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Kindle Notes & Highlights
by
Peter Lynch
Read between
June 6 - June 27, 2019
(11) IT’S A USER OF TECHNOLOGY
(12) THE INSIDERS ARE BUYERS
When insiders are buying like crazy, you can be certain that, at a minimum, the company will not go bankrupt in the next six months. When insiders are buying, I’d bet there aren’t three companies in history that have gone bankrupt near term.
When management owns stock, then rewarding the shareholders becomes a first priority, whereas when management simply collects a paycheck, then increasing salaries becomes a first priority.
There are many reasons that officers might sell.
But there’s only one reason that insiders buy: They think the stock price is undervalued and will eventually go up.)
(13) THE COMPANY IS BUYING BACK SHARES
The common alternatives to buying back shares are (1) raising the dividend, (2) developing new products, (3) starting new operations, and (4) making acquisitions.
If you have a can’t-fail idea but no way of protecting it with a patent or a niche, as soon as you succeed, you’ll be warding off the imitators.
Another stock I’d avoid is a stock in a company that’s been touted as the next IBM, the next McDonald’s, the next Intel, or the next Disney, etc.
Instead of buying back shares or raising dividends, profitable companies often prefer to blow the money on foolish acquisitions. The dedicated diworseifier seeks out merchandise that is (1) overpriced, and (2) completely beyond his or her realm of understanding. This ensures that losses will be maximized.
From an investor’s point of view, the only two good things about diworseification are owning shares in the company that’s being acquired, or in finding turnaround opportunities among the victims of diworseification that have decided to restructure.
“Synergy” is a fancy name for the two-plus-two-equals-five theory of putting together related businesses
If a company must acquire something, I’d prefer it to be a related business, but acquisitions in general make me nervous. There’s a strong tendency for companies that are flush with cash and feeling powerful to overpay for acquisitions, expect too much from them, and then mismanage them. I’d rather see a vigorous buyback of shares, which is the purest synergy of all.
Whisper stocks have a hypnotic effect, and usually the stories have emotional appeal. This is where the sizzle is so delectable that you forget to notice there’s no steak. If you or I regularly invested in these stocks, we both would need part-time jobs to offset the losses.
the great story had no substance. That’s the essence of a whisper stock.
When in doubt, tune in later.
The company that sells 25 to 50 percent of its wares to a single customer is in a precarious situation.
If the loss of one customer would be catastrophic to a supplier, I’d be wary of investing in the supplier.
what makes a company valuable, and why it will be more valuable tomorrow than it is today. There are many theories, but to me, it always comes down to earnings and assets. Especially earnings.
People may wonder what the Japanese are doing and what the Koreans are doing, but ultimately the earnings will decide the fate of a stock.
(In a few cases the p/e ratio listed in the newspaper may be abnormally high, often because a company has written off some long-term losses against the current short-term earnings, thus “punishing” those earnings.
Some bargain hunters believe in buying any and all stocks with low p/e’s, but that strategy makes no sense to me. We shouldn’t compare apples to oranges. What’s a bargain p/e for a Dow Chemical isn’t necessarily the same as a bargain p/e for a Wal-Mart.
A company with a high p/e must have incredible earnings growth to justify the high price that’s been put on the stock.
Interest rates have a large effect on the prevailing p/e ratios, since investors pay more for stocks when interest rates are low and bonds are less attractive.
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. These are the factors to investigate as you develop the story. If you have an edge, this is where it’s going to be most helpful.
Before buying a stock, I like to be able to give a two-minute monologue that covers the reasons I’m interested in it, what has to happen for the company to succeed, and the pitfalls that stand in its path.
Once you’re able to tell the story of a stock to your family, your friends, or the dog (and I don’t mean “a guy on the bus says Caesars World is a takeover”), and so that even a child could understand it, then you have a proper grasp of the situation.
Successful cloning is what turns a local taco joint into a Taco Bell or a local clothing store into The Limited, but there’s no point buying the stock until the company has proven that the cloning works.
as information gatherers they can be the stockpicker’s best friend. They can provide the S&P reports and the investment newsletters, the annuals, quarterlies and prospectuses and proxy statements, the Value Line survey and the research from the firm’s analysts. Let them get the data on p/e ratios and growth rates, on insider buying and ownership by institutions. They’ll be happy to do it, once they realize that you’re serious.
Professionals call companies all the time, yet amateurs never think of it. If you have specific questions, the investor relations office is a good place to get the answers. That’s one more thing the broker can do: get you the phone number.
You can almost assume that the more tenuous the enterprise, the more optimistic the rhetoric is going to be. From what I hear from the software people, you’d think that there’s never been a down year in the history of software. Of course, why shouldn’t they be upbeat? With so many competitors in software, you have to sound upbeat.
Rich earnings and a cheap headquarters is a great combination.
I could never prove this scientifically, but if you can’t imagine how a company representative could ever get that rich, chances are you’re right.
I’ve continued to believe that wandering through stores and tasting things is a fundamental investment strategy.
(That’s a rule with annuals and perhaps with publications in general—the cheaper the paper the more valuable the information.)
Comparing the 1987 cash to the 1986 cash in the right-hand column, I see that Ford is socking away more and more cash. This is a sure sign of prosperity.
Debt reduction is another sign of prosperity. When cash increases relative to debt, it’s an improving balance sheet. When it’s the other way around, it’s a deteriorating balance sheet.
When cash exceeds debt it’s very favorable.
As often as not, it turns out that long-term debt exceeds cash, the cash has been shrinking and debt has been growing, and the company is in weak financial shape. Weak or strong is what you want to know in this short exercise.
The p/e ratio of any company that’s fairly priced will equal its growth rate. I’m talking about growth rate of earnings here.
it’s always advisable to check the cash position (and the value of related businesses) as part of your research.
Among turnarounds and troubled companies, I pay special attention to the debt factor. More than anything else, it’s debt that determines which companies will survive and which will go bankrupt in a crisis. Young companies with heavy debts are always at risk.
Bank debt (the worst kind, and the kind that GCA had) is due on demand. It doesn’t have to come from a bank. It can also take the form of commercial paper, which is loaned from one company to another for short periods of time. The important thing is that it’s due very soon, and sometimes even “due on call.” That means that the lender can ask for his money back at the first sign of trouble.
Funded debt (the best kind, from the shareholder’s point of view) can never be called in no matter how bleak the situation, as long as the borrower continues to pay the interest. The principal may not be due for 15, 20, or 30 years. Funded debt usually takes the form of regular corporate bonds with long maturities.
debenture (a bond that can be converted into stock at the buyer’s discretion).
Stocks that pay dividends are often favored over stocks that don’t pay dividends by investors who desire the extra income. There’s nothing wrong with that.
The basic conflict between corporate directors and shareholders over dividends is similar to the conflict between children and their parents over trust funds. The children prefer a quick distribution, and the parents prefer to control the money for the children’s greater benefit.
One strong argument in favor of companies that pay dividends is that companies that don’t pay dividends have a sorry history of blowing the money on a string of stupid diworseifications.
Another argument in favor of dividend-paying stocks is that the presence of the dividend can keep the stock price from falling as far as it would if there were no dividend.
