Notes to One Up On Wall Street
By : Peter Lynch with John Rothchild
I read this on July 23, 2000 and then again on January 31, 2005. Lynch is an awesome read for the casual, experienced, and inexperienced investor. If you want to learn about investing or enhance your competence in investing, I would certainly recommend any of Lynch's writings.
1. "Only invest what you could afford to lose without that loss having any effect on your daily life in the foreseeable future." Lynch explains that when investing in Common Stocks, one must be prepared to invest for at least a 5 year period. He indicates that companies do hit "banana peels" and that these drops can occur for long periods of time.
2. Necessary qualities of an investor in order to succeed. Of course this would include an investment advisor.
a. patience.
b. self-reliance
c. common sense
d. open-mindedness
e. tolerance for pain
f. detachment
g. persistence
h. humility
i. flexibility
j. willingness to do independent research
k. an equal willingness to admit to mistakes
l. ability to ignore general panic
3. Many investments could be right under your nose. Lynch discusses a physician who is very enthused about a certain product he has been writing prescriptions for. He stresses that if you love a company or a product, you should not run out and buy the investment, but you should run out and start learning about the company, as it may become a potential investment. He calls this "taking advantage of what you already know".
4. Some items to remember:
a. look for companies that are off the radar scope. These could become the future 10 baggers.
b. invest in companies, not the stock market.
c. ignore short term fluctuations
d. Invest in a house before you invest in the stock market. (I am writing this on February 1, 2005, I don't necessarily agree with this principle at the moment, as I believe we may be in a massive housing bubble. Yet, my profession is investing in companies, not in houses, hence I am not qualified to give housing advise, and at the same time, over 1/2 of my net worth is tied up in my house.
e. Large profits can be made in common stocks.
f. Large losses can be made in common stocks.
g. Predicting the economy is futile.
h. The average person is exposed to interesting local companies and products years before the professionals.
5. Investing without research is like playing stud poker and never looking at the cards.
6. "If you find a stock with little or no institutional ownership, you've found a potential winner. Find a company that no analyst would admit to knowing about, and you've got a double winner."
7. "If I could avoid a single stock, it would be the hottest stock in the hottest industry...."
The Final Checklist ( This is not his entire list. The following are merely reminders to me of things I certainly want to look at).
1. Stocks in General
a. look at p/e ratio
b. percentage of institutional ownership, the lower the better.
c. Insider activity
d. record of earnings growth, look at whether they are consistent or sporadic.
e. Look at balance sheet, debt-equity levels.
f. Look at cash position.
2. Slow Growers - large and aging companies, that are expected to grow slightly faster than the GNP.
a. generally bought for dividends. find out how often dividends are raised.
b. look at dividend payout ratio.
3. Stalwarts - Large companies that grow slightly faster than slow growers. Lynch names a few as Coca-Cola, Bristol-Meyers, Procter and Gamble.
a. Look at price and p/e.
b. Look for possible "diworsefications" that can reduce future earnings.
c. Look at long term growth rate (CAGR)
d. Look how company has faired in recessions and market drops.
4. Cyclicals - Companies whose revenues and profits rise and fall in a fairly predictable fashion. These are companies, for example, in the airline, auto, steel, tire industries.
a. Look at inventory. Look for new competition.
b. Look at various P/E's. Look at the various cycles of revenue growth and shrinkage, and compare the P/E during those periods.
5. Fast Growers - "small, aggressive new enterprises that grow at 20 - 25% per year."
a. Be wary of companies that are growing in excess of faster than 25% annually.
b. Can the company continue its growth rate.
c. Is the P/E, near or at its growth rate.
d. few institutions and analysts could be a plus here.
6. Turnarounds - potential fatalities. no growers, "battered, depressed, and often can barely drag themselves into Chapter 11."
a. Can the company survive the creditors and covenants.
b. Is business coming back.
c. Look at potential and will stockholders benefit from that potential.
7. Additional pointers from Lynch.
a. "Long shots almost never pay off."
b. "Look for companies with niches"
c. "Look for companies that consistently buy back their own shares"
8. Final Thoughts
a. A sharp market decline is the historical norm.
b. market declines are great opportunities to buy stocks in companies you like.
c. Trying to predict the market direction is nearly impossible.
d. You do not have to be correct a majority of the time. I often use the following analogy in investing. If you are playing baseball in the major leagues, and say you have a 20 year career, of which during that 20 year career, you managed to get an out 67% of the time, you would still probably end up in the hall of fame for your batting skills and consistency.
e. It takes years to produce big results.
f. Just because the price goes up doesn't mean you are correct.
g. Just because the price goes up doesn't mean you are wrong.
h. Selling an outstanding fast grower because its stock seems slightly overvalued is a losing technique.
i. There is always something to worry about.
j. Keep an open mind to new ideas.