“One up on wall street” is one of the greatest books on investment by renowned money manager Peter Lynch. While many people out there complicate the ways to tackle investing, Lynch emphasizes on common sense approach to investing. In this book, Lynch shares his investment philosophy and experience (He managed money at Fidelity from 1977 to 1990 – the Magellan fund).
Some of the important takeaways from this book are:
Patience and Observance is Key
When one (buys) sells in desperation, one always (buys expensive) sells cheap. It also means, when one (buys from) sells to desperate, one would always (buy cheap) sell expensive. Therefore, one needs to be patient for better opportunities.
The common-sense approach to investing is ‘being patient and observant’. Look at the developments around, search for products/services that attract and wow customers. Maybe there lies a potential opportunity for investment. Further, it takes years, not months, to produce big results. Therefore, think over the long term and let your investments compound over a period of time.
In finance, ignore the same advice
Financial experts are different from experts in Engineering and or Medical fields. When 10 engineers/doctors suggest