More than one million copies have been sold of One Up on the Wall Street in which famous mutual-fund manager Peter Lynch explains the advantages that average investors have over professionals and how they can use these advantages to achieve financial success. This article reviews the book One up on Wall Street with video summary in English and Hindi
Table of Contents
Beating the Street and Learn to Earn
Peter Lynch managed the Magellan Fund at Fidelity in the USA from 1977 to 1990 which gave an average annual return of 29.2% which was more than double the S&P 500 in the same period. His investment success led the fund to grow from $18 million to $14 billion.
He has also written Beating the Street and Learn To Earn. We would recommend reading One up on Wall street than Beating the street. Learn to Earn is for teenagers. One Up on Wall Street explains the investment principles that Lynch used during his market-beating tenure as the manager of Fidelity’s Magellan Fund. Beating the Street talks about these principles by providing case studies of the stocks that Lynch recommended. It’s interesting to read about Lynch’s logic for buying or not buying certain stocks. For example in the 1992 EQK Green Acres, In a quarterly earnings report suggested that it might forgo additional dividend increases. It had increased its dividend every quarter during the prior three years. Lynch interpreted that as a sign of deeper problems at EQK and decided not to recommend the stock.
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Review of One up on Wall Street
“Know what you own, and know why you own it”
He says that one should invest in stocks only if they pass the mirror test (Chapter 4), where he says that most people(young people starting out, old people, etc.) should not invest, and even if people invest in stock market, it should only be that amount of money, without which they can do in the long run. He also says that one should invest for the long term (5-10 years or more). He is against leverage and desists from speculation. Also, he recommends 6-month check-ups and investing small amounts on a regular schedule etc.
The market has a mind of its own. For instance, when people expected the stocks to decline drastically after President Kennedy was shot, it only dipped by 3% and astonishingly went up and also recovered within just three days. Other instances also show that the market can go in any direction no matter what the fundamentals say
He advises investors to stick to their field of competency, something that is also advocated by legendary investor Warren Buffett. Lynch’s argument is that a doctor will always know more about medicines and hence will be in a better position to judge pharmaceutical companies than a civil engineer.
For two decades after the Crash, stocks were regarded as gambling by a majority of the population, and this impression wasn’t fully revised until the late 1960s when stocks once again were embraced as investments, but in an overvalued market that made most stocks very risky. Historically, stocks are embraced as investments or dismissed as gambles in routine and circular fashion, and usually at the wrong times. Stocks are most likely to be accepted as prudent at the moment they’re not
The Individual Investor can Beat the Pros
The individual investor can beat the professionals. Investors feel that Wall Street have a ton of analysts from the fanciest Ivy League schools working 80 hours every week to find bargain stocks and so they are good. But the professionals have many disadvantages compared to the amateur:
Size of the fund: Capital is dependent on clients. A successful money manager will attract a lot of capital, and more capital means fewer opportunities. For instance, a $10 billion fund cannot invest in a company with a market cap of $10 million and expect the investment to have a meaningful impact on the fund’s overall performance. Investors tend to pull back their money during bear markets and put in more of it during bulls. This leaves the manager with the following dilemma: he has a lot of money to invest when everything is expensive, and too little of it when everything is cheap.
Professional Fund Managers Focus is on being safe: Fund managers are employees with jobs that aren’t guaranteed. There’s a saying on Wall Street that “you’ll never lose your job losing your clients money in an IBM.” This means professional fund managers are more focused on playing it safe to keep their job than they are willing to take risks to outperform. 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 professionals such as fund managers would invest in latter as they have to answer to trustees, investors and can’t lose more than the other professionals in the market(How many are pointing fingers at Prashant Jain right now). Success is one thing, but it’s more important not to look bad when you fail.
There’s a lot of explaining: Fund managers tend to spend about 25% of their time explaining to various stakeholders about why they made certain decisions.
The opportunities available to the average retail investors are much more than that for large investors. It is like picking from an ocean of fish compared to fishing in a small pond.
The very first rule by the book is for one to stop listening to professionals! That means ignoring the hot tips, the recommendations from brokerage firms and the can’t miss suggestions but to do your own research. He states that nobody, not even the Wall Street professionals from reputed colleges, are born great investors. Research is what eventually transforms a novice to a seasoned stock picker.
If You Like the Store, Chances are You’ll Love the Stock
Which products do you enjoy and use from publicly listed companies? When you’re looking for investment opportunities this way you must always remember to check how much the product or service that you enjoy affects the bottom line for the company.
