equity fund, the harder it gets for it to outperform the competition.

You don’t have to spend a quarter of your waking hours explaining to a colleague why you are buying what you are buying. There’s no rule prohibiting you from buying a stock that begins with r, a stock that costs less than $6, or a stock in a company that’s connected to the Teamsters.

You’re not forced to own 1,400 different stocks, nor is anyone going to tell you to sprinkle your money on 100 issues. You’re free to own one stock, four stocks, or ten stocks. If no company seems attractive on the fundamentals, you can avoid stocks altogether and wait for a better opportunity. Equity fund managers do not have that luxury, either. We can’t sell everything, and when we try, it’s always all at once, and then there’s nobody buying at decent prices.

Six out of ten is all it takes to produce an enviable record on Wall Street.

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.

“If you must forecast,” an intelligent forecaster once said, “forecast often.”

If you wake up in the morning and think to yourself, “I’m going to buy stocks because I think the market is going up this year,” then you ought to pull the phone out of the wall and stay as far away as possible from the nearest broker. You’re relying on the market to bail you out, and chances are, it won’t.

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.

Invest in things you know about.

Investing without research is like playing stud poker and never looking at the cards.