One Up on Wall Street - critical summary review

Investing icon Peter Lynch came to prominence in the 1980s as the manager of the Magellan Fund at Fidelity Investments. During his 13-year tenure, he averaged a 29.2% annual return, increasing assets from $18 million in 1977 to $14 billion in 1990, and making the Magellan Fund the best-performing mutual fund in the world. However, in “One Up on Wall Street,” he claims that anyone can be a better investor than him just by following a few simple guidelines.

So, get ready to discover the benefits of self-directed investing and learn how to identify the superior companies that can grow tenfold, the famous “tenbaggers” in Lynchian parlance!

The Wall Street oxymorons vs. the Regular Joes

Lynch is widely regarded as one of the greatest professional investors of all time. So, it may come as a shock to you that his number one investing rule is to “stop listening to professionals!” That’s right: ignore the stocks Lynch buys, take no notice of the hot tips from brokerage firms, and disregard the latest “can’t miss” recommendations from your favorite newsletter! And do all this – in favor of your own research.

“Twenty years in this business convinces me that any normal person using the customary three percent of the brain can pick stocks just as well, if not better, than the average Wall Street expert,” writes Lynch. In his opinion, “professional investing” is an oxymoron on par with phrases such as “deafening silence,” “learned professor,” and “military intelligence.” In other words – there’s no such thing. So, when the guys at respected brokerage firms talk, contrary to popular opinion, you should not be listening, but, instead, snoring.

When it comes to investing, the only guy worth listening to is yourself. More precisely, it means that you should never invest in any company before you’ve done your homework on the said company – no matter what the so-called professionals say about its prospects. It’s all about research, about finding out everything you can about the company’s financial condition and competitive position, as well as its vision and plans for expansion. Because, only then, you can be sure that you’re not buying a lottery ticket, but a stock you actually believe.

In essence – as Warren Buffett often says – buying a stock is not so different from buying a whole company, and you would think twice before buying a company judging solely on the current market trends. So, “the trick is not to learn to trust your gut feelings, but rather to discipline yourself to ignore them.” It would be wonderful if we knew how to avoid the market setbacks with timely exits – but then everybody would be rich. The truth is, whatever bestselling authors say, nobody has ever figured out how to predict the market. What matters is that, in the end, “superior companies will succeed, and mediocre companies will fail – and investors in each will be rewarded accordingly.” Your goal should never be learning how to beat the market – but how to identify superior companies.

Six different types of companies

Just like countries have gross national income (GNI), both industries and individual companies have a growth rate. Keeping track of industry and company growths in relation to their size and the country’s GNI should be very important for any investor. Only then you will know when and how much to invest in a company, besides the kind of returns you can expect and for how long you should expect them. In Lynch’s typology, there are six different types of companies: 

1. Slow growers. Fast growers in the past, these are now “large and aging companies” expected to grow only slightly faster than the GNI – no more than 2-3%. A sure sign of a slow grower – or a sluggard – is that “it pays a generous and regular dividend.”
2. Stalwarts. These grow a bit faster than the slow growers, but, even so, you can’t expect them to be agile climbers. Good examples are Coca-Cola, Bristol-Myers, Procter & Gamble, Hershey’s, and Colgate-Palmolive. Their ceiling: 10% annual growth in earnings.
3. Fast growers. These are “small, aggressive new enterprises that grow at 20% to 25% a year.” Obviously, these are some of Lynch’s favorite investments. “If you choose wisely, this is the land of the 10 to 40-baggers, and even the 200-baggers,” he writes. So, only one or two of these can make a career.
4. Cyclicals. These usually follow a rise-fall-rise pattern, rising and falling more predictably than the rest of the companies. “The autos and the airlines, the tire companies, steel companies, and chemical companies are all cyclicals.”
5. Turnarounds. Turnarounds aren’t even slow growers – they are “no growers” capable of rebounding from time to time. Since they are “Chapter 11 sign-offs,” turnarounds are some of the most exciting companies to look out for. Lynch made a lot of money from the revival of turnaround companies such as Chrysler and Penn Central. He missed on Lockheed.
6. Asset plays. These are small mispriced companies completely overlooked by Wall Street – although they sit on assets that you feel like they must have some inherent value. “The asset play,” remarks Lynch, “is where the local edge can be used to greatest advantage.”

