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Book Summary - One up on Wallstreet - Peter Lynch
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Summary of One Up On Wall Street: How To Use What You AlreadyKnow To Make Money In The Market
PART I: Preparing to Invest
1. The Making of a Stock Picker
There’s no such thing as a hereditary knack for picking stocks. There are no people that are
born to invest; Lynch states clearly that his experience has shown him that.
Distrust in stocks prevailed between the 1950s and the 1960, this taught the author how
hard it is to predict markets, and also that small investors tend to be pessimistic and
optimistic at precisely the wrong times
The author states that studying history and philosophy was much better preparation for the
stock market than studying statistics for example. Investing in stocks is an art, not a
science. The entire math you need in the stock market you get in the fourth grade.
During a business trip where the author learnt many concepts of trading stocks, he found it
difficult to integrate the efficient-market hypothesis1 with the random-walk hypothesis2.
This was because Lynch had seen enough odd fluctuations to doubt the rational part, and
because of the success of the great Fidelity (where he was working at the time) fund
managers was hardly unpredictable.
Lynch noticed that the professors who believed in quantum analysis and random walk,
weren’t doing as well as Fidelity, so this have him a clue of where was the way to go.
2. The Wall Street Oxymoron’s
Since most of the shares in major companies are controlled by institutions, it’s very likely
that you as a trader are competing against oxymoron’s3 whenever you buy or sell shares.
This is a big advantage to those who invest different, out of the box (such as Lynch). But
not all professional traders are like this, there are great fund managers, innovative fund
managers, and maverick fund managers who invest as they please (Peter de Roeth, George
Soros, Warren Buffet, etc).
Great investing has nothing to do with youth, and prove of this is that the middle-aged
investor who has lived through several kinds of markets may have an advantage over the
youngster who hasn’t.
1
Everything in the stock market is known and prices are always rational
2
Ups and downs of the market are irrational and entirely unpredictable
3
A combination of contradictory or incongruous words
,There are many stocks that are obviously going into a certain direction, to the level that
anyone could notice it. The problem is that for most professionals there are many obstacles
and problems, which make them unable to make the decision in time. These are as follows:
- Into 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 have put it on the recommended list
- The fund manager most likely is looking for reasons not to buy exciting stocks, so
that he can offer the proper excuses if those exciting stocks happen to go up.
Between the chance of making an unusually large profit on an unknown company
and the assurance of losing only a small amount on an established company, the
normal fund manager would jump at the latter4. Fund managers in general spend a
quarter of their working hours explaining what they just did.
- Whenever fund managers decide to buy something exciting, they may be held back
by various written rules and regulations. Some bank trust departments simply won’t
allow the buying of stocks in any companies with unions. This could even be caused
by the SEC5
- They behave exactly as institutions trade, which can lead them to the same result
they have, which isn’t always great. When trading you shouldn’t be afraid to trade
on your own because of where you come from, as the author states, from the
unexperienced traders if from where most Tenbaggers6 come from. You don’t need
to explain why you are buying set stock, is a waste of time.
Very important statement by the author: The stocks he tries to buy are the very stocks
that traditional fund managers try to overlook. He continues to think like an amateur
as frequently as possible
3. Is This Gambling, or What?
One eternal discussion is whether to invest in stocks or in bonds, with the recent
uncertainty in stock market many people have gone with bonds, which are considered to be
safer. Investing in bonds, money-markets, or CDs7 are all different forms of investing in
debt, for which you are paid an interest rate. There’s nothing wrong with getting paid
interest, especially if it is compounded. In the past bonds weren’t attractive since they had a
4
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
5
The U.S. Securities and Exchange Commission is an independent federal government regulatory agency
responsible for protecting investors, maintaining fair and orderly functioning of the security markets, and
facilitating capital formation.
6
An investment that appreciates to 10 times its initial purchase price.
7
A credit default swap (CDS) is a financial derivative or contract that allows an investor to "swap" or offset
his or her credit risk with that of another investor.
, low interest rate, but in the past years rates have gotten higher, making them more
attractive.
Liberating the Pass Books
Bonds used to be sold only in large denominations, which made it very difficult for little
investors to invest in this market. Then the bond funds were invented, and regular people
could invest in debt right along with tycoons. After that, the money-market fund liberated
millions of former passbook savers from the captivity of banks, once and for all.
The Stock Rebut
The stocks in general have paid off fifteen times as well as corporate bonds, and well over
thirty times better than Treasury bills. This is because with stocks you’ve got the
company’s growth on your side, while with bonds, you’re nothing more than the nearest
source of spare change
What about risks?
Even though many consider stocks to be the riskier market, bonds can be risky too. The
possible exceptions of this are the very short-term bonds and bond funds. Here, rising
interest rates will force you to accept one of two unpleasant choices: suffer with the low
yield until the bonds mature, or sell the bonds at a substantial discount to face value.
Stocks are most likely to be accepted as prudent at the moment they’re not.
For years, stocks in large companies were considered “investments” and stocks in small
companies “speculations,” but lately small stocks have become investments and the
speculating is done in futures and options. Once the unsettling fact of the risk in money is
accepted, you can begin to separate gambling from investing not by the type of activity but
by the skill, dedication, and enterprise of the participant.
By asking some basic questions about companies, you can learn which are likely to grow
and prosper, which are unlikely to grow and prosper, and which are entirely mysterious.
People who succeed in the stock market also accept periodic losses, setbacks, and
unexpected occurrences. Six out of ten is all it takes to produce an enviable record on
Wall Street.
4. Passing the Mirror Test
Before you buy a share of anything, there are three personal issues that ought to be
addressed: Do I own a house? Do I need the money?, and Do I have the personal qualities
that will bring me success in stocks?
Do I own a house?
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