One Up On Wall Street: How to Use What You Already Know… (2024)


28 reviews6 followers

September 2, 2018

- The average person is exposed to interesting local companies and products years before the professionals.
- Look for opportunities that haven't yet been discovered and certified by Wall Street - companies that are "off the radar scope." Remember the Street Lag.
- Predicting the economy or the short-term direction of the stock market is futile.
- Invest in companies, not in the stock market.
The market ought to be irrelevant. If I could convince you of this one thing, I'd feel this book had done its job. And if you don't believe me, believe Warren Buffett. "As far as I'm concerned," Buffet has written, "the stock market doesn't exist. It is there only as a reference to see if anybody is offering to do anything foolish."
- The long-term returns from stocks are both relatively predictable and also far superior to the long-term returns from bonds. In stocks you've got the company's growth on your side. In bonds, the best you can hope for is to get it back, plus interest.

1. Identify whether you're dealing with a slow grower, a stalwart, a fast grower, a turnaround, an asset play, or a cyclical. By putting your stocks into categories you'll have a better idea of what to expect from them.
2. The p/e ratio will give you a rough idea of whether the stock is undervalued or overvalued relative to its immediate prospects.
3. Next you need to develop the "story". Lynch gives himself a two-minute monologue that covers the reasons he's interested in it, what has to happen for the company to succeed, and the pitfalls that stand in its path.

1. Start-up phase: riskiest for most investors as success isn't yet established
2. The rapid expansion phase: SAFEST AND WHERE THE MOST MONEY IS MADE, because the company is growing simply by DUPLICATING ITS SUCCESSFUL FORMULA.
3. The mature phase: most problematic as the company runs into its limitations.

The Slow Growers:
1. Initially fast grower (fast-growing industry), but has turned mature. For example, Electric utilities, Railroads
2. Growth is slightly faster than Gross National Product
3. Chart is more or less flat
4. Generally pay generous and regular dividend because they can't expand the business anymore.
-Check if dividends have always been paid and wether they are routinely raised.
-The percentage of the earnings paid out as dividends. If it's a low percentage, then the company has a cushion in hard times. Otherwise, the dividend is riskier.

Selling signs:
-30-50 percent appreciation
-Fundamentals have deteriorated
-Lost market share for 2 consecutive years and is hiring another advertising agency
-No new products being developed, spending on research and development is curtailed, i.e. the company is resting on its laurels.
-Two recent acquisitions of unrelated businesses look like diworseifications, and the company is still looking for further "at the leading edge of technology" acquisitions.
-Overpaid for acquisitions, making its balance sheet deteriorate. No surplus funds to buy back shares, even if price falls sharply
-Even at lower price, the dividend yield is not high enough to attract much interest from investors.

The Stalwarts:
1. 10-12 percent annual growth in earnings.
2. Most are huge companies like Kellogg, Hershey's, Coca-Cocla, P&G which probably at best give 50% in a year or two, then probably you would want to begin to think about selling
3. Lynch generally buys for 30% to 50% gain, then sells and repeats the process with similar issues that haven't yet appreciated.
4. Lynch always keeps some stalwarts in portfolio as they offer good protection during hard times. People still eat cornflakes and people don't buy less dog food during recessions. Soon they will be reassessed and their value will be restored.
-These are big companies that aren't likely to go out of business. Key issue is price, p/e ratio will tell if you are paying too much.
-Check for diworseifications that may reduce earnings in the future
-Check the company's long-term growth rate, if it has kept up the same momentum in recent years.
-If you plan to hold the stock forever, see how the company has fared during previous recessions and market drops.

Selling signs:
-If stock price gets above the earnings line, i.e. if pe strays too far beyond normal range
-New products introduced in the last two years have had mixed results, others still in testing stage are a year away from the marketplace.
-Has p/e of 15, while other similar quality companies in the same industry has p/e's of 11-12
-No insider bought shares in the last year
-A major division that contributes 25 percent of earnings is vulnerable to an economic slump that's taking place (housing, oil drilling, etc)
-Company's growth rate has been slowing down even though it's been maintaining profits by cutting costs, future cost-cutting opportunities are limited.

