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

by Peter Lynch

you can follow only one bit of data, follow the earnings—assuming the company in question has earnings. As you’ll see in this text, I subscribe to the crusty notion that sooner or later earnings make or break an investment in equities.

What the stock price does today, tomorrow, or next week is only a distraction.

People who want to know how stocks fared on any given day ask, Where did the Dow close? I’m more interested in how many stocks went up versus how many went down.

My advice for the next decade: Keep on the lookout for tomorrow’s big baggers. You’re likely to find one.

Dumb money is only dumb when it listens to the smart money.

Since there’s very little in the corporate bond business that isn’t callable, you’re advised to buy Treasuries if you hope to profit from a fall in interest rates.)

Once the unsettling fact of the risk in money is accepted, we can begin to separate gambling from investing not by the type of activity (buying bonds, buying stocks, betting on the horses, etc.) but by the skill, dedication, and enterprise of the participant.

Before you buy a share of anything, there are three personal issues that ought to be addressed: (1) Do I own a house? (2) Do I need the money? and (3) Do I have the personal qualities that will bring me success in stocks?

Only invest what you could afford to lose without that loss having any effect on your daily life in the foreseeable future.

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.

The way you’ll know when the market is overvalued is when you can’t find a single company that’s reasonably priced or that meets your other criteria for investment.

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.

The person with the edge is always in a position to outguess the person without an edge—who after all will be the last to learn of important changes in a given industry.

If you’re considering a stock on the strength of some specific product that a company makes, the first thing to find out is: What effect will the success of the product have on the company’s bottom line?

Once I’ve established the size of the company relative to others in a particular industry, next I place it into one of six general categories: slow growers, stalwarts, fast growers, cyclicals, asset plays, and turnarounds.

I always keep some stalwarts in my portfolio because they offer pretty good protection during recessions and hard times.

Basing a strategy on general maxims, such as “Sell when you double your money,” “Sell after two years,” or “Cut your losses by selling when the price falls ten percent,” is absolute folly.

Negative-growth industries do not attract flocks of competitors.

(A quick way to tell if a stock is overpriced is to compare the price line to the earnings line. If you bought familiar growth companies—such as Shoney’s, The Limited, or Marriott—when the stock price fell well below the earnings line, and sold them when the stock price rose dramatically above it, the chances are you’d do pretty well. [It

There are five basic ways a company can increase earnings*: reduce costs; raise prices; expand into new markets; sell more of its product in the old markets; or revitalize, close, or otherwise dispose of a losing operation.

The p/e ratio of any company that’s fairly priced will equal its growth rate.