The book “One Up On Wall Street: How to Use What You Already Know to Make Money in the Market” by Peter Lynch - review

“One Up on Wall Street: How to Use What You Already Know to Make Money in the Market” by Peter Lynch. This book describes, in great detail, examples of how an ordinary investor can use what he already knows about a lot of companies whose products he uses regularly to invest and get a very good return on the stock market.

Peter Lynch was the manager of the Magellan investment fund at Fidelity Investments from 1977 to 1990, growing his portfolio from $ 18 million to $ 14 billion in 13 years.

The book addresses investors in individual stocks and provides plenty of examples of stock analysis from well-known companies such as Avon, Coca-Cola, Colgate-Palmolive, Exxon, Ford, IBM, Intel, McDonald's, Philip Morris, Procter and Gamble, Subaru, Toys “R” Us or Xerox.

Some ideas from this book:

• An average investor can become an expert in their field and choose
• winning companies as efficiently as Wall Street professionals with just a little research;
• A stock is not attractive until several institutional investors have recognized its value and several analysts on Wall Street have not put it on the list of buying recommendations;
• Never invest in a company before analyzing the company's revenue prospects, financial conditions, competitors, development plans, and so on;
• You do not have to make money from each selected action. From the author's experience, 6 out of 10 winners in the portfolio can produce a satisfactory result;
• Everyone considers themselves a long-term investor, including the audience traders who took a few free hours. Long-term investments have become so popular that it's easier to admit you're addicted to drugs than it is to be a short-term investor;
• People are advised to think long term, but every comment on stock market fluctuations makes them look at the market in the short term. It's a challenge not to act. If people checked their stock prices once every 6 months, just as they check their car oil, they would be much more relaxed;
• It is important not to buy stocks or equity funds with the money you will have to spend in the next 12 months, so as not to be forced to sell in a declining market to get cash. When you sell desperately, you always sell cheap. When you are a long-term investor, time is on your side;
• Rule no. 1 of the book is: do not listen to stock market professionals! 20 years of experience have convinced the author that any normal person, using the 3% of their brain capacity, can choose actions as well, if not better, than an average Wall Street expert;
• An American mutual fund may not hold more than 10% of a company's shares, nor may it invest more than 5% of the fund's assets in a single company. Some funds may not hold shares in a company worth less than $ 100 million. The individual investor has no such constraints, which can be an investment advantage. This explains why many mutual or pension funds fail to beat market averages. The larger a stock fund, the harder it is for it to beat the competition;

Before you start investing in the stock market, you need to ask yourself:

1. Do I own a home? A home is a good investment that almost anyone can make;
2. I need money? Invest only what you can afford to lose, without it having any effect on your daily life in the short term;
3. Do I have the personal qualities to succeed? These include patience, common sense, failure tolerance, open-mindedness, detachment, persistence, humility, flexibility, willingness to research one's own, willingness to admit mistakes, the ability to ignore general panic and make decisions without you have complete or perfect information;
4. An uninitiated investor goes through three states: worry, complacency, and capitulation. He is worried after the market has fallen or the economy seems to be collapsing, which prevents him from buying good companies at a reduced price. Then after buying at higher prices, he is pleased to see that his shares are rising. This is the time when you should check the fundamentals of the shares you bought, but don't. At the end, when his shares fall in hard times and prices fall below what he paid for the shares, he capitulates and sells wildly;
5. You have to discipline yourself to ignore your feelings and keep your actions as long as the fundamental analysis of that company satisfies you;
6. He doesn't believe in market predictions, he believes in great companies. The only reliable buy signal is a solid company. In this case, it is never too early or too late to buy her shares;
7. The best place to find companies that make 10x profit ("ten baggers") is close to home, shopping at the mall, and especially where you work (the advantage of the profession). This advantage is especially useful in the case of cyclical industries. So invest in things you already know. You can develop your stock detection system outside the financial information channels, from there you will receive the information late;
8. Even if an action caught your attention, its discovery is not a buy signal. You've just reached a point where a story needs to be developed. Investing without prior research is like playing poker without looking at cards;
9. The size of a company is important to expectations. Success tends to dilute large companies over smaller ones. A very large company can't accelerate its growth very much. Don't buy shares in a giant like Coca-Cola waiting to grow 4 times in 2 years. If you buy Coca-Cola at the right price, you can triple your money in six years, but not in two years. Meanwhile, a competitive product can launch a smaller company in a period of strong growth and is a more profitable investment.

