Half Up on Wall Street
Before it becomes misleading for any reader out there, I would like to enunciate the essence of the title. This article is a riveting compendium of the New York Times Best Selling Book “One up on Wall Street” by legendary investor Peter Lynch. The insights that can be procured from the original work are, by all means, more enriching and comprehensive than the staccato summary of a 304-page masterpiece, hence the quaint title.
I would recommend the original book to all finance and investing fanatics who are reading this. This piece is intended to cater to readers who need a breather on the original or possess modicum time and attention. The format and language of this article have been deliberately made simple. Every paragraph is a concise and meaningful summary of a chapter from the book and hence, can be deemed as a crucial takeaway bullet. Without further ado, let’s invest!
THE MAKING OF A STOCKPICKER
Contrary to the belief that some people are naturally good at stock investing, it is not an innate ability but rather a skill that can be acquired through research and experience. Many individuals may have a negative perception of the stock market, and Lynch was no different. Lynch’s perception changed after working as a caddy and overhearing conversations about the market. After saving some money, he bought stocks for the first time at $7 per share, but as America went to war and he had luckily invested in an airfreight company, the stock rates shot up, and he knew he had carved the trajectory of his career.
THE WALL STREET OXYMORONS
When an individual investor gets involved in buying stocks, they often find themselves in a paradoxical situation. Investing professionally — a term that is commonly used — can also be considered contradictory. This statement is not meant to discredit all finance professionals, but to affirm that those who think independently, such as Max Heine, have also been successful in making money. Even though the information people from both ends of the spectrum have access to is common, it is crucial to understand the challenges faced. There are many examples of people who have done exceptionally well in the stock market without any formal business education. The secret resides in the fact that they rely on logical thinking and do not restrict themselves by the rules set by other professionals.
IS THIS GAMBLING, OR WHAT?
There is often a disagreement between those who choose to invest in stocks and those who prefer bonds. Some people may view investing in stocks a risky gamble while bonds are seen as a safe and secure option. However, since 1927, statistics have shown that stocks have consistently outperformed bonds. Specifically, stocks have yielded a return of 9.8%, while bonds have yet to surpass the 5% mark. Despite various economic downturns, conflicts and crises, stocks have consistently delivered higher returns. This is due to the fact that when you invest in stocks, you become a part owner of the company and benefit as the company grows. Bonds do not offer this opportunity and the bond market is not completely risk-free as it is prone to defaulting and has become more unpredictable.
PASSING THE MIRROR TEST
Passing the mirror test requires one to honestly answer three simple questions. Before investing in stocks, an individual should first ask themselves whether they already own a house. Investing in real estate is generally considered to be safer than the stock market. Many people are able to purchase a house and often witness a good return on their investment. Additionally, it is rare for someone to lose all their life savings when investing in a home, but that is a possibility when investing in stocks. The second question to ask oneself is whether they can financially afford to invest in stocks at that point in time. If there are many other financial obligations, it may be wise to avoid the stock market. The third and most crucial question an investor should ask themselves is whether they possess the necessary qualities of patience, persistence, and detachment before investing in stocks.
IS THIS A GOOD MARKET? PLEASE DON’T ASK
If it were possible to make money in the stock market by accurately predicting future events, almost everyone would have made a profit. Sadly, that’s still far away from reality. Hence, most people who claim to be able to predict a bear or bull market end up losing money. The stock market and the overall economy are often interconnected, but it is not possible to predict inflation or deflation. Investors may try to prepare for potential disasters, but if they are not aware of what those disasters may be, it becomes a conundrum. Instead of attempting to predict or outperform the market, the average investor should focus on investing in profitable companies that are not overpriced.
STALKING THE TENBAGGER
An everyday person may have a better chance of getting a “tip” about stock prices increasing before a professional does. For example, if you run a tire shop and notice a high demand for Goodyear tires, you have a valuable tip/piece of information to get started right there. People often overlook the potential in what they already know and always search for something better, but this is not how the stock market works. Therefore, if you want to succeed in the stock market, it is wise to invest in something you are knowledgeable about instead of constantly searching for something better.
I’VE GOT IT, I’VE GOT IT — WHAT IS IT?
When a typical investor receives a tip, they may impulsively rush to buy the stock, but is this a wise decision? Investing in stocks without conducting any research is similar to playing a blind game in poker. It may seem smart to invest in large companies like Coca-Cola or GE to get the highest returns, but this strategy is not ideal for those looking to significantly increase the value of their stocks in a short amount of time. While large companies can be a safe investment, considering smaller fundamentally strong (can only be decided by implicit “tips” or research) companies may offer more potential for growth and higher returns.
THE PERFECT STOCK, WHAT A DEAL!
When searching for the right stocks to invest in, there are several factors to consider. Firstly, pay attention to the company’s name. Is it uninteresting or boring, like Pep Boys? Secondly, does the company engage in similar boring activities? The more boring the company, the better the investment opportunity. As ridiculous as It sounds, these companies tend to see growth before anyone notices. Thirdly, if the company produces something that is again boring, it can be an advantage. Keep in mind that there are no perfect companies in the stock market, but it is important to look for those with the potential for growth, instead of focusing on large companies that have no room for expansion.
