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

by Peter Lynch

An amateur investor can pick tomorrow’s big winners by paying attention to new developments at the workplace, the mall, the auto showrooms, the restaurants, or anywhere a promising new enterprise makes its debut.

You don’t need to make money on every stock you pick. In my experience, six out of ten winners in a portfolio can produce a satisfying result.

All you need for a lifetime of successful investing is a few big winners, and the pluses from those will overwhelm the minuses from the stocks that don’t work out.

By the way, the odds against making a living in the day-trading business are about the same as the odds against making a living at racetracks, blackjack tables, or video poker.

It would be wonderful if we could avoid the setbacks with timely exits, but nobody has figured out how to predict them. Moreover, if you exit stocks and avoid a decline, how can you be certain you’ll get back into stocks for the next rally? Here’s a telling scenario: If you put $100,000 in stocks on July 1, 1994, and stayed fully invested for five years, your $100,000 grew into $341,722. But if you were out of stocks for just thirty days over that stretch—the thirty days when stocks had their biggest gains—your $100,000 turned into a disappointing $153,792. By staying in the market, you more than doubled your reward.

The basic story remains simple and never-ending. Stocks aren’t lottery tickets. There’s a company attached to every share. Companies do better or they do worse. If a company does worse than before, its stock will fall. If a company does better, its stock will rise. If you own good companies that continue to increase their earnings, you’ll do well.

But rule number one, in my book, is: Stop listening to professionals! Twenty years in this business convinces me that any normal person using the customary three percent of the brain can pick stocks just as well, if not better, than the average Wall Street expert.

There are at least three good reasons to ignore what Peter Lynch is buying: (1) he might be wrong! (A long list of losers from my own portfolio constantly reminds me that the so-called smart money is exceedingly dumb about 40 percent of the time); (2) even if he’s right, you’ll never know when he’s changed his mind about a stock and sold; and (3) you’ve got better sources, and they’re all around you. What makes them better is that you can keep tabs on them, just as I keep tabs on mine.

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

It is personal preparation, as much as knowledge and research, that distinguishes the successful stockpicker from the chronic loser. Ultimately it is not the stock market nor even the companies themselves that determine an investor’s fate. It is the investor.

Investing in stocks is an art, not a science, and people who’ve been trained to rigidly quantify everything have a big disadvantage.

On the other hand, since I’m now forty-five and still running Fidelity Magellan, I’m eager to report that great investing has nothing to do with youth—and that the middle-aged investor who has lived through several kinds of markets may have an advantage over the youngster who hasn’t.

There’s an unwritten rule on Wall Street: “You’ll never lose your job losing your client’s money in IBM.”

If seven out of ten of my stocks perform as expected, then I’m delighted. If six out of ten of my stocks perform as expected, then I’m thankful. Six out of ten is all it takes to produce an enviable record on Wall Street.

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

The unwary investor continually passes in and out of three emotional states: concern, complacency, and capitulation.

Stand by your stocks as long as the fundamental story of the company hasn’t changed.

I don’t believe in predicting markets. I believe in buying great companies—especially companies that are undervalued, and/or underappreciated.

What I hope you’ll remember most from this section are the following points: • Don’t overestimate the skill and wisdom of professionals.

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

For a General Electric to double or triple in size in the foreseeable future is mathematically impossible. GE

But value always wins out—or at least in enough cases that it’s worthwhile to believe it.

Although it’s easy to forget sometimes, a share of stock is not a lottery ticket. It’s part ownership of a business.

“Right now in October? You know what Mark Twain says: ‘October is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August, and February.’ ”

It’s a real tragedy when you buy a stock that’s overpriced, the company is a big success, and still you don’t make any money.

I think if you decide that a certain amount you’ve invested in the stock market will always be invested in the stock market, you’ll save yourself a lot of mistimed moves and general agony.

Warren Buffett thinks that stock futures and options ought to be outlawed, and I agree with him.