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Kindle Notes & Highlights
by
Peter Lynch
Read between
June 6 - June 27, 2019
the smaller companies that don’t pay dividends are likely to grow much faster because of it.
A company with a 20- or 30-year record of regularly raising the dividend is your best bet.
Cyclicals are not always reliable dividend-payers:
the stated book value often bears little relationship to the actual worth of the company. It often understates or overstates reality by a large margin.
The closer you get to a finished product, the less predictable the resale value. You know how much cotton is worth, but who can be sure about an orange cotton shirt?
Overvalued assets on the left side of the balance sheet are especially treacherous when there’s a lot of debt on the right.
When you buy a stock for its book value, you have to have a detailed understanding of what those values really are.
Just as often as book value overstates true worth, it can understate true worth. This is where you get the greatest asset plays.
There are hidden assets when one company owns shares of a separate company—as
tax breaks turn out to be a wonderful hidden asset in turnaround companies.
In cases where you have to spend cash to make cash, you aren’t going to get very far.
if cash flow is ever mentioned as a reason you’re supposed to buy a stock, make sure that it’s free cash flow that they’re talking about. Free cash flow is what’s left over after the normal capital spending is taken out. It’s the cash you’ve taken in that you don’t have to spend.
When inventories grow faster than sales, it’s a red flag.
A company may brag that sales are up 10 percent, but if inventories are up 30 percent, you have to say to yourself: “Wait a second. Maybe they should have marked that stuff down and gotten rid of it.
the only growth rate that really counts: earnings.
If you find a business that can get away with raising prices year after year without losing customers (an addictive product such as cigarettes fills the bill), you’ve got a terrific investment.
all else being equal, a 20-percent grower selling at 20 times earnings (a p/e of 20) is a much better buy than a 10-percent grower selling at 10 times earnings (a p/e of 10).
comparing companies within the same industry. The company with the highest profit margin is by definition the lowest-cost operator, and the low-cost operator has a better chance of surviving if business conditions deteriorate.
What you want, then, is a relatively high profit-margin in a long-term stock that you plan to hold through good times and bad, and a relatively low profit-margin in a successful turnaround.
There are three phases to a growth company’s life: the start-up phase, during which it works out the kinks in the basic business; the rapid expansion phase, during which it moves into new markets; and the mature phase, also known as the saturation phase, when it begins to prepare for the fact that there’s no easy way to continue to expand.
The worse the slump in the auto industry, the better the recovery. Sometimes I root for an extra year of bad sales, because I know it will bring a longer and more sustainable upside.
it’s much easier to predict an upturn in a cyclical industry than it is to predict a downturn.)
Look for small companies that are already profitable and have proven that their concept can be replicated.
Be suspicious of companies with growth rates of 50 to 100 percent a year.
It’s better to miss the first move in a stock and wait to see if a company’s plans are working out.
Companies that have no debt can’t go bankrupt.
Managerial ability may be important, but it’s quite difficult to assess. Base your purchases on the company’s prospects, not on the president’s resume or speaking ability.
All else being equal, favor companies in which management has a significant personal investment over companies run by people that benefit only from their salaries.
Devote at least an hour a week to investment research. Adding up your dividends and figuring out your gains and losses doesn’t count.
When in doubt, tune in later.
In certain years you’ll make your 30 percent, but there will be other years when you’ll only make 2 percent, or perhaps you’ll lose 20. That’s just part of the scheme of things, and you have to accept it.
If you expect to make 30 percent year after year, you’re more likely to get frustrated at stocks for defying you, and your impatience may cause you to abandon your investments at precisely the wrong moment.
If professionals who are employed to pick stocks can’t outdo the index funds that buy everything at large, then we aren’t earning our keep.
For all the time and effort it takes to choose individual stocks, there ought to be some extra gain from it.
to be able to say that picking your own stocks is worth the effort, you ought to be getting a 12–15 percent return, compounded over time.
The point is not to rely on any fixed number of stocks but rather to investigate how good they are, on a case-by-case basis.
In my view it’s best to own as many stocks as there are situations in which: (a) you’ve got an edge; and (b) you’ve uncovered an exciting prospect that passes all the tests of research.
There’s no use diversifying into unknown companies just for the sake of diversity. A foolish diversity is the hobgoblin of small investors.
If you are looking for tenbaggers, the more stocks you own the more likely that one of them will become a tenbagger. Among several fast growers that exhibit promising characteristics, the one that actually goes the furthest may be a surprise.
The more stocks you own, the more flexibility you have to rotate funds between them. This is an important part of my strategy.
Slow growers are low-risk, low-gain because they’re not expected to do much
Stalwarts are low-risk, moderate gain.
Asset plays are low-risk and high-gain if you’re sure of the value of the assets. If you are wrong on an asset play, you probably won’t lose much, and if you are right, you could make a double, a triple, or perhaps a fivebagger.
Cyclicals may be low-risk and high-gain or high-risk and low-gain, depending on how adept you are at anticipating cycles.
fast growers or from turnarounds—both high-risk, high-gain categories. The higher the potential upside, the greater the potential downside, and if a fast grower falters or the troubled old turnaround has a relapse, the downside can be losing all your money.
I don’t go into cash—except to have enough of it around to cover anticipated redemptions. Going into cash would be getting out of the market. My idea is to stay in the market forever, and to rotate stocks depending on the fundamental situations.
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.
Get out of situations in which the fundamentals are worse and the price has increased, and into situations in which the fundamentals are better and the price is down.
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.
The best time to buy stocks will always be the day you’ve convinced yourself you’ve found solid merchandise at a good price—the same as at the department store.
