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Book Summary - One up on Wallstreet - Peter Lynch
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SummaryOne up on Wall Street – Peter Lynch
The lessons of October
I’ve always believed that investors should ignore the ups and downs of
the market.
When you sell in desperation, you always sell cheap.
To all the dozens of lessons we’re supposed to have learned from October, I can
add three:
1. Don’t let nuisances ruin a good portfolio;
2. Don’t let nuisances ruin a good vacation;
3. Never travel abroad when you’re light on cash
Whether it’s a 508-point day or a 108-point day, in the end, superior companies
will succeed and mediocre companies will fail, and investors in each will be
rewarded accordingly.
Dumb money is only dumb when it listens to the smart money.
But rule number one, in my book, is: Stop listening to professionals!
Moreover, when you pick your own stocks, you ought to outperform the experts.
Otherwise, why bother?
The mutual fund is a wonderful invention for people who have neither the time
nor the inclination to test their wits against the stock market, as well as for
people with small amounts of money to invest who seek diversification.
Tenbaggers
In the last decade the occasional five- and tenbagger, and the rarer
twentybagger, has helped my fund outgain the competition – and I own 1 400
stocks. In a small portfolio even one of these remarkable performers can
transform a lost cause into a profitable one. It’s amazing how it works.
To make this spectacular showing, you only had to find one big winner out of
eleven.
The more right you are about any one stock, the more wrong you can be on all
the others and still triumph as an investor.
Actually there are numerous tenbaggers in companies you’ll recognize:
Dunkin’ Donuts, Wal-Mart, Toys R Us, Stop & Shop, Subaru
Common knowledge
To get these spectacular returns you had to buy and sell at exactly the right time.
But even if you missed the highs or the lows, you would have done better to have
invested in any of the familiar companies mentioned above than in some of the
esoteric enterprises that neither of us understands.
… but I stumbled onto the big winners in extracurricular situations, the same way
you could: L’eggs is the perfect example of the power of common
knowledge.
Public company?
Luckily there are enough tenbaggers around so that both of us could fail to notice
the majority and we’ll still hit our share. In a large portfolio such as mine I have to
hit several before it makes an appreciable difference. In a small portfolio such as
yours, you only have to hit one.
Visiting stores and testing products is one of the critical elements of the analyst’s
job.
,People seem more comfortable investing in something about which they are
entirely ignorant.
Gig my gigahertz and whetstone my megaflop, if you couldn’t tell if that was a
racehorse or a memory chip you should stay away from it, even though your
broker will be calling to recommend it as the opportunity of the decade to make
countless nanobucks.
Finding the promising company is only the first step. The next step is
doing the research.
,Part 1 Preparing to invest
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.
Chapter 1 Making of a stockpicker
The Lynch Law, closely related to the Peter Principle, states: Whatever Lynch
advances, the market declines.
Distrust of stocks was the prevailing American attitude throughout the 1950s and
into the 1960s, when the market tripled and than doubled again. This period of
my childhood, and not the recent 1980s, was truly the greatest bull market in
history, but to hear if from my uncles, you’d have thought it was the craps game
behind the pool hall.
Looking back on it, I realize there was less risk of losing all one’s money in the
stock market of the 1950s than at any time before or since. This taught me not
only that it’s difficult to predict markets, but also that small investors tend to be
pessimistic and optimistic at precisely the wrong times, so it’s self-defeating to
try to invest in good markets and get out of bad ones.
Investing in stocks is an art, not a science, and people who’ve been trained to
rigidly quantify everything have a big disadvantage. If stockpicking could be
quantified, you could rent time on the nearest Cray computer and make a
fortune.
Logic is the subject that’s helped me the most in picking stocks, if only because it
taught me to identify the peculiar illogic of Wall Street. Actually Wall Street thinks
just as the Greeks did. The early Greeks used to sit around for days and debate
how many teeth a horse has. They thought they could figure it out by just sitting
there, instead of checking the horse. A lot of investors sit around and
debate whether a stock is going up, as if the financial muse will give
them the answer, instead of checking the company.
