Peter Lynch's

Beating the Street

4-19-98

Peter Lynch ran the Magellan Fund for Fidelity for thirteen years. During that time it was the top-ranked general equity fund. His forte was and is picking stocks.

 

Lynch's 20 golden rules:

 

1. You can outperform the experts if you use your edge by investing in

companies or industries you already understand.

2. You can beat the market by ignoring what the herd is doing.

3. There is no correlation between the success of a company and its stock.

The stock price will often lag. It pays to be patient.

4. You have to know what you own and why you own it. "This baby is a

cinch to go up!" doesn't get it.

5. Long shots almost always miss the mark.

6. Don't get involved with more than you can handle. Own 5 stocks and follow

eight to ten.

7. If you can't find any companies that you think are attractive, put you money

in the bank until you discover some.

8. Never invest in a company without understanding its finances. The biggest

losses in stocks come from companies with poor balance sheets.

9.Avoid hot stocks in hot industries. Great companies in cold, nongrowth

industries are consistent big winners.

10. With small companies, you're better off to wait until they turn a profit

before you invest.

11. You need to find only a few good stocks to make a lifetime of investing

worthwhile.

12. In every industry and every region of the country, the observant amateur

can find great growth companies long before the professionals have discovered them.

13. If you are prepared for a decline it can't hurt you. A decline is a great

opportunity to pick up bargains.

14. Everyone has the brainpower to make money in stocks. Not everyone

has the stomach for it.

15. Avoid weekend worrying and dire predictions of forecasters.

16. No one can predict the economy or the market. Concentrate on the on

what is happening to the companies in which you are invested.

17. If you study ten companies you will find one surprise that Wall

Street has overlooked.

18. Studying companies improves your odds of success, in the same way

that looking at your cards in a poker game does.

19. If you own shares in a great company time is on your side. You

can afford to be patient.

20. In the long run, a portfolio of well chosen stocks will outperform any

other kind of investment.


Here are some other good ideas I found in the book:

Page 45:

"Keeping faith and stockpicking are normally not discussed in the same paragraph, but success in the latter depends on the former."

Page 45-46:

"I'm convinced that its the cultural memory of the 1929 Crash more than any other single factor that continues to keep millions of investors away from stocks and attracts them to bonds and to money-market accounts. Sixty years later, the Crash is still scaring people out of stocks, including people in my generation who weren't even born in 1929."

Page 168-169:

Here Lynch makes a good case for a company's buying back its own shares being a positive sign. I have commented that when a fully mature business like GM does it, that may not be a positive sign. It may be saying that existing plant can handle future growth. Therefore the company is looking at flat growth prospects. But Lynch points out that when a small to medium size company does it, it shows that the shares are worth more that what the market is selling them for. Lynch goes on to say that some companies deliberately buy back their shares, as an ongoing policy to increase both earnings per share and shareholder value.


Lynch documents a number of searches for the elusive bargain stock. He ruthlessly roots out value. That is the secret of his success and what makes him the great stock picker that he is.

 

His most persistent strategy is to look for the one or two great value companies, the one or two companies with bright futures in those industries which everyone 'knows' are disasters. He looks for tigers amongst the dogs, roses in the rubbage. It must work. His stunning career is proof.

 

Often one investment opportunity led Lynch to another. His contact with the American Realtors Association led him to the realization that, contrary to popular belief at the time, the housing market was growing, not folding. The building of new homes led him to look at Peer One, because people in new homes need all kinds of stuff to go in those houses. That led him into an examination of the whole greenhouse/nursery industry where he found 3 likely canidates for buys.

 

Lynch got to buying Savings and Loan stocks just after the great collapse of that industry. He found several 'roses' there. He also made a bundle buying stock in mutually owned Savings and Loans that were being taken public. This led him to his greatest all-time investment: Fannie Mae.


This book is a must read. Peter Lynch's search for value is, in truth, the search for excellence. That he was able to find it again and again is a tribute to Mr. Lynch and to this incredible country our forefathers bequeathed to us. Freedom of action is the freedom to fail and to learn from that failure. It is the freedom not just to succeed, but to excell. Lynch did not start writing books until he was well away from managing funds. He is therefore, not trying to sell you anything other than his ideas. This makes his ideas unemcumbered and all the more valuable. Every investor should read this book.


 

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