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

by Peter Lynch

It takes remarkable patience to hold on to a stock in a company that excites you, but which everybody else seems to ignore. You begin to think everybody else is right and you are wrong. But where the fundamentals are promising, patience is often rewarded—Lukens

LOOK AT ALL THE MONEY I’VE LOST: I DIDN’T BUY IT!

Regarding somebody else’s gains as your own personal losses is not a productive attitude for investing in the stock market. In fact, it can only lead to total madness. The more stocks you learn about, the more winners you realize that you’ve missed, and soon enough you’re blaming yourself for losses in the billions and trillions.

I MISSED THAT ONE, I’LL CATCH THE NEXT ONE

If you failed to buy Home Depot at a low price, and then bought Scotty’s, the “next Home Depot,” then you probably made another mistake, because Home Depot is up twenty-five-fold since it came public, and Scotty’s is up only 25–30 percent, underperforming the general market over the same period.

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.

THE STOCK’S GONE UP, SO I MUST BE RIGHT, OR . . . THE STOCK’S GONE DOWN SO I MUST BE WRONG

So when people say, “Look, in two months it’s up 20 percent, so I really picked a winner,” or “Terrible, in two months it’s down 20 percent, so I really picked a loser,” they’re confusing prices with prospects. Unless they are short-term traders who are looking for 20-percent gains, the short-term fanfare means absolutely nothing.

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

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. So far, nothing’s been strong enough to shake me out of it.

If you take anything with you at all from this last section, I hope you’ll remember the following: • Sometime in the next month, year, or three years, the market will decline sharply. • Market declines are great opportunities to buy stocks in companies you like. Corrections—Wall Street’s definition of going down a lot—push outstanding companies to bargain prices. • Trying to predict the direction of the market over one year, or even two years, is impossible. • To come out ahead you don’t have to be right all the time, or even a majority of the time. • The biggest winners are surprises to me, and takeovers are even more surprising. It takes years, not months, to produce big results. • Different categories of stocks have different risks and rewards. • You can make serious money by compounding a series of 20–30 percent gains in stalwarts.

Stock prices often move in opposite directions from the fundamentals but long term, the direction and sustainability of profits will prevail. • Just because a company is doing poorly doesn’t mean it can’t do worse. • Just because the price goes up doesn’t mean you’re right. • Just because the price goes down doesn’t mean you’re wrong. • Stalwarts with heavy institutional ownership and lots of Wall Street coverage that have outperformed the market and are overpriced are due for a rest or a decline. • Buying a company with mediocre prospects just because the stock is cheap is a losing technique. • Selling an outstanding fast grower because its stock seems slightly overpriced is a losing technique. • Companies don’t grow for no reason, nor do fast growers stay that way forever. • You don’t lose anything by not owning a successful stock, even if it’s a tenbagger. • A stock does not know that you own it. • Don’t become so attached to a winner that complacency sets in and you stop monitoring the story. • If a stock goes to zero, you lose just as much money whether you bought it at $50, $25, $5, or $2—everything you invested. • By careful pruning and rotation based on fundamentals, you can improve your results. When stocks are

out of line with reality and better alternatives exist, sell them and switch into something else. • When favorable cards turn up, add to your bet, and vice versa. • You won’t improve results by pulling out the flowers and watering the weeds. • 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. • There is always something to worry about. • Keep an open mind to new ideas. • You d...