In centuries past, people hearing the rooster crow as the sun came up decided
that the crowing caused the sunrise. It sounds silly now, but every day the
experts confuse cause and effect on Wall Street in offering some new explanation
for why the market goes up: hemlines are up, a certain conference wins the
Super Bowl, the Japanese are unhappy, a trendline has been broken, Republicans
will win the election, stocks are ‘oversold’, etc. when I hear theories like these, I
always remember the rooster.
Mister Johnson believed that you invest in stocks not to preserve capital, but to
make money.
Then you take your profits and invest in more stocks, and make even more
money.
“Stocks you trade, it’s wives you’re stuck with.” Mister Johnson (father
of Ned Johnson (Fidelity))
“Don’t gamble; take all your savings and buy some good stock and hold
it till it goes up, then sell it.
If it don’t go up, don’t buy it.” Will Rogers
Chapter 2 Wall Street oxymorons
Given the numerous cultural, legal, and social barriers that restrain professional
investors (many of which we’ve nailed up ourselves), it’s amazing that we’ve
done as well as we have, as a group.
The secret of his success is that he never went to business schools – imagine all
the lessons he never had to unlearn. (about Peter de Roetth / Harvard Law School
graduate)
, These notable exceptions are entirely outnumbered by the run-of-the-mill fund
managers, dull fund managers comatose fund managers, sycophantic fund
managers, timid fund managers, plus other assorted camp followers, fuddy-
dutties, and copycats hemmed in by the rules.
I’m eager to report that great investing has nothing to do with youth – and that
middle-aged investor who lived through several kinds of markets may have an
advantage over the youngster who hasn’t.
Street lag
Under the current system, a stock isn’t truly attractive until a number of large
institutions have recognized its suitability and an equal number of respected Wall
Street analysts (the researchers who track the various industries and companies)
have put it on the recommended list. With so many people waiting for others to
make the first move, it’s amazing that anything gets bought.
Inspected by 4
With survival at stake, it’s the rare professional who has the guts to traffic in an
unknown La Quinta. In fact, between the chance of making an unusually large
profit on an unknown company and the assurance of losing only a small amount
of an established company, the normal mutual-fund manager, pension-fund
manager or corporate-portfolio manager would jump at the latter. Success is one
thing, but it’s more important not to look bad if you fail. There’s an unwritten rule
on Wall-Street: “You’ll never lose you job losing your client’s money in IBM.”
The worst of the camp-following takes place in the bank pension-fund
departments and in the insurance companies, where stocks are bought and sold
from preapproved lists. Nine out of ten pension managers work from such lists, as
a form of self-protection from the ruination of ‘diverse performance’. ‘Diverse
performance’ can cause a great deal of trouble, as the following example
illustrates. Almost by definition the result will be mediocre, but acceptable
mediocrity is far more comfortable than diverse performance.
There’s about as much job security in portfolio management as there is in go-go
dancing and football coaching. Coaches can at least relax between seasons. Fund
managers can never relax because the game is played year-round. The wins and
losses are reviewed after every third month, by clients and bosses who demand
immediate results.
There’s an unwritten rule that the bigger the client, the more talking the portfolio
manager has to do to please him.
In our business the indiscriminate selling of current losers is called ‘burying the
evidence’.
Among the seasoned portfolio managers, burying the evidence is done so quickly
and efficiently that I suspect it’s already become a survival mechanism, and it
will probably be inbred so that future generations can do it without hesitation, the
way that ostriches have learned to stick their heads in the sand.
Oysters Rockefeller
Whenever fund managers do decide to buy something exiting (against all the
social and political obstacles), they may be held back by various written rules and
regulations.
If it’s not the bank or the mutual fund making up rules, then it’s the SEC. for
instance, the SEC says a mutual fund such as mine cannot own more than 10% of
the shares in any given company, nor can we invest more than 5% of the fund’s
assets in any given stock.
The various restrictions are well-intentioned, and they protect against a fund’s
putting all its eggs in one basket and also against a fund’s taking over a company
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