ONE UP ON WALL STREET

              ‘One Up on wall street’ is authored by Peter Lynch who is an American businessman and stock investor. He was the manager of Magellan Fund at Fidelity Investments from 1977 to 1990 which posted a CAGR of 29.2% making it the best performing mutual fund in the world.

                 Investment philosophy

                 Peter Lynch’s investment philosophy is simple: Invest in what you understand. He has been technophobic so he didn’t invest in the Internet stocks. Moreover, these internet stocks can’t be compared using P/E ratio because they don’t have earnings. According to him, people focus only on price, rather they should focus on earnings first and lastly on stock price. In Lynch’s lingo, P/E ratio works on the similar principal as payback period. For instance, if a person invests into a company quoting at a P/E of 40, it will take 40 years for him to recover his investment.

                First step in finding great company  

                Lynch advocates an amateur has an edge over professionals because an amateur can find the great companies when he visits restaurants, shopping malls, workplace etc. However this is just the first right step taken by an individual. Thereafter, he needs to do his homework with respect to analyzing a company quantitatively as well as qualitatively. For this, information can be easily available online.

                History

                In the world of investing, it is very important to look back into the past: history. History can be a guide to the investor regarding the frequency of corrections, bear markets and severe bear markets. However, a person who has experienced these events won’t have an edge in the market but to make him aware that he should invest for the long term.   

                Avoid imitating

                Another important advice from the book is an amateur should never buy a share just because renowned investor has bought it simply because that investor can be wrong, he might exit from that stock anytime or percentage holding of that stock in his portfolio cannot be known.

               Surplus money

               A person should only invest his surplus money into the markets. On the contrary, if he has a short term horizon and on top of that he needs that money maybe 2-3 years down the line, he will be a forced seller. He might have to exit his investment at terrible loss. Therefore, a person should always invest keeping a long term horizon of minimum 10 years.  

                Bottom Line

                When an amateur finds a great company, it’s only a lead to the story. This can’t be taken the basis for buying a stock. He should analyze what percentage of profit a product contributes to the company. This has been exemplified by Lynch through P&G and Pampers. Although, pampers is a popular product but it contributes only small percentage to the bottom line of P&G.

               Big companies, small moves      

               The real money making takes place in small-caps and mid- caps. Rationale behind it is law of large numbers. For instance, G.E. a company that has done everything right – made sensible acquisitions, cut costs, developed successful products still the stock inches along. G.E. is not responsible for that rather it has entered into a terrain of subdued growth rate. On the other hand, market rewards fast growers. Therefore, it is very essential to categorize stocks.

               Six categories

               An investor needs to place the stock into one of the six categories: slow growers, stalwarts, fast growers, cyclicals, assets play and turnarounds.

·         Slow growers    :  Companies falling in these categories grow slower than the country’s growth rate. Slow growers will pay generous and regular dividends to its shareholders.

·         Stalwarts   :  Such companies grow in the range of 10-12% with respect to their earnings. It is very essential to have stalwarts in one’s portfolio because that helps in diversification.

·        Fast growers : Companies that post a robust growth in the range of 20-25% fall in this category. These companies can truly become 10 to 40 baggers.

·         Cyclicals :  A cyclical is a company whose sales and profits rise and fall in line with the economy.

·        Turnarounds : Turnaround candidates have been battered, depressed. Occasional major success makes the turnaround business very exciting and very rewarding.

·       Asset Plays:  Asset can be in the form of cash or real estate. The real estate is recorded in the B/S at historical cost so if its market price is higher than its stock price, it’s a steal.   

Perfect stock

    

      Eventually, an ideal stock should possess the following characteristics:

           ·         Any idiot can run the business

·         Spinoffs normally have strong B/S .They possess characteristics of a perfect stock.

·         Invest into a company that uses technology which ultimately brings down the cost.

·         Person purchases the product on a regular basis such as cigarettes, soft-drinks, razors.