We all have valuable information about publicly-listed companies through our everyday life, and this is information that Wall Street either doesn’t know of yet or had to spend hundreds of hours of market research to realize. Does a particular regional fast-food chain seem to be doing well in your area? Keep your eye on it, because odds are it will probably do well nationwide too. Use your consumption habits and your 9-5 to identify investment opportunities in companies where you have an edge over the rest of the investing community. But Never invest in any company before you’ve done the homework on the company’s earnings prospects, financial condition, competitive position, plans for expansion, and so forth.”
The 6 Categories of Stock Investments
You can categorize stock investments into the following 6 categories: slow growers, stalwarts, fast growers, cyclicals, turnarounds and asset plays. Companies don’t stay in the same category forever. Take McDonald’s for example. It’s gone from being a fast grower to a stalwart, to an asset play to slow grower.
Understand the nature of the companies you own and the specific reasons for holding the stock. (“It is really going up!” doesn’t count.) By putting your stocks into categories you’ll have a better idea of what to expect from them.
Slow growers (sluggards): These company(s) are typically large and operates in a mature industry. The growth of the company is expected to be in the low single digits of percentages. These are large and ageing companies that were once fast growers but have since fallen back for any number of reasons. In Lynch’s words, they “pooped out.” Their market prices don’t fluctuate much, thus aren’t very lucrative when it comes to capital gain. But they do offer high dividends, so they are suitable for low-risk investors who don’t expect sky-high capital gains.
Stalwarts or Medium growers are multibillion-dollar hulks are not exactly agile climbers, but they’re faster than slow growers. An earnings growth rate of 10-12% per year is standard for this category. They’re not exactly the stock market’s equivalent of cheetahs, but they are no snails either. He likes to keep some stalwarts in his portfolio because they offer defensive protection during market slumps: “You know they won’t go bankrupt, and soon enough they will be reassessed and their value will be restored.”
Fast growers: These favourites of Lynch are small, aggressive new enterprises that grow at 20 to 25% a year. This is the category to explore if you want to find 10- to 40-baggers, and perhaps even more. They’re often priced much higher, but if you can conclude that a company is likely to be able to keep up the growth for several years, it can be a great investment. According to Lynch, fast-growing companies may be part of fast-growing industries, but he preferred fast growers in a slow-growth industry. Among the winning stories were retailers that learned to succeed in one place and then duplicate their formula: Walmart, The Gap and Yum Brands’ Taco Bell. Always remember to verify your assumptions regarding the growth rate though. For instance – if Amazon can keep up its revenue growth rate of 30% per year for the next 10 years, its revenue will be equal to the GDP of France in 2029! Is this reasonable?
Cyclicals: Cyclical stocks are companies whose sales and profits rise and fall in a more or less predictable fashion. They go through episodes of expansion and contraction as their ability to generate profits are highly sensitive to certain external factors. Typically, they produce services and/or products that the consumers will postpone consumption of in times of financial uncertainty. Most are related to oil, petrochemical, coal, commodities, agricultural products and real estate. For example, oil companies should see their sales and profits surge when oil prices go up and vice versa.
Turnarounds: These are companies that have suffered severe losses or nearly went bankrupt due to unprofitable investments or lack of liquidity but are in the process of turning themselves around. If these companies repay their debts or successfully restructure their businesses and turn a profit, you’ll be benefiting hugely from that, too. But these are highly risky investments as they could go bankrupt anytime.
Asset Plays: These companies usually own high-value assets such as real estate or shares in other companies,patents, natural resources, subscribers, or even company losses (as these are deductible from future earnings). If you put money in an Asset Play company that invests in profitable businesses or in prime real estate, the value of the Asset Play company will also increase as well. That means you have a chance to enjoy huge capital gain when the market realizes the real value of the assets the company is holding.
“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.“
wonderful companies become risky investments when people overpay for them… In 1972 [McDonald’s] stock was bid up to a precarious 50 times earnings. With no way to ‘live up to these expectations,’ the price fell from $75 to $25.“
Traits of the Tenbagger
A ten-bagger, coined by Peter Lynch, is an investment that appreciates to 10 times its initial purchase price.
- The company name is dull or even better ridiculous. Such companies tend to be overlooked. The pros of investing will think twice before bragging about their recent investment in “Nyamisira land and avocado company” its sounds way too ridiculous.
- It does something dull.
- It does something disagreeable e.g. a company that makes tobacco snus.
