Notes to BEATING THE STREET By : Peter Lynch with John Rothchild
Never invest in any idea you can’t illustrate with a crayon. You should be able to easily explain why you own an investment in 3 minutes or less. You should be able to explain this to a 5th grader. Ideally, you should be able to do this in 90 seconds, as a 5ht grader might get bored in the 3 minutes discussed above.
You can lose money in a very short time but it takes a long time to make money.
The stock market really isn’t a gamble, as long as you pick good companies that you think will do well, and not just because of the stock price.
You can make a lot of money from the stock market, but then again you can also lose money, as we proved.
You should invest in several stocks because out of every five you pick one will be very great, one will be really bad, and three will be OK.
Just because a stock goes down doesn’t mean it can’t go lower.
You should not buy a stock because it’s cheap but because you know a lot about it. Do your homework.
Hold only those stocks on which you can remain informed.
The key to making money in stocks is not to get scared out of them. This point cannot be overemphasized.
A decline in stocks is not a surprising event; it’s a recurring event ‑ as normal as frigid air in Minnesota. If you live in a cold climate, you expect freezing temperatures, so when your outdoor thermometer drops below zero, you don’t think of this as the beginning of the next Ice Age. You put on your parka, throw salt on the walk, and remind yourself that by summertime it will be warm outside.
A successful stock picker has the same relationship with a drop in the market as a Minnesotan has with freezing weather. You know it’s coming and you’re ready to ride it out, and when your favorite stocks go down with the rest, you jump at the chance to buy more.
Historically, stocks return nearly 11 percent.
Warren Buffett’s admonition that people who can’t tolerate seeing their stocks lose 50 percent of their value shouldn’t own stocks also applies to stock funds.
People who can’t tolerate seeing their mutual funds lose 20‑30 percent of their value in short order certainly shouldn’t be invested in growth funds or general equity funds.
When stocks in good companies are selling at 3‑6 time’s earnings, the stock picker can hardly lose.
A sure cure for taking a stock for granted is a big drop in the price.
Ergo, the devoted stock picker is happier when the market drops 300 points than when it rises the same amount.
If you like the store, chances are you’ll love the stock.
Peters Principle #18: When even the analysts are bored, it’s time to start buying.
It is a wonderful thing for shareholders when a utility builds a new plant (one that get a license to operate, at least) or takes other steps to increase capacity. When capacity grows, so does the rate base, and so do the earnings.
A healthy portfolio requires a regular checkup‑perhaps every six months or so.
Long shots almost always miss the mark.
Owning stocks is like having children ‑ don’t get involved with more than you can handle. There don’t have to be more than 5 companies in the portfolio at any one time.
If you can’t find any companies that you think are attractive, put your money in the bank until you discover some.
Avoid hot stocks in hot industries.
A stock‑market decline is as routine as a January blizzard in Colorado. If you’re prepared, it can’t hurt you. A decline is a great opportunity to pick up the bargains left behind by investors who are fleeing the storm in panic.
Nobody can predict interest rates, the future direction of the economy, or the stock market. Dismiss all such forecasts and concentrate on what’s actually happening to the companies in which you’ve invested.
If you don’t study any companies, you have the same success buying stocks as you do in a poker game if you bet without looking at your cards.
Equity to Assets ratio discussion. The higher the E/A, the better. E/A of 5.5 to 6 is average. S&L, he likes to see E/A of at least 7.5.
6 month check up as a reminder. Two Basic questions of 6 month check up.
Is the stock still attractively priced relative to earnings?
What is happening in the company to make the earnings go up.