The companies are divided into 6 categories: slow growers ("lazy"), stalwarts ("robust"), fast growers ("fast"), cyclical ("cyclical"), asset plays, and turnarounds (“returns”), is an approximate translation. "Growth" means that the company produces (grows) more in one year than in the previous year;

1) Slow Growers

• large and old companies, which grow slightly more than GDP (2-4% per year, on average). They may have been fast-growing companies in the past, but when their industry slows down, most of the companies in that industry lose their pace, and sooner or later any fast-growing industry becomes a slow-growing industry. Examples of slow-growing industries: energy utilities, metallurgy, chemistry, computers;
• tend to pay generous dividends, their main advantage;
• to buy if they have paid good dividends in the past. Find out the percentage of profit distributed in the form of dividends. If the percentage was lower, then the company probably has a cash pillow for harder times. If the percentage was higher, then the dividend may be riskier;
• to be sold if they have increased by 30-50% or if their foundations have deteriorated, even if the share price has fallen. Even at a lower price, the dividend yield may not be attractive enough to attract the interest of investors.

2) Stalwarts ("robust")

• for example Coca-Cola, Bristol-Meyers, Procter and Gamble, and Colgate-Palmolive. These companies are more dynamic than the "lazy", with revenues increasing by 10-12% annually;
• depending on when you buy and at what price, you can get a reasonable profit with "robust";
• it can take several years for you to double or triple your money, at most, but it offers good protection during a recession;
• Before you buy, check that you have not diversified your field of activity, check the rate of growth of long-term income, and whether it has kept pace in recent years. If you plan to keep the shares forever, analyze how the company's shares behaved during previous recessions and falls;
• they are usually kept for a profit of 30-50%, after which they are sold and the process is repeated with other similar companies whose shares are currently undervalued;
• sell if new products no longer have the expected success, if PER is already significantly higher than other companies of the same size in the industry if the growth rate has decreased although it has maintained its profits by lowering expenses, and other opportunities to reduce costs seem limited.

3) Fast Growers

• small, aggressive companies, which grow by 20-25% per year. If you choose them wisely, some of them will bring increases of 10x - 40x;
• a fast-growing company does not necessarily have to belong to a fast-growing industry but to make a substantial profit. All it takes is space for expansion in a slow-growing industry. Examples of companies that have performed well in the past: Anheuser-Busch (produces Budweiser beer), Marriott, Wal-Mart, Taco Bell, The Gap;
• the trick is to figure out when they will stop growing and how much to pay for that growth;
• verify that the stock has a PER close to the growth rate;
• these companies cannot maintain a double-digit increase in the long run, so sooner or later they run out and reach a one-digit increase as "lazy" or "robust";
• signs for sale: sales down 3% in the last quarter, various executives went to the competition, the stock is sold with a PER of 30, while the most optimistic sales growth projections would be around 15-20% in the next two years.

4) Cyclicals

• a cyclical is a company whose sales or profits increase or decrease regularly or predictably. Examples of pro-cyclists include the tire industry, metallurgy and chemistry, the automotive or aviation industry, and even the defense industry;
• In a growing economy, cyclical are booming and stock prices tend to rise faster than the price of "robust" because demand for cars, planes, steel, and chemicals is rising. In the economic downturn, cyclical suffer as well as stock prices. You can lose 50% of your investment quickly if you buy cyclical at the wrong time in the cycle and it can be years before you notice a return. Timing is very important in this case, and the advantage of the profession can be very valuable for this category of companies;
• Before buying, analyze the inventory, and the relationship between supply and demand, and observe newcomers to the market, which can become dangerous. Anticipates the reduction of PER over time as businesses recover from an economic crisis and then the peak of PER when investors expect the end of the economic cycle;
• sells when inventory stocks increase and the company cannot sell them, which means lower prices and lower profits when the competition has become too fierce, when final demand for products has slowed or when the company fails to cope with external competition, although -reduced costs.

5) Turnarounds

• are companies initially doomed to extinction, but manage to return before the end. They can go bankrupt quickly and their variations are not related to market variations;
• they may depend on government guarantees for loans (eg Chrysler or Lockheed), they may suffer major losses from unforeseen events, they may go bankrupt, but somehow recover (eg Toys "R" Us), they may succeed in restructuring unprofitable subsidiaries;
• sell if debt rises sharply, if inventory grows twice as fast as sales, or if PER is too high relative to future earnings prospects.

6) Asset plays

• any company that owns something valuable, but the market has neglected. The advantage of the professional matters a lot here. The asset can be a large amount of cash, real estate assets, patents for medical products, etc.
• analyzes the value of those assets, the size of the company's debts about those assets, and whether that company intends to make new loans that would make those assets less valuable.