- Institutions don’t own it ad it’s not followed around by analysts. Such companies haven’t been discovered by the big boys which give them an extra potential upside.
- There is something depressing about it e.g. The burial service company cooperation international.
- The company’s industry isn’t growing fast; staling industries aren’t prone to competition.
- Its got a niche (companies with moats).
- It has reoccurring revenues. The product/service is a subscription or something that is consumed so that the customers are forced to return for more.
- Insiders are buying. The insiders know more about the company than anyone else. if they are buying you can be pretty sure at the very least the company isn’t going bankrupt soon.
- The company is buying back shares. If a company is buying back shares shows that it has faith in itself.
Traits of The Reversed Ten bagger
And of course, there are also general don’ts, that you don’t want to see in any type of company that you are investing in.
- Sign 1: It’s in a hot industry
- Sign 2: It’s “the next” something Beware when someone expresses that It’s the next Amazon! The next Facebook! The next Google! Or similar.Usually, it’s not.
- Sign 3: The company is diworseifying Some call it diversification, but Lynch likes to refer to it as diworseification. If the company is acquiring other companies in unrelated industries, stay away!
- Sign 4: It’s dependent on a single customer Some companies are relying on one customer for a significant share of profits. Usually, this is a weak bargaining position to be in, and the company can potentially be squeezed by this only customer.
- Sign 5: It’s a whisper stock. These are the long shots, often thought of as being on the brink of doing something miraculous, like curing every type of cancer, completely removing any addiction or creating world peace.
The 12 Silliest Things
The 12 main misconceptions people have about stocks include:
- “It is already so down; it won’t go any lower”. You can never know the lowest point of stock like you can never know its pinnacle. People who think they can are foolish.
- “You can tell when a share hits rock-bottom”. Only because a stock has fallen to enormous levels, doesn’t imply it will not drop any further. It may always be.
- “If the stock is this high, then it won’t go any higher”. No artificial limit decides how high a stock may go.
- “It is just $3 per share; how much can I lose?”. The clear answer is $3 per share. Such a mindset is not right. A loss, regardless of its size, is a loss. Prevent them. You do not want to invest in losers.
- “They will come back ultimately”. Some firms never return.
- “The time before the dawn is always the darkest”. You require more solid grounds because things can get even darker.
- “When it gets back to $10, I’ll sell”. You should try to sell immediately. By setting artificial targets like this, the stock is unable ever to achieve it. You may end up with under-performers for a long time.
- “I don’t worry. Conservative stocks do not swing much”. It is possible for anything to swing these days. There are no guarantees. Don’t be content about your portfolio.
- “It’s been so long, but nothing has happened”. Be patient. The day after you are fed up with waiting and sell is going to be the day the prices soar.
- “Look how much I’ve lost: I should have bought it earlier!”. You’ll not lose money if you postpone buying. If you think like this, you’re likely to turn desperate and err.
- “I should not have missed it. I’ll try to get the next one.” If you miss it, let it go.
- “The stock’s high, so my predictions are right.” Don’t ever decide on swings. Only because a stock changes, doesn’t imply your predictions were right or wrong. Only time can tell this.
Learn to Earn
Peter Lynch talks about teenagers aren’t learning enough about the importance of American companies in improving lives and creating wealth. Why students are taught that Hamlet was a tragic hero and Napoleon was a great general, but they don’t know that Sam Walton founded Wal-Mart. In Learn To Earn, Lynch dedicates 90 pages to A Short History of Capitalism. He talks about Karl Marx, the Communist who believed capitalism was doomed, and the robber barons, the shrewd railroad magnates of the late 19th century who amassed huge fortunes by manipulating the markets. The history lesson allows investors to understand the mistakes many have made before such as the investing in things you don’t understand, herd mentality, getting into debt. Understanding these basic personal finance skills are absolutely necessary if you want to be a successful investor.
Video on One up on Wall Street Summary in English/Hindi
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If interested to buy the book click on the image below
Lynch reaffirms that investors should stick to what they know and avoid investing in ‘hot’ sectors. It’s an easy way to lose all of your money. Instead, he invites investors to look at stock like a little piece of the company. Where is the company going? What are their earnings prospects? These are all questions Lynch asks when he himself is analyzing a company. Once you complete all this research, if you can’t explain why you want to invest in a company in 2 minutes, don’t invest in it at all.
Have you read One up on the Wall Street? Did you like it or not? What stocks will you consider to be Turnarounds, Fast growers in India?