The Fast Growers:
1. Small, aggressive new enterprises that grow 20% to 25% a year
2. Doesn't have to belong to fast-growing industry. In fact, Lynch rather it doesn't. All it needs is the room to expand within a slow-growing industry. E.g. Beer is a slow-growing industry, but Anheuser-Busch has been a fast grower by taking over market share, and enticing drinkers of rival brands to switch to theirs. The hotel business grows at only 2 percernt a year, but Marriott was able to grow 20 percent by capturing a larger segment of that market over the last decade.
-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 can be replicated
3. One risk is that small fast grower tend to be overzealous and underfinanced, so look for healthy balance sheet and substantial profitability.
4. The trick is to know when it will stop growing & how much to pay for the growth. (high p/e isn't always bad)
-Investigate the product is a major part of the company's business
-What the growth rate in earnings has been in recent years. Is it slowing down (5 new motels last year and 3 this year) or speeding up (3 last year and 5 this year)?
-The company has duplicated its successes in more than one city or town, to prove that expansion will work.
-The company still has room to grow.

Selling signs:
-The main thing to watch for is the end of the second phase or rapid growth.
-If 40 Wall Street analysts are giving their highest recommendation, 60% of the shares are held by institutions, 3 national magazines have fawned over the CEO, it's time considering selling.
-Unlike cyclicals, growth company's p/e usually gets bigger near the end of rapid growth.
-When you saw a Holiday Inn franchies every twenty miles, it had to be time to worry, where else could they expand?
-Same store sale are down 3 percent in the last quarter.
-New store results are disappointing
-2 top executives and several key employees leave to join a rival firm.
-The company's telling positive story to institutional investors in 12 cities in two weeks.
-Selling at p/e 30, while the most optimistic projections of earnings growth are 15-20 percent for the next two years.

The Cyclicals:
1. Sales and profits rise and fall in regular if not completely predictable fashion. For example, automobile, airlines, tire, steel, chemical, etc
2. Contrary to growth stocks which keep expanding, cyclicals expand and contract, then expand and contract again
3. Coming out of a recession into a vigorous economy, cyclicals outperform stalwarts, and vice versa
4. Do not confuse cyclicals with stalwarts just because major cyclicals are large and well-known companies.If stalwarts like Bristol-Myers can lose half of its value, then cyclicals like Ford can lose 80% in downturn
5. Timing is everything to detect early signs of business falling off or picking up. If you work in some profession that's connected to steel, alumninum, airlines, automobiles, etc., then you've got your edge.
6. You can easily lose more than 50 perent of your investment very quickly if you buy in the wrong part of the cycle, and it may be years before you'll see another upswing..
-Keep a close watch on inventories, and the supply-demand relationship. Watch for new entrants into the market, which is usually a dangerous development
-Anticipate a shrinking p/e multiple over time as business recovers and investors look ahead to the end of the cycle, when peak earnings are achieved.
-If you know your cyclical, you have an advantage in figuring out the cycles. E.g. everyone knows there are cycles in the auto industry. Cars get older and they have to be replaced. People can put off replacing cars for a year or two longer than expected, but sooner or later they are back in the dealerships.
-The worse the slump in the auto industry, the better the recovery.

Selling signs:
-Sometimes the knowledgeable vanguard begins to sell a year before there's a single sign of companiy's decline to avoid the rush. Hence the stock price starts to fall for apparently no earthly reason.
-Other than at the end of cycle, best time to sell is when something has actually started to go wrong.
1. Costs have started to rise
2. Existing plants are operating at full capacity, the company begins to spend money to add to capacity.
-One obvious sell signal is that inventories are building up, and the company can't get rid of them
-Falling commodity prices, usually prices of oil, steel, etc., will turn down several months before the troubles show up in the earnings.
-Future price of commodity is lower than the current, or spot price.
-Two key union contracts expire in the next 12 months, and labor leaders are asking for a full restoration of the wages and benefits they gave up in the last contracts.
-Final demand for the product is slowing down.
-Company has doubled its capital spending budget to build a fancy new plant, as opposed to modernizing the old plants at low cost.
-Company has tried to cut costs but still can't compete with foreign producers.
-p/e ratio gets smaller near the end

1. These aren't slow growers; these are no growers
2. A poorly managed cyclical is always a potential candidate for turnaround.
3. Turnaround stocks make up lost ground very quickly.
4. The best thing about investing in successful turnarounds is that of all the categories of stocks, their ups and downs are least related to the general market.
-Can the company survive a raid by its creditors? What is the debt structure?
-How is the company supposed to be turning around? Has it rid itself of unprofitable divisions? This can make a big difference in earnings.

