The Bottom Line: Lynch not only built a platform from which to speak, he writes a great book for the average reader to become an above-average investor.
mht's Full Review: Peter Lynch and John Rothchild - One Up on Wall St...
Among the gimmicky investment books out there, the words of the most successful mutual fund manager stand out. Peter Lynch turned a small mutual fund into a colossus through smart investing. This book introduces one to how Lynch has done it in a readable, engaging volume. I'm glad that a friend of mine from Northwestern University School of Law recommended this volume to me.
If Lynch & Buffett Can't Time It...
...neither can the rest of us. Some people seem to think they can look at all the multitudinous macroeconomic factors and all the numerous factors that impact the many macroeconomic factors, and confidently predict when to get in and out of the market. Lynch says he can't, and likewise, neither can the superstar investor Warren Buffett, the 2nd wealthiest man in America. Instead of trying to engage in such a futile exercise, Lynch recommends regular, periodic, long-term investment in companies that will outperform the market. Let me note though that Lynch doesn't say to ignore totally what is presently happening in the macroeconomic realm.
Picking Up the Hints
Lynch thinks that whatever one knows, there can be clues there as to what stocks may do well. For example, if one is an avid player of sports, frequents sporting good stores, and has an eye for what other customers would also want, one may be able to see an excellent sporting goods company when one sees it.
Contrary to what the "details" of this product states, Lynch isn't saying to pick simply companies that make what one likes. If one has rare tastes in something that is going out of favor with the buying public, don't think the company catering to one's rare tastes will grow and expand--unless that taste becomes more common to many people.
Numerical Analysis
Lynch doesn't dwell on the numbers but he does explain some of the most important numbers to understand. If you have no idea what a P/E ratio is, and want to learn, he explains. While this book won't turn one into an accomplished accountant, it does give one some idea of some of vital statistics to which one is well-advised to understand.
While every book is limited in what it can cover, and this isn't the only Lynch volume on investing, I did think that he intentionally tried to limit a lot of technical, numerical analysis to some of the most important numbers. I suppose he and his co-author were thus trying to reach a broader audience.
Narrative Analysis
Along with getting a handle of the numbers, Lynch also talks about finding and keeping track of the company's story. Numbers don't tell it all, so keeping track of relevant news about the company can help much.
Relevant news is an important qualifier. Lots of supposed news doesn't tell one much. For example, there are thinly disguised advertisements that are paid by a company to produce a "news release" on that company. For help along those lines, check out the SEC (Security Exchange Commission) required disclosures on the bottom of such "news" stories.
Not Just Throwing Darts
Lynch has demonstrated by his superb record over a sustained period of time that study can really make a difference in how well one picks stocks. Yet he points out that so many people who invest in stocks pay more attention to their favorite sports teams, fashion trends, etc. than they do to the companies in which they invest. Stocks are not a random game of chance; otherwise, investors like Lynch couldn't pull off their results through research. In other words, stock investment isn't gambling: it's the wise allocation of capital into companies that will use it productively.
Better Than the Pros
Lynch notes that the full-time stock folks have a number of disadvantages. The disadvantages include the defensive measure of picking stocks that their investment constituency have heard of so that they won't take heat for picking obscure stocks. Investors tend to be able to defend picking IBM more than a small waste management company. Lynch has picked many obscure stocks that have done extremely well.
The fact that most people who do stocks for their full-time job have done worse than the S&P 500 means that generally, unless one has found an outstanding stock picker, one would be better off just getting an S&P 500 Index Fund (which simply invests one in all the S&P 500 companies) or taking on the challenge oneself.
Fallacies Exploded
Lynch dismantles erroneous thoughts like "If it has gone down this much, it can't go down any lower." or its reverse, "It's gone up so much, it can't go up any higher". Highly priced stocks can rise higher and low-priced stocks can fall further.
For example, a food company that lost some 60% looked like a bargain to me. It has since fallen further. While I do think it has decent long-term prospects, it obviously didn't "bottom out" when I thought it had, even though it had hit lows of historic proportions.
When it comes down to it, what a stock did in the past doesn't determine what it will do in the future. For the purpose of the investor, what it will do after one buys it...that's what ends up mattering for that person's portfolio.
Personal Application
I guess in an attempt to be modest, I wanted to refrain from speaking about how the book has played itself out for me. (not that there have been nothing but strong picks by any means) While it certainly hasn't been the only book I've used, I have tried to internalize and apply what Lynch writes.
For example, there was a company that I was analyzing that was emerging from bankruptcy. Though it has been the leader in its field, no analyst was covering it when I was contemplating buying it (not unlike many stocks that Lynch picked). I went through the numbers, got a feel for its "story", looked more indepth at its turnaround prospects (the turnaround, such as Chrysler, is a type of "play" that Lynch talks about), and concluded it was worth diving into. So far, I'm quite glad that I did.
The results overall so far have been encouraging enough that I recently formed an investment organization called Lux Ventures, LP. I find Lynch's ideas, concepts, and methods often shaping my thinking and approach to investing in stocks.
To Conclude
There are good reasons that this book has sold over a million copies as a New York Times Bestseller. Along with many others I'm sure, this book provided an excellent introduction to investing, a sound way to steward resources.
Incidentally, Lynch retired at the age of 45 to spend more time with family and devote himself to the more important things in life.
I would be remiss if I didn't mention that all of Lynch's sage words do one no good if they aren't diligently applied. If they are put into practice though, they can go a long way to improving one's investment prospects.
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