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

by Peter Lynch

there are two particular periods when great bargains are likely to be found. The first is during the peculiar annual ritual of end-of-the-year tax selling.

If you have a list of companies that you’d like to own if only the stock price were reduced, the end of the year is a likely time to find the deals you’ve been waiting for.

The second is during the collapses, drops, burps, hiccups, and freefalls that occur in the stock market every few years.

One of the biggest troubles with stock market advice is that good or bad it sticks in your brain. You can’t get it out of there, and someday, sometime, you may find yourself reacting to it.

It’s normally harder to stick with a winning stock after the price goes up than it is to believe in it after the price goes down.

in nine cases out of ten, I sell if company 380 has a better story than company 212, and especially when the latter story begins to sound unlikely. As it turns out, if you know why you bought a stock in the first place, you’ll automatically have a better idea of when to say good-bye to it.

One obvious sell signal is that inventories are building up and the company can’t get rid of them, which means lower prices and lower profits down the road.

Falling commodity prices is another harbinger. Usually prices of oil, steel, etc., will turn down several months before the troubles show up in the earnings.

WHEN TO SELL A FAST GROWER Here, the trick is not to lose the potential tenbagger. On the other hand, if the company falls apart and the earnings shrink, then so will the p/e multiple that investors have bid up on the stock. This is a very expensive double whammy for the loyal shareholders.

If forty Wall Street analysts are giving the stock their highest recommendation, 60 percent of the shares are held by institutions, and three national magazines have fawned over the CEO, then it’s definitely time to think about selling.

With so many raiders around, it’s harder for the amateur to find a good asset stock, but it’s a cinch to know when to sell. You don’t sell until the Bass brothers show up, and if it’s not the Bass brothers, then it’s certain to be Steinberg, Icahn, the Belzbergs, the Pritzkers, Irwin Jacobs, Sir James Goldsmith, Donald Trump, Boone Pickens, or maybe even Merv Griffin.

Bottom fishing is a popular investor pastime, but it’s usually the fisherman who gets hooked.

there’s no arbitrary limit to how high a stock can go, and if the story is still good, the earnings continue to improve, and the fundamentals haven’t changed, “can’t go much higher” is a terrible reason to snub a stock.

Frankly, I’ve never been able to predict which stocks will go up tenfold, or which will go up fivefold. I try to stick with them as long as the story’s intact, hoping to be pleasantly surprised.

whether a stock costs $50 a share or $1 a share, if it goes to zero you still lose everything. If it goes to 50 cents a share, the results are slightly different.

Sometimes it’s always darkest before the dawn, but then again, other times it’s always darkest before pitch black.

In my experience no downtrodden stock ever returns to the level at which you’ve decided you’d sell.

Whenever I’m tempted to fall for this one, I remind myself that unless I’m confident enough in the company to buy more shares, I ought to be selling immediately.

Companies are dynamic, and prospects change. There simply isn’t a stock you can own that you can afford to ignore.

If you give up on a stock because you’re tired of waiting for something wonderful to happen, then something wonderful will begin to happen the day after you get rid of it. I call this the postdivestiture flourish.

Most of the money I make is in the third or fourth year that I’ve owned something—only with Merck it took a little longer. If all’s right with the company, and whatever attracted me in the first place hasn’t changed, then I’m confident that sooner or later my patience will be rewarded.

Regarding somebody else’s gains as your own personal losses is not a productive attitude for investing in the stock market.

In most cases it’s better to buy the original good company at a high price than it is to jump on the “next one” at a bargain price.

That’s not to say that futures don’t serve a useful purpose in the commodity business, where a farmer can lock in a price for wheat or corn at harvest and know he can sell for that amount when the crops are delivered; and a buyer of wheat or corn can do the same. But stocks are not commodities, and there is no relationship between producer and consumer that makes such price insurance necessary to the functioning of a stock market.

Actually I do know a few things about options. I know that the large potential return is attractive to many small investors who are dissatisfied with getting rich slow. Instead, they opt for getting poor quick.

Options are the broker’s gravy train. A broker with only a handful of active options clients can make a wonderful living.

In the multibillion-dollar futures and options market, not a bit of the money is put to any constructive use. It doesn’t finance anything, except the cars, planes, and houses purchased by the brokers and the handful of winners.

The scary part about shorting stock is that even if you’re convinced that the company’s in lousy shape, other investors might not realize it and might even send the stock price higher.

If you’ve shorted something that’s going up, you begin to realize that there’s nothing to stop it from going to infinity, because there’s no ceiling on a stock price. Infinity is where a shorted stock always appears to be heading.

the market, like individual stocks, can move in the opposite direction of the fundamentals over the short term,

Small investors are capable of handling all sorts of markets, as long as they own good merchandise. If anyone should worry, it’s some of the oxymorons.

When a raider comes in to buy out a solid and prosperous enterprise, it’s the shareholders who get robbed. Maybe it looks like a good deal to the shareholders today, but they’re giving away their stake in the future growth.

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.

It takes years, not months, to produce big results.

Stock prices often move in opposite directions from the fundamentals but long term, the direction and sustainability of profits will prevail.

You don’t lose anything by not owning a successful stock, even if it’s a tenbagger.

Don’t become so attached to a winner that complacency sets in and you stop monitoring the story.

If you don’t think you can beat the market, then buy a mutual fund and save yourself a lot of extra work and money.