This microbook is a summary/original review based on the book: One Up on Wall Street: How to Use What You Already Know to Make Money
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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!
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.
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:
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:
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.
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:
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.
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.
Peter Lynch is an American mutual fund manager, investing icon, and philanthropist. In 1977, he was named the head of the Magellan Fund. During his 13-year tenure, Lynch consistently more than doubled the S&P 500 market index, averaging almost 30% annual return,... (Read more)
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