STOCKS I’D AVOID
When looking to avoid certain stocks, it’s important to pay attention to the hottest picks of the time. For example, during a period of growth in the carpet industry, many investors put their money into carpet companies, but the industry quickly declined and many individuals lost insane amounts of money. The issue with popular stocks is that they often attract many competitors quickly, leading to their decline. Additionally, the value of these stocks drops even more rapidly, leaving little opportunity to sell before the value decreases.
EARNINGS, EARNINGS, EARNINGS
When considering purchasing a stock, the best way to determine if the price will rise is to evaluate the company’s earnings. Unlike a lottery ticket, buying stocks means becoming a partial owner of the company, so it’s important to consider the company’s financial performance. While there may be various theories, ultimately the value of a stock is determined by the company’s assets and earnings. When investing, it’s important to consider the potential earnings of the company, as a decrease in earnings can lead to a decrease in the stock’s value.
THE TWO-MINUTE DRILL
Regardless of the nature of the stock, it is important to have a clear motive for purchasing it, and to stay updated about the company’s developments. One way to do this is by conducting a “two-minute drill” to evaluate the potential for the stock to increase in value. This process is crucial to ensure that there is something dynamic happening with the company, such as the release of a new product, that will result in an increase in stock value and hence your and their earnings.
GETTING THE FACTS
To determine if a stock’s price will increase, it’s best to examine the company’s earnings. A stock is not like a lottery ticket, as buying stock makes you a partial owner of the company, so it’s important to consider the company’s earnings and assets. Well, that’s a very short gist od this chapter.
SOME FAMOUS NUMBERS
When selecting stocks, it’s important to pay attention to certain numbers. There are three primary figures, which can reveal as much about a company as the annual report itself. Peter Lynch suggests focusing on the sales percentage, and that should be attractive. For example, if the stock you’re considering is Lexan Plastic and it only generates 6.8% of GE’s revenue, it may not be a good investment for shareholders. Secondly, it’s important to look at the P/E ratio, which should be in proportion to the growth rate of the company, and lastly, it is crucial to analyze the company’s cash position to understand how much cash it holds.
RECHECKING THE STORY
As an investor, it is important to examine the story behind a company and to understand its growth phases. Companies go through three stages of development: establishment, expansion, and saturation. During the establishment phase, a company is becoming established and solidifying its position in the market. In the expansion phase, the company is growing and expanding its reach. However, in the saturation phase, the company has no more avenues to grow and may struggle. An example of this is the Sensormatic company, whose stock rose from $2 to $40 when they were selling detection systems, but when they ran out of stores to sell to, the stock prices dropped significantly. Investing in a company during the establishment phase can be risky, but the expansion phase is generally considered sound. Investing during the saturation phase, however, can be problematic.
THE FINAL CHECKLIST
This chapter is more like a summary of the summary of “One up on Wall Street”. These guidelines may vary depending on the type of stock, but he also provides general advice for all types of stocks. The first step an investor should take is to review the P/E ratio, which measures the company’s current share price against its earnings. It is important to compare this ratio to other companies in the same industry. Additionally, investors should pay attention to the percentage of institutional ownership, as well as the strength of a company’s balance sheet, which can indicate its long-term prospects. Lastly, Lynch emphasizes the importance of understanding a company’s cash position.
DESIGNING A PORTFOLIO
When evaluating the performance of your stock investments, it’s important to have realistic expectations. While it’s possible to see returns of 30% or more in some years, it’s also common to experience unexpected losses of 20% or more. One way to gauge your performance is to compare your returns to those of safe mutual funds that track the S&P 500 index. If you do not see any extra returns from the extra effort and risk of individual stock investing, it might be more beneficial to simply invest in mutual funds and receive average returns without the added stress.
THE BEST TIME TO BUY AND SELL
It’s impossible to know the ideal time to purchase stocks as there isn’t one, but there are some exceptions. During the months of October to December, many investors sell their stocks to demonstrate a tax loss, and although it may seem irrational to be happy about failures, this time period often reveals a significant decline that presents more chances to invest. If you don’t want to invest or don’t have enough money during this time, you can always wait for the occasional collapses, free-falls and hiccups that occur.
THE TWELVE SILLIEST (AND MOST DANGEROUS) THINGS PEOPLE SAY ABOUT STOCK PRICES
When it comes to investing in stocks, it’s important to be aware of the various rumors that circulate in the market. Some of these rumors may be ridiculous, and even professionals can fall victim to them. For example, some may say that a stock that has already fallen too low can’t go any lower, which is not only untrue but can be dangerous if you hold on to bad stocks. Similarly, others may say that a stock that is already high can’t go any higher, which is also a myth. Keep in mind that there is no limit to how high a stock can go as long as the company has the potential for further growth.
OPTIONS, FUTURES, AND SHORTS
There are too many investment gimmicks making the rounds, and since stocks are already so difficult to predict in the first place, there’s no necessity for additional side bets that only serve as distractions. This doesn’t mean that futures are completely useless because they help farmers make profits as well, but since the stock market is not a commodity that has a relationship between the consumer and the producer, it’s not possible to compare it with futures, options, and shorts.
50,000 FRENCHMEN CAN BE WRONG
The market can sometimes have a mind of its own. For instance, when people expected the stocks to decline drastically after President Kennedy was shot, it only dipped by 3% and astonishingly went up and also recovered within just three days. This incident–along with various other instances–is proof that the market can go in the opposite direction no matter what the fundamentals say (but eventually the fundamentals do come into force and reflect on the stock price).
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Cheers!