Companies do not always remain in the same category, some go from "fast" to "lazy" or "robust", and others even become "cyclical". Some "cyclical" ones can have big problems, but they recover before they collapse.

Examples of choosing perfect actions:

• Interesting names can attract investors who have not checked the company's fundamentals and overestimate its listing. Instead, companies with boring names are undervalued (eg Automatic Data Processing);
• it is an uninteresting activity, which keeps analysts away until good news about it appears and shopping begins. If a company with good profits and a solid balance does an uninteresting activity, this gives you enough time to buy the stock cheaper. Then, when it becomes expensive and fashionable, you can sell the shares of those who come after you;
• is not in a fast-growing industry and has no problems with competition, has no relevant rivals and no one is interested in it;
• it has a niche market, being a virtual monopoly, which allows price control. Examples: pharmaceutical or chemical companies (selling pesticides or herbicides) that hold patents for products that no one else is allowed to do, or companies that own brands (eg, Coca-Cola, Robitussin, Tylenol, Marlboro) for which it takes a lot of money and many years to build a public reputation;
• uses technology and benefits from declining prices for technological products;
• produce goods that need to be bought regularly, such as medicines, juices, razor blades, or cigarettes;
• when insiders buy en masse, which means that the company will not go bankrupt in the next 6 months;
• when management owns shares, then rewarding shareholders becomes the priority, while when management receives only salaries, then raising salaries becomes their priority;
• when the company repurchases its shares, thus rewarding investors by increasing the price per share.

Examples of actions to avoid:

• shares from the most popular company in the hottest industry, the one with the most favorable publicity, which any investor has heard of and buys, not resisting social pressure;
• the actions in vogue grow fast, but as nothing keeps them standing but hope and rarefied air, they will fall just as fast;
• companies that are said to be the next IBM, the next McDonald’s, the next Intel, the next Disney, and so on.
• companies that diversify into areas outside their area of ​​competence, which leads to increased losses;
• companies that rely on too few customers and where the loss of a customer (including the state) could be catastrophic for the company.

Other interesting ideas from the book:

• There are 5 basic ways in which a company can increase its profits: reduce costs, increase prices, expand into new markets, sell more in existing markets, and revitalize or close certain lost operations.
• The PER (or P / E ratio) is often a useful measure for assessing whether a stock is overvalued, correctly valued, or undervalued relative to the company's potential to produce value. It is obtained by dividing the current price of the share by the financial gains of the last 12 months of the company;
• Usually PER is lower for "lazy" and higher for "fast", with "cyclic" oscillating in the middle;
• If the PER is lower than the growth rate, you may have found a good deal. But if the PER exceeds twice the growth rate, this is a negative criterion;
• Avoid companies with too high a PER, because they must have an incredible increase in earnings to justify their very high stock prices;
• Another useful ratio is (long-term growth rate + dividend yield) / PER. If it is less than 1, it is weak; at 1.5 it is OK; over 2 is excellent;
• Another criterion is the type of company debt. Debts to banks are bad because, if that company cannot repay the loan, then the creditors take their share of the assets and there is nothing left for the shareholders. Debts in the form of bonds on the capital market are better from the perspective of shareholders, as long as the company continues to pay interest;
• Checking profit after paying taxes can tell you a lot about the company's profitability compared to other companies in the same industry. The companies with the best profitability rate are by definition the operators with the lowest costs, which gives them a better chance of survival in case of deterioration of the market situation;
• Every few months you have to re-check the company's history, quarterly reports, current earnings, and their evolution;

Bad and dangerous ideas about actions:

• if it has already fallen so much, it cannot fall much further;
• you can tell when an action has reached a minimum;
• if it has already reached so high, how is it possible for it to grow even higher?
• the action is only 3 USD apiece, how much could I lose?
• the actions always recover;
• when it returns to $ 10, I'll sell it;
• I missed this opportunity, I'll catch the next one;
• the action went up, so I was right, or… the action went down, so I think I was wrong;

In some years you will gain 30%, in other years you will barely get 2% or even lose 20%. It's part of the game and you have to accept it;

The yearly average for shares is approximately 9-10%. If you can't get more than 12-15% on average from buying individual shares, then you better invest in an index fund that follows a global S & P500 index and goes with the market;

Allocate at least as much time and effort in choosing a new stock as you do in choosing a new refrigerator.

Read too:

The book "One-Page Financial Plan" by Carl Richards - review

"Rich Dad Poor Dad", by Robert T. Kiyosaki - book review

P.S. If you like to read while drinking coffee, you can offer me a coffee too.