When to sell turnaround
-Best time to sell turnaround is after it's turned around.
-If the turnaround has been successful, you have to reclassify the stock.
E.g. Chrysler was a turnaround play at $2 a share, but not at $48. By when the debt was paid and the rot was cleaned out, and Chrysler was back to being a solid, cyclical auto company. It has to be judged the same way General Motors, Ford are judged.
-Debt, which has declined for five straight quarters, just rose by $25 million in the latest quarterly report.
-Inventories are rising at twice the rate of sales growth.
-The p/e is inflated relative to earnings prospects.
-The company's strongest division sells 50 percent of its output ot one leading customer, and that leading customer is suffering from a slowdown in its own sales.

The Asset Plays
1. The asset may be as simple as a pile of cash. Sometimes it's real estate.
-What's the value of the assets? Are there any hidden assets?

1) It sounds dull – or even better, ridiculous
2) It does something dull
3) It does something disagreeable
4) It’s a spinoff
5) The institutions don’t own it and the analysts don’t follow it
-The last analyst showed up at the company three years ago
-Once-popular stocks which the professionals have abandoned.
6) Rumors abound: it’s involved with toxic waste and/or the mafia
7) There’s something depressing about it, e.g. mortality, funeral services
8) It’s in a no growth industry
-In no-growth industries like bottle caps, coupon-clipping services, oil-drum retrieval, or motel chains, especially one that's boring and upsets people, there's no problem with competition.
9) It’s got a niche
-Warren Buffett on newspapers and TV stations that dominated major markets, beginning with the Washington Post.
-Drug companies and chemical companies have niches - products that no one else is allowed to make, i.e. patent.
10) People have to keep buying it
-Drugs, soft drinks, razer blades, cigarettes. Why take chances on fickle purchases when there's so much steady business around?
11) It’s a user of technology
-Instead of investing in computer companies that struggle to survive in an endless price war, why not invest in a company that benefits from the price war - such as Automatic Data Processing? As computers get cheaper, Automatic Data can do its job cheaper and thus increase its own profits.
12) Insiders are buyers
-When management owns stocks, then rewarding the shareholders becomes a first priority, whereas when management simply collects a paycheck, then increasing salaries becomes a first priority.
-It's more significant when employees at the lower echelons add to their positions. If you see someone with a $45,000 annual salary buying $10,000 worth of stock, you can be sure it's a meaningul vote of confidence. That's why I'd rather find seven vice presidents bying 1,000 share apiece than the president buying 5,000.
-It's even better when several individuals are buying at once.
-In normal situation, insider selling usually means nothing and it's silly to react to it (if it's not majority of their shares). There are many reasons that officers might sell, e.g. pay children's tuition, buy a new house, satisfy a debt. But there's only one reason insiders buy: they think the stock price is undervalued and will eventually go up!
13) The company is buying back shares
-If a company buys back half its shares and its overall earnings stay the same, the earnings per share have just doubled.

1. Hottest stock in the hottest industry due to fierce competition.
2. Beware the NEXT SOMETHING,
-e.g. stock touted as the next IBM, the next McDonald's, or the next Disney, etc
3. Avoid Diworseifications
-Diversification only makes sense when there's synergy, for example since Marriott already operates hotels and restaurants, it make senses for them to acquire the Big Boy resturant chain, and also to acquire the subsidiary that provides meal service to prisons and colleges.


Percent of Sales
When I'm interested in a company because of a particular product, the first thing I want to know is what the product means to the company in question. What percent of sales does it represent? Pampers was more profitable than L'eggs, but it didn't mean as much to the huge P&G.P/E Ratio
Avoid stocks with excessively high p/e's because they must have incredible earnings growth to justify. Buying all low PE companies doesn't make sense because different types of stocks command different kinds of p/e.
The p/e ratio of any company that's fairly priced will equal its growth.
Divide long-term growth rate by p/e ratio. Less than a 1 is poor, and 1.5 is okay, look for a 2 or better.The Cash Position
Ford's "net cash" position in 1987 annual report:
= $5.672 billion in cash and cash items + $4.424 billion in marketable securities -$1.75 billion long-term debt
= $8.35 billion ($16 a share is the floor on the stock, unlikely to drop below that.)The Debt Factor
debt-to-equity ratioBook Value
The flaw is that the stated book value often bears little relationship to the actual worth of the company. If often understates or overstates reality by a large margin.

