Book review: Beating the Street by Peter Lynch
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The essence of what he talks about is don’t try to buy the hot stock, you won’t make any money on the hot company that everybody is following (and probably even lose money). Try to buy the good companies in the boring industries that no one follows. And you should always understand and be able to explain what a company does in 30 seconds to a 10 year old before even thinking about buying it. Don’t try to buy Google because uncle Larry said they are doing great things, if you work in a restaurant for example you probably know what chain of restaurants are winning, try to buy those. And even then you should not over pay for a company. You probably won’t pay 1 million SEK for a money printing machine that print 1 SEK everyday, but you probably will if it prints it every second. One simple way to valuate a company is find the growth it will have in the next 5 years and then only buy it when the p/e is lower than that.
The book is written in 1994 so the examples he talks about may be a little old, but the principals still stand so I strongly suggest it. By the end of the book there is this page with 25 GOLDEN RULES that we are gonna go through here.
- Investing is fun, exciting, and dangerous if you don’t do any work.
What he means is try to research and know what you buy.
- Your investor’s edge is not something you get from Wall Street experts. It’s something you already have. You can outperform the experts if you use your edge by investing in companies or industries you already understand.
Your edge is the job you do, the things you like, the things you know about. If you go to the mall everyday you probably can see what stores have the most customers.
- 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.
The herd need to diversify, need to follow the companies in S&P500, need to compete with (and copy) other fund managers. You don’t need to do that so it is easier for you to beat them in their own game.
- Behind every stock is a company. Find out what it’s doing.
Know what you are buying and follow them closely.
- 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 percent correlation between the success of the company and the success of its stock. This disparity is the key to making money; it pays to be patient, and to own successful companies.
As Benjamin Graham said, stock market is a voting machine in the short term and a weighing machine in the long term.
- You have to know what you own, and why you own it. “This baby is a cinch to go up!” doesn’t count.
I can’t stress this enough, know what you buy.
- Long shots almost always miss the mark.
There are lots of unknown in the future, so work with things you understand better and are easy to understand. Trying to invent the next internet is very hard, but whatever you do people always need to buy homes.
- 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.
- If you can’t find any companies that you think are attractive, put your money in the bank until you discover some.
Don’t over pay for what you buy.
- Never invest in a company without understanding its finances. The biggest losses in stocks come from companies with poor balance sheets. Always look at the balance sheet to see if a company is solvent before you risk your money on it.
Do your research, and one of the places to look is company’s quarterly reports.
- Avoid hot stocks in hot industries. Great companies in cold, nongrowth industries are consistent big winners.
Go with boring companies that everybody ignores.
- With small companies, you’re better off to wait until they turn a profit before you invest.
Don’t gamble your money away.
- If you’re thinking about investing in a troubled industry, buy the companies with staying power. Also, wait for the industry to show signs of revival. Buggy whips and radio tubes were troubled industries that never came back.
This is where your edge comes in handy. When you work in a car dealership you know when people start buying cars again.
- 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.
As Warren Buffett has said, you only need 3 to 5 good ideas in your lifetime to become very rich. Actually he says if you had a punch card with 20 places and you had to a make a hole whenever you buy a company you would definitely get rich, because you will think a lot before buying a company since it is limited.
- In every industry and every region of the country, the observant amateur can find great growth companies long before the professionals have discovered them.
Know your surroundings, go to the mall, see what store is attracting the most customers, then do your research on them.
- A stock-market decline is as routine as a January blizzard in Colorado. If you’re prepared, it can’t hurt you. A decline is a great opportunity to pick up the bargains left behind by investors who are fleeing the storm in panic.
Stay in the market, have extra cash ready to buy if the opportunity presents itself. It is really easy to do if you know what you are buying.
- Everyone has the brainpower to make money in stocks. Not everyone has the stomach. If you are susceptible to selling everything in a panic, you ought to avoid stocks and stock mutual funds altogether.
As Warren Buffett has said, stock market is a device to transfer wealth from the impatient to the patient.
- 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 deteriorate, not because the sky is falling.
Don’t listen to the doomsayers, there is always something wrong going on, and usually the people on the tv have their own agenda.
- 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’ve invested.
You can’t find the winner time, but maybe you can find the winner company. Time in the market is more useful than timing the market.
- If you study 10 companies, you’ll find 1 for which the story is better than expected. If you study 50, you’ll find 5. There are always pleasant surprises to be found in the stock market — companies whose achievements are being overlooked on Wall Street.
Don’t leave any stone unturned, that is your advantage against Wall Street since you are working with little sums of money.
- If you don’t study any companies, you have the same success buying stocks as you do in a poker game if you bet without looking at your cards.
Don’t gamble your money away, do your research.
- Time is on your side when you own shares of superior companies. You can afford to be patient — even if you missed Wal-Mart in the first five years, it was a great stock to own in the next five years. Time is against you when you own options.
Don’t try to get rich overnight, that’s a recipe for disaster.
- If you have the stomach for stocks, but neither the time nor the inclination to do the homework, invest in equity mutual funds. Here, it’s a good idea to diversify. You should own a few different kinds of funds, with managers who pursue different styles of investing: growth, value, small companies, large companies, etc. Investing in six of the same kind of fund is not diversification. The capital-gains tax penalizes investors who do too much switching from one mutual fund to another. If you’ve invested in one fund or several funds that have done well, don’t abandon them capriciously. Stick with them.
We have explained this here with Dollar cost averaging.
- Among the major stock markets of the world, the U.S. market ranks eighth in total return over the past decade. You can take advantage of the faster-growing economies by investing some portion of your assets in an overseas fund with a good record.
Small markets and companies can grow faster.
- In the long run, a portfolio of well-chosen stocks 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.
To some it up do your research😅 and revisit your research once in a while.
Hope you enjoyed this story and read the book too. Let me know if you had any questions around the book’s principles. See you on the next story.