Finding the perfect stock – and which stocks to avoid

Once you found or discover a company with a product that guarantees it’s going to be a success even if an idiot runs it – then you’ve found your investment. However, there are 13 additional traits which may further direct your decision. These are all good signs:

1. It sounds dull – or, even better, ridiculous.
2. It does something dull.
3. It does something disagreeable.
4. It’s a spin-off.
5. The institutions don’t own it, and the analysts don’t follow it.
6. There’s something depressing about it.
7. The rumors abound: it’s involved with toxic waste or the mafia.
8. It’s a no-growth industry.
9. It’s got a niche.
10. People have to keep buying it.
11. It’s a user of technology.
12. The insiders are buyers.
13. The company is buying back shares.

Just as there are signs to tell you which companies are good investments, there are indications that might suggest the opposite. For example, it’s never a good idea to buy “the next big something” or to invest money in “the stock with the exciting name.” On the contrary, find good, possibly ignored companies with seemingly dull names that might hold off hotheaded investors from driving up their price artificially. 

Additionally, don’t buy stocks that people lower their voices to share with you. These are “the whisper stocks,” “the whiz-bang stories,” the longshots. Beware middleman companies as well, that is to say, companies that sell 25% to 50% of their products to a single customer. If the loss of one customer is catastrophic to a supplier – then it is not a good company to bet your money on. Finally, avoid profitable companies that blow money on foolish acquisitions. These “diworseifications” – as Lynch calls maximize losses for both companies and investors. 

The 12 silliest (and most dangerous) things people say about stock prices

Pythagoras was one of the smartest men of the ancient world and, yet, he believed that evil spirits hide in rumpled bedsheets. Supposedly intelligent “professional investors” are no different: they might be right about one thing, but immensely wrong about another. However, it’s thanks to them that some dangerous myths about investing have become part of common wisdom. The following 12 are perhaps the most dangerous – as well as the silliest:

1. If it’s gone down this much already, it can’t go much lower. There are no rules: nobody can predict the bottom or the peak of a stock.
2. You can always tell when a stock’s hit bottom. “Trying to catch the bottom on a falling stock is like trying to catch a falling knife,” explains Lynch. “It’s normally a good idea to wait until the knife hits the ground and sticks, then vibrates for a while and settles down before you try to grab it. Grabbing a rapidly falling stock results in painful surprises, because inevitably you grab it in the wrong place.”
3. If it’s gone this high already, how can it possibly go higher? Just like stock bottoms, ceilings are not predetermined. There’s no way of telling how high a stock can go.
4. It’s only $3 a share, what can I lose? Well, $3. But do this several times over, and your losses will be much bigger. It’s the mentality that you have to resist: a loss is a loss, no matter the size.
5. Eventually they always come back. The Visigoths never did, neither did Genghis Khan. The RCA as well.
6. It’s always darkest before the dawn. Sometimes the dawn is darker. What you need – to be a successful investor – is research, not popular proverbs.
7. When it rebounds to $10, I’ll sell. Unless you’re confident enough to buy more shares in a company, sell immediately. Otherwise, you’ll end up stuck with an underperformer for several years.
8. Conservative stocks don’t fluctuate much! Everything is dynamic nowadays – “there simply isn’t a stock you can own that you can afford to ignore.”
9. It’s taking too long for anything to happen. If it’s a superior company, it’s worth waiting for it. If not – see 7.
10. Look at all the money I’ve lost: I didn’t buy it! Could have, would have, should have! Stop regretting the past. Disappointment makes people forget about the present – and make mistakes about the future.
11. I missed that one, I’ll catch the next one. Once again, what’s past is past. Don’t compound your error by betting on another company in the same industry. You missed that train? Try to hop on a different one.
12. The stock’s gone up, so I must be right (or: The stock’s gone down, so I must be wrong). This one’s the fundamental mistake. Mr. Market is not your friend: he’s a manic-depressive whose behavior can’t be pinned down. Basing your decisions on his fluctuating conduct means playing a game with no rules. Just because a stock moves up today, it doesn’t mean it won’t go down tomorrow – and vice versa. Short-term stock movements don’t define the prospects of a company: assets, competitive advantages, and management style do. Look for that.

Final Notes

Brimming with intelligence and charisma, “One Up on Wall Street” is certainly one of the best books on investing ever written. 

If you have any interest whatsoever in individual stock-investing, then reading this book should be a no-brainer.

12min Tip

Before you buy a share of anything, ask yourself the following three questions: Do I own a house? Do I need the money? Do I have the personal qualities that will bring me success in stocks? Never ignore the following two rules: “Only invest what you could afford to lose without that loss having any effect on your daily life in the foreseeable future;” and invest only in what you know and understand.