Unwritten rule here: The closer you get to a finished product, the less predictable the resales value. You know how much cotton is worth, but who can be sure about an orrage cotton shirt? You know what you can get for a bar of metal, but what is it worth as a floor lamp?

More Hidden Assets
-Assets which have appreciated in values but their values recorded on the books are the original paid prices.
-Brand names, patented drugs, cable franchises, TV and radio stations.
-Sometimes there are inefficiencies in the holdings relationships. e.g. A holds 25% of B, but B's value alone is more than A market cap, then you can buy A.Cash Flow
If a company is earning $100 million and has to spend $80 million to keep the machineries up-to-date, then it's bad, the first year it doesn't do so, it loses business to more efficient competitors. Modest earnings can be great investment because of free cash flow. E.g. a company with a huge depreciation allowance for old equipment that doesn't need to be replaced in the immediate future.Inventories
With a manufacturer or a retailer, an inventory buildup is usually a bad sign. When inventories grow faster than sales, it's a red flag.

On the bright side, if a company has been depressed and the inventories are beginning to be depleted, it's the first evidence that things have turned around.

Growth Rate
"Growth" isn't synonymous with "expansion", the is a misconception. E.g. Philip Morris in a cigarette consumption in U.S. is growing at about -2% a year. Philip Morris managed to increase earnings by lowering costs and especially by raising prices. That's the only growth rate that really counts: earnings.

If you find a business that can get away with raising prices year after year without losing customers (an addictive product such as cigarettes fills the bill), you've got a terrific investment.

All else being equal, a 20-percent grower selling at a p/e of 20 is a much better buy than a 10-percent grower selling at a p/e of 10.

Future Earnings
You can't predict future earnings, but you can find out how a company plans to increase its earnings. There are five basic ways to increase earnings:
1. reduce costs
2. raise prices
3. expand into new markets
4. sell more in the old markets
5. revitalize, close or dispose of a losing operation.

Lynch doesn't go into cash it would mean getting out of market, he wants to stay in the market forever, and to rotate stocks depending on the fundamental situations. E.g. sell the overpriced stalwart which has gone up 40 percent - which is what he expected to get out of it (nothing wonder has happened with the company to make him think there're pleasant surprises ahead) - and replace it with another stalwarts which is attractively priced.

If you can't convince yourself "When I'm down 25 percent, I'm a buyer" and banish forever the fatal thought "When I'm down 25 percent, I'm a seller," then you'll never make a decent profit in stocks.

Don't get faked out by macro events such as M1-money supply, oil prices, dollar index, etc. Lynch pays no attention to external economic conditions, except in the few obvious instances when he's sure that a specific business will be affected in a specific way.
1. When oil prices go down, it obviously has an effect on oil-service companies, but not on ethical drug companies
2. 1986-87, he sold his Jaguar, Honda, Subaru, and Volvo holdings because he was convinced that the failling dollar would hurt the earnings of foreign automakers that sell a high percentage of their cars in the U.S.

This entire review has been hidden because of spoilers.

Benjy Shashinka

12 reviews3 followers

December 30, 2020

This is the friendliest and most approachable book on investing I've read. It's a mix of general investing philosophy, personal anecdotes and specific strategies for choosing, buying and selling stocks. He writes about his frequent missteps with regret but also the humor and perspective of one who has learned from his mistakes. Many investing books are written by authors who present themselves as ingenious laser-visioned mavericks who have reduced investing to a perfect science. Lynch, on the other hand, makes it clear that he's a rather normal person for the most part, and fully capable of misjudgment. He never tries to sell you on an 'infallible method' (How to Make Money in Stocks), something too easy to be true (Rule #1), nor overly simplistic (Millionaire Teacher, which can be summed up as 'just buy index funds'). Instead, he has a common-sense perspective, and rattles off wonderful gems like these:

•'In my experience, six out of ten winners in a portfolio can produce a satisfying result.'
•'Frankly, there is no way to separate investing from gambling into those neat categories that are meant to reassure us.'
•'All the major advances and declines have been surprises to me.'
•'Remember, things are never clear until it's too late.'
•'The size of a company has a lot to do with what you can expect to get out of the stock.'
•'If you can follow only one bit of data, follow the earnings.'
•'The bearish argument always sounds more intelligent.'
•'That's not to say there's no such thing as an overvalued market, but there's no point worrying about it.'
•When you sell in desperation, you always sell cheap.'

