OT Lynch Bag (long post)
A couple of weeks ago a certain hirsute pongid suggested a holiday reading list
Message 12257470
and since so many around here are lazy (e.g., Merlin and JDSU, what can I say?), I thought I'd put up some crib notes.
Peter Lynch's Beating the Street (Simon and Schuster, 1994), is indeed a great book for newbie investors. Lynch, as everyone knows, was the greatest mutual fund manager ever, heading Fidelity's Magellan Fund from 1977-1990 and generating a 2800% return for his shareholders during that span. He is certainly no gorilla gamer (in fact he is quite dismissive of technology investing in general), but he is a source of common sense investing advice that can serve as a foundation on which the specific tenets of Moore et al. can be erected.
The book takes you through his years at Magellan, explaining what he bought and why, and then through his selection of 21 stocks to recommend in Barron's at the beginning of 1992. (In the following two years, although some went down almost by half, the combination of his 21 picks generated a cumulative 80.43% return, compared to 19.19% for the S&P500 and 25.77% for the Nasdaq Composite.)
The reason the book is so good is that it shows you how one of the world's greatest stock-pickers actually thinks. With each company under consideration he explains what he liked, what he didn't like, what he expected to happen, and so forth, giving readers a wonderful model for how to perform their own DD. Although serious investors will want to pore over the various case studies (from many different sectors but not technology), much of the general advice he offers is contained in the following quotes:
"Whatever method you use to pick stocks or stock mutual funds, your ultimate success or failure will depend on your ability to ignore the worries of the world long enough to allow your investments to succeed. It isn't the head but the stomach that determines the fate of the stockpicker. The skittish investor, no matter how intelligent, is always susceptible to getting flushed out of the market by the brush beaters of doom." (19)
"In 39 out of the 40 stock-market corrections in modern history, I would have sold all my stocks and been sorry. Even from the Big One, stocks eventually came back. A decline in stocks is not a surprising event, it's a recurring event--as normal as frigid air in Minnesota....A successful stockpicker has the same relationship with a drop in the market as a Minnesotan has with freezing weather. You know it's coming, and you're ready to ride it out, and when your favorite stocks go down with the rest, you jump at the chance to buy more." (46)
"In retrospect, I probably spent more time on than I should have--an hour a day instead of ten minutes. It was fun to buy and sell, but I would have been better off using the extra 50 minutes to call two more companies. This is one of the keys to successful investing: focus on the companies, not the stocks." (102)
"The best stock to buy may be the one you already own." (129)
"There's no shame in losing money on a stock. Everybody does it. What is shameful is to hold on to a stock, or worse, to buy more of it, when the fundamentals are deteriorating....Although I had more stocks that lost money than I had 10-baggers, I didn't keep adding to the losers as they headed for Chapter 11....Never bet on a comeback while they're playing 'Taps.'" (138)
"Stockpicking is both an art and a science, but too much of either is a dangerous thing. A person infatuated with measurement, who has his head stuck in the sand of the balance sheets, is not likely to succeed. If you could tell the future from a balance sheet, then mathematicians and accountants would be the richest people in the world by now....On the other hand, stockpicking as art can be equally unrewarding....[People who think stockpicking is an art or a knack] tend to prove [this viewpoint's] validity by neglecting to do research and 'playing' the market, which results in more losses, which reinforce the idea that they're lacking in knack. One of their favorite excuses is that 'a stock is like a woman--you can never figure one out.' This is unfair to women (who wants to be compared to a share of Union Carbide?) and to stocks. My stockpicking method...involves elements of art and science plus legwork...." (140-1)
"The best way to handle a situation in which you love the company but not the current price is to make a small commitment and then increase it in the next sell-off." (158)
"If anybody ever tells you that a stock that's already gone up 10-fold or 50-fold cannot possibly go higher, show that person the Wal-Mart chart....Many lucky residents of Bentonville, Arkansas...invested at the earliest opportunity and made 20 times their money in the first decade. Was it time to sell and not be greedy and put the money into computers? Not if they believed in making a profit. A stock doesn't care who owns it, and questions of greed are best resolved in church or in the psychiatrist's office, not in the retirement account. The important issue to analyze was not whether Wal-Mart stock would punish the greed of its shareholders, but whether the company had saturated its market. The answer was simple: even in the 1970s, after all the gains in the stock and in the earnings, there were Wal-Mart stores in only 15 percent of the country. That left 85 percent in which the company could still grow. You could have bought Wal-Mart stock in 1980, a decade after it came public, after the 20-fold gain was already achieved, and after Sam Walton had become famous....If you held the stock from 1980 through 1990, you would have made a 30-fold gain, and in 1991 you would have made another 60 percent, giving you a 50-bagger in 11 years. The patient original shareholders have that to feel greedy about, on top of the original 20-fold gain. They also have no problem paying their psychiatrists." (158-9)
"In business, competition is never as healthy as total domination." (182)
"This is a useful year-end review for any stockpicker: go over your portfolio company by company and try to find a reason that the next year will be better than the last. If you can't find such a reason, the next question is, why do I own this stock?" (226)
"A company does not tell you to buy it. There is always something to worry about. There are always respected investors who say that you're wrong. You have to know the story better than they do, and have faith in what you know. For a stock to do better than expected, the company has to be widely underestimated Otherwise, it would sell for a higher price to begin with. When the prevailing opinion is more negative than yours, you have to constantly check and recheck the facts, to reassure yourself that you're not being foolishly optimistic. The story keeps changing, for either better or worse, and you have to follow those changes and act accordingly." (263-4)
"Rejecting a stock because the price has doubled, tripled, or even quadrupled in the recent past can be a big mistake. Whether a million investors made or lost money on Chrysler last month has no bearing on what will happen next month. I try to treat each potential investment as if it had no history--the 'be here now' approach. Whatever occurred earlier is irrelevant." (303)
"Over the past three decades, the stock market has come to be dominated by a herd of professional investors. Contrary to popular belief, this makes it easier for the amateur investor. You can beat the market by ignoring the herd." (305)
"Often, there is no correlation between the success of a company's operations and the success of its stock over a few months or even a few years. In the long term, there is a 100% correlation between the success of the company and the success of the stock. This disparity is the key to making money; it pays to be patient, and to own successful companies." (305)
"Long shots almost always miss the mark." (305)
"Owning stocks is like having children--don't get involved with more than you can handle. The part-time stockpicker probably has time to follow 8-12 companies, and to buy and sell shares as conditions warrant. There don't have to be more than 5 companies in the portfolio at any one time." (305)
"If you invest $1,000 in a stock, all you can lose is $1,000, but you stand to gain $10,000 or even $50,000 over time if you're patient. The average person can concentrate on a few good companies, while the fund manager is forced to diversify. By owning too many stocks, you lose this advantage of concentration. It only takes a handful of big winners to make a lifetime of investing worthwhile." (305)
"There is always something to worry about. Avoid weekend thinking and ignore the latest dire predictions of the newscasters. Sell a stock because the company's fundamentals are deteriorating, not because the sky is falling." (305-6)
"Nobody can predict interest rates, the future direction of the economy, or the stock market. Dismiss all such forecasts and concentrate on what's actually happening to the companies in which you're invested." (306)
"Time is on your side when you own shares of superior companies....Time is against you when you own options." (306)
"In the long run, a portfolio of well-chosen stock and/or equity mutual funds will always outperform a portfolio of bonds or a money-market account. In the long run, a portfolio of poorly chosen stocks won't outperform the money left under the mattress." (306) |
