Peter Lynch’s classic One Up on Wall Street was published in 1989. I bet it left a mark on anyone bit by the investing bug in the 1990s.
The downside of classics like Lynch’s books is how easy it is for new impressionable investors to overlook what’s important when you don’t know what’s important. When I first read it, I’m fairly sure the only lesson I walked away with was “find multi-baggers.” Easy enough. (It wasn’t!)
It’s almost like you have to read the classics three or four times before all the lessons sink in. And maybe add a few years of investing in the markets for good measure too.
I recently dug up my old copy. There was no marginalia (not a good sign) — only some folded page corners. Turns out, I missed a lot but the important lessons were there.
In fact, Lynch ends each of the three sections with this: “If you take away anything from this section…I hope you’ll remember the following.” Then he rattled up off a list.
A selection of his summations are below:
- Ignore short-term fluctuations.
- Large profits can be made in common stocks.
- Large losses can be made in common stocks.
- Predicting the economy is futile.
- Understand the nature of the companies you own and the specific reasons for holding the stock. (“It is really going up!” doesn’t count.)
- Big companies have small moves, small companies have big moves.
- Consider the size of a company if you expect it to profit from a specific product.
- Look for small companies that are already profitable and have proven that their concept can be replicated.
- Be suspicious of companies with growth rates of 50 to 100 percent a year.
- Avoid hot stocks in hot industries.
- Long shots almost never pay off.
- It’s better to miss the first move in a stock and wait to see if a company’s plans are working out.
- Separate all stock tips from the tipper, even if the tipper is very smart, very rich, and his or her last tip went up.
- Invest in simple companies that appear dull, mundane, out of favor, and haven’t caught the fancy of Wall Street.
- Moderately fast growers (20 to 25 percent) in nongrowth industries are ideal investments.
- Look for companies with niches.
- When purchasing depressed stocks in troubled companies, seek out the ones with the superior financial positions and avoid the ones with loads of bank debt.
- Look for companies that consistently buy back their own shares.
- Study the dividend record of a company over the years and also how its earnings have fared in past recessions.
- Look for companies with little or no institutional ownership.
- All else being equal, favor companies in which management has a significant personal investment over companies run by people that benefit only from their salaries.
- Be patient. Watched stock never boils.
- When in doubt, tune in later.
- Invest at least as much time and effort in choosing a new stock as you would in choosing a new refrigerator.
- Sometime in the next month, year, or three years, the market will decline sharply.
- Market declines are great opportunities to buy stocks in companies you like. Corrections — Wall Street’s definition of going down a lot — push outstanding companies to bargain prices.
- Trying to predict the direction of the market over one year, or even two years, is impossible.
- To come out ahead you don’t have to be right all the time, or even a majority of the time.
- The biggest winners are surprises to me, and takeovers are even more surprising. It takes years, not months, to produce big results.
- Different categories of stocks have different risks and rewards.
- Stock prices often move in opposite directions from the fundamentals but long term, the direction and sustainability of profits will prevail.
- Just because a company is doing poorly doesn’t mean it can’t do worse.
- Just because the price goes up doesn’t mean you’re right.
- Just because the price goes down doesn’t mean you’re wrong.
- Companies don’t grow for no reason, nor do fast growers stay that way forever.
- Don’t become so attached to a winner that complacency sets in and you stop monitoring the story.
- By careful pruning and rotation based on fundamentals, you can improve your results. When stocks are out of line with reality and better alternatives exist, sell them and switch into something else.
- If you don’t think you can beat the market, then buy a mutual fund and save yourself a lot of extra work and money.
- There is always something to worry about.
- Keep an open mind to new ideas.
One Up on Wall Street
- Lies, Damn Lies and Market Valuation – ValIdea
- Risk = Danger + Opportunity! – Musings on Markets
- Five Times Lucky – C. Ellis
- The Long Run is Lying to You – Or is It? – Klement on Investing
- David Tepper: The King of Bouncing Back – Neckar
- Andrew Lo: Finding the Perfect Portfolio — a ‘Never-Ending Journey’ – The Long View
- The Power Law – Net Interest
- How Einstein Arrived at His Theory of General Relativity – Lithub