Lynch doesn't talk about 'stocks' in general but organizes them into five categories – the stalwarts, fast growers, slow growers, turnarounds, and cyclicals. Each has their own characteristics and reasons to buy. He also talks about the three phases in a growth company's life: the start-up phase, rapid expansion phase and the mature phase. Depending on the type of company and the current stage of its growth cycle, you need to use a different investing technique, he argues. This way of thinking is a breath of fresh air compared to that offered by most investing books, which treat stocks as simply 'stocks.'

He also dives into the emotional and psychological aspect of investing, writing about the personal qualities needed (tolerance for pain, open-mindedness, detachment, persistence, the ability to ignore general panic), and the 'three emotional states' that every 'unwary investor' passes through: 'concern, complacency, and capitulation.' He discourages you from beating yourself up when you miss an opportunity, like a stock on your watchlist that you chose not to buy, only to afterwards watch it do well: 'Regarding somebody else's gains as your own personal losses is not a productive attitude for investing in the stock market.'

Finally, in addition to his broader ideas and suggestions, Lynch gives super concrete advice that can easily be put into action. When choosing stocks, he recommends focusing on basic elements like the importance of earnings and assets, free cash flow, pretax profit margin, the PE ratio being half vs twice the growth rate of the company, and the amount of debt the company is carrying (80 percent debt and 20 percent equity is bad). These are practical tips you can put into practice right away.

All in all this is the best investing book I've yet read, and perhaps the only one where, if you followed most of his advice, you'd almost certainly do well. Like most investing books, it suffers from two problems: it can get repetitive: sometimes after making a point, he'll offer more and more (interesting) examples to make the same point. Second, since it was written in 1999, some of the examples can feel jarringly dated. It would be fantastic if authors like Lynch could update their classic books every ten years or so, with new examples and insight. Other than that, however, this is an excellent investing guidebook, for beginners and more advanced investors alike.



189 reviews50 followers

September 4, 2022

Kitabı yazdığı seksenli yıllarda 9 milyar dolara çıkmış bir fonu yönetmiş Peter Lynch, döneminin en çok kazandıran fonlarından birinin yöneticisi olmuş. Tecrübelerini sokaktaki adama bu işin kumar olmad��ğını ve nasıl bir strateji izlenirse başarılı olabileceğini, özellikle kişinin kendi çalıştığı ya da her gün nasıl iş yapıldığını gözlemle fırsatı bulduğu sektörleri seçmesinin yaratacağı avantajlarla birlikte anlatıyor. Genelde çok daha bilinmeyen, moda, son teknolojik, eğlenceli işlere yatırım yapma eğilimi var. Kendimden biliyorum. :) Bunlar yorum kabiliyetini de kısıtlıyor. Zaten -diyelim- bilmiyorsun sektörü, nereye gidecek, ne olacak. Bunun yerine kendin yorumlayabileceğin mümkünse sıkıcı sektörlere bir yönlendirme...

Büyük ihtimalle daha az hata yapılacak olan sektörler çünkü bunlar. Kitapta bolca yaptığı hatalara değiniyor Lynch. Özeleştirilerinden dersler çıkarmamızı istediğini düşünüyorum. (Bir de bu işin doğasında bu hatalar var. Onun için çeşitlendirme, yumurtaları aynı kaba koymama elzem.) Bu dersleri özetler halinde tekrar sunduğu kısımları arada gözden geçirmekte fayda var. Şirketleri ayırdığı kategoriler bile çok şey söylüyor. Benim ağır tempolu - döngüsel şirketle ne işim var bunu niye aldım derken bulabiliyorsunuz kendinizi?

