I have been pushing myself to once again pick up the habit of reading in 2021. The last time I read seriously I was 15 (now 22). So far I have finished 11 books (not a lot but at least a good start) and One Up on Wall Street is one of them. Even though I have only read a few books about investing, this book by Peter Lynch is definitely the easiest to understand and no doubt my favourite. I will keep coming back to this article to keep myself on track when I feel uncertain about my investment. Hopefully, I will become a better and better investor.
Personal Qualities
The qualities required to be a successful investor are patience, self-reliance, common sense, a tolerance for pain, open-mindedness, detachment, persistence, humility, flexibility, a willingness to do independent research, an equal willingness to admit to mistakes, and the ability to ignore general panic. It is also crucial to be able to resist human nature and your gut feeling.
Reminder
Just because the price goes up doesn’t mean you’re right.
Just because the price goes down doesn’t mean you’re wrong.
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.
Unless you’re confident enough in the company to buy more shares in a dip or crash, sell immediately. When in doubt, tune in later.
You don’t have own every good company.
You don’t lose anything by not owning a successful stock, even if it’s a ten-bagger.
There is no next Home Depot, no next Amazon, no next Costco.
To come out ahead you don’t have to be right all the time, or even a majority of the time.
Buying a company with mediocre prospects just because the stock is cheap is a losing technique.
Selling an outstanding fast grower because its stock seems slightly overpriced is a losing technique.
Don’t become so attached to a winner that complacency sets in and you stop monitoring the story.
You won’t improve results by pulling out the flowers and watering the weeds.
Don’t try time things that are beyond your control, i.e. interest rate, stock prices in the short term, monetary policy, recession, etc.
Checklist
Consider the size of a company if you expect it to profit from a specific product.
It’s better to miss the first move in a stock and wait to see if a company’s plans are working out.
Look for small companies that are already profitable and have proven that their concept is duplicatable in different markets.
Moderately fast growers (20~25%) in nongrowth industries are ideal investments.
Invest in simple companies that appear dull, mundane, out of favour, and haven’t caught the fancy of Wall Street.
Companies that have no debt can’t go bankrupt.
Base your purchases on the company’s prospects, not on the president’s resume or speaking ability.
Avoid hot stocks in hot industries.
If the stock is grossly overpriced, even if everything else goes right, you won’t make any money.
Find a storyline to follow as a way of monitoring a company’s progress.
Look for companies with little or no institutional ownership.
All else being equal, favour companies in which management has a significant personal investment over companies run by people that benefit only from their salaries.
Beware the stocks with exiting names.
Buy a business that can be run by any idiot.
The Six Categories of Stocks
1. THE SLOW GROWERS — focus on dividend and payout ratio
Large and aging companies are the slower grower but slightly faster than the gross national product. Sooner or later every popular fast-growing industry becomes slow growing.
2. THE STALWARTS — focus on P/E ratio and factors to accelerate growth rate
These are multi-billion companies that are expected to grow faster than slow growers (10~12% annual growth). Companies in this category offer good protection during recessions and hard times. For example, people will continue to eat cornflakes during recession and thus Kellogg will grow steadily.
3. THE FAST GROWERS — focus on where and how it plans to continue to grow fast
These are small, aggressive new enterprises that grow at 20~25% a year. With a small portfolio, one or two of these can make a career. A fast growing company doesn’t necessarily have to be in the fast-growing industry. Risk in fast growers is overzealous and underfinanced young companies.
4. THE CYCLICALS — focus on business conditions, inventories and prices
In a cyclical industry, companies’ sales and profits are expanding and contracting regularly. The autos and the airlines, the tire companies, steel companies, and chemical companies are all cyclicals. When bought at the wrong part of the economic cycle, it may be years before you’ll see another upswing.
5. TURNAROUNDS — focus on the company’s plan
Turnaround candidates have been battered, depressed and go so far down in a down cycle that people think it would never come back again. The majority of turnarounds fail, but the occasional major success makes the turnaround business very exciting, and very rewarding overall.
6. THE ASSET PLAYS — focus on assets and how much they are worth
An asset play is any company that is sitting on something valuable that you have known about, but the crown has overlooked. You are looking for a business with assets whether it’s cash, investments, properties, machines, etc that is worth more than the price you will pay for the stock.