Bahsettiği konularda Buffett ve Fisher okurken de denk geldiğim birçok kısım oldu. Aklın yolu bir diyeceğim ama yazar özellikle zekanın bu iş için önemsiz olduğunu vurguluyor. Buffett’ın stratejisi de benzer şekilde yöntemlerinin ne kadar basit olduğunu gözünüze sokuyordu. Bu noktada bunlara hakim olduktan sonra sanırım işin psikolojik boyutu - irade önem kazanıyor. Yavaştan listemizdeki bu kitaplara doğru kaymakta fayda var. :)

Ders niteliğindeki alıntılarım,

"On kişi bir borsacıyla hisse senetleri hakkında konuşmaktan kaçınıp dişçilerle diş taşından söz ediyorsa bilin ki borsa yakında yükselecektir. (96)
...Dördüncü aşamada yine etrafımdaki kalabalık eksilmekte ama bu kez bana hangi hisse senetlerini almam gerektiğini söylüyorlardır. Dişçinin bile aklında birkaç tüyo vardır ve partiyi izleyen günlerde gazeteye bakınca bana önerdiği hisselerin hepsinin değer kazanmış olduğunu görürüm. Tanıdıklarım borsa hakkında, üstelik haklı tavsiyelerde bulunmaya başlayınca artık borsa en yüksek noktasına çıkmış, düşmeye hazırlanıyordur." (96)

"Deneyimli ve disiplinli bir müşterek bahisçi için atlar üzerine bahse girmek gayet güvenli bir uzun vadeli yatırım olabilir. Bu, o kişi için yatırım fonlarına para yatırmak ya da General Electric hisse senetleri almak gibi bir şeydir. Öte yandan her duyduğu tüyoya atılan, gömlek değiştirir gibi portföy değiştiren dikkatsiz ve dağınık bir borsa yatırımcısının” en güzel yeleli ata yada mor pantolonlu jokeye bütün maaşını yatıran bir bahisçiden farkı yoktur." (76)

"İşte en önemli soru bu! Borsada başarılı olmak için gerekli özelliklerin başında sabır, özgüven, sağduyu, dayanıklılık, açık fikirli olmak, bağımsızlık, sebat, alçak gönüllülük, esneklik, araştırmacı bir ruh, hataları kabul edebilme ve kolay kolay paniğe kapılmama becerisi gelir. Zekâ puanına gelince, bence en iyi yatırımcılar en alt yüzde on ile en üst yüzde üç arasındaki gruptan çıkar. Dâhiler teorik düşüncelere kendilerini kaptırdıkları için aslında son derece basit olan hisse senedi hareketlerini bir türlü anlayamazlar."

"Bilgisayarlarla ilgili bir işte çalışmıyorsanız brokerlarınızın size Wang hakkında verdiği tüyoyu bir kenara itin. Wang hakkında başkalarının bilmediği ama sizin bildiğiniz ne olabilir? Bu sorunun yanıtı 'hiçbir şey' ise hiçbir şansınız yok demektir. Ama eğer lastik imal ediyorsanız, dağıtımını ya da satışını yapıyorsanız o zaman Goodyear hisselerini alırken avantajlısınız demektir. İmalat ve satış işinde çalışan kişiler çeşit çeşit hisselerle karşılaşırlar." (113)

"Sıkıcı bir iş yapan bir şirket en az sıkıcı isimli bir şirket kadar iyidir. Hatta bu ikisi bir araya gelirse sonuç muhteşem olur. Hem adı hem de yaptığı iş sıkıcı olan bir şirket, borsa uzmanlarını gerçek değeri anlaşılana kadar kendisinden uzak tutacak, böylece hisselerinin fiyatı sürekli yükselecektir. Eğer kazancı yüksek, bilançosu sağlam bir şirketin yaptığı iş sıkıcıysa önünüzde hisseleri düşük fiyattan almak için bol bol zaman var demektir. Derken şirket değer kazanıp moda olunca elinizdeki hisseleri ancak borsadaki genel eğilime göre alım satım yapan aptal yatırımcılara satabilirsiniz." (157)

"Eminim şimdi unuttuğum buna benzer birçok aptallık daha yapmışımdır. Ama bir hissenin fiyatı yükseldikten sonra onu satmamak gerçekten zordur. Eğer etrafınızda hisselerinizi satmanızı öğütleyen kişiler varsa önce hisseleri ilk başta niçin almıştınız, onu düşünün, ona göre karar verin." (326)



162 reviews2 followers

March 27, 2020


Full disclosure:
I am myself a retired portfolio manager.
I happen to belong to the opposite school to Mr. Lynch in terms of portfolio concentration, I prefer a few stocks vs. 20 (and definitely vs. 1,400), and I have done very well with this strategy (which happens to be much closer to Warren Buffett's strategy)

First off, had this been written by anyone else, it would have deserved in my opinion one star, as I indicate, however considering this is from Mr. Lynch, it frankly deserves much less.

It is very difficult for me to describe how bad I found this book, but here is a try...

The few places where it shines
- there are a few helpful beginner lessons/explanations for DIY investors
- there are a few helpful warnings for beginner DIY investors

The major problems

Fundamentally dangerous 'lessons'

I fell off my chair when I read the below passage from Chapter 12:

Reading Balance Sheet in Ford 1987 Annual Report

‘(You may have noticed Ford’s short-term debt of $1.8bn. I ignore short-term debt in my calculations. The purists can fret all they want about this, but why complicate matters unnecessarily? I simply assume that the company’s other assets [inventories and so forth] are valuable enough to cover the short-term debt, and I leave it at that.)’

Ignoring short-term debt? Short-term debt must be the main reason for the bankruptcy of 50%+ of companies out there... and you want to ignore it? Really? 'Purists'? It gets worse... by Mr. Lynch's own admission, Ford (at the time and still does) has a financial services division, which any bank analyst will tell you makes the true 'debt' or 'cash' position of an industrial business hard to ascertain, but at the very least requires more adjustments than can be described in ONE paragraph like Mr. Lynch does... This is shameful really, as it can only lead to retail investors losing money... I can't believe that at the very least this has not been corrected in subsequent editions, especially when one considers what happened in the 2008-2009 debacle... Please go and explain to ex-shareholders of Northern Rock, a defunct UK bank, that short-term debt should be ignored, and see what reaction you get

It really is unbelievable at some point, notably on the research level. With 1,400 positions, Mr. Lynch recommends doing due diligence by trying the company's products and services? Really, how can one find the time? See if he OWNS 1,400 stocks, he needs to follow typically at least 3x as many (assuming that he does not just buy EVERYTHING that crosses his desk), so that means more than 4,000 companies!!!!

It just simply does not add up, it is physically impossible and even, EVEN if it was possible for him... there is no way anyone can do something even remotely close from home, with zero analyst support

The lessons presented in the book often are not applicable or basically dangerous for anyone with a standard sub-30 stock portfolio. For instance, turnaround situations are notoriously difficult to get right. Yes, when they work, they are lucrative, but how many of the ones Mr. Lynch picked failed? Well, he does not tell us really, but to get a corporate turnaround correctly more often than not, by reading a 300-page book (especially THIS 300-page book).... It's not going to happen... especially, when the amount of content relevant to turnarounds, is probably less than 5 pages... This is really irresponsible

I read this book hoping for an answer to the elephant in the room as far as Mr. Lynch's career is concerned... How and why own so many stocks? 100, ok, 200, ok that's a stretch... 500, mmm, there are 500 names in the S&P 500, are you not just owning the entire index? 1,400!!!!!!! Now you are insane... but ok.... I will listen, please explain...

But here is the thing... NO EXPLANATION... By his own admission, he has 500 names that represent about 1% of his portfolio... Yes, you read right, 1%!!! so that is 0.002% on average for each of those 500 more minor stocks.... WHY OH GOD WHY would you own 0.002% of anything? Why not just own 1% of cash, and save you the trouble of research, commissions, etc... that 1% needs to do A LOT to make a difference for you....

This is Insanity and really I expected to get some intelligent answer to this in the book, but sadly there is none.

The more minor problems

Really too many for my limited time, but let's just mention one: it's terribly written, terrible, the humor either has not aged well, or... full of pointless examples, where there is no meant but... for instance... "Company A was trading at [$X] when I bought it and then I sold it at [$Y], look how stupid or smart I am" it's really really really pointless, there is no business intelligence here

One Up On Wall Street: How to Use What You Already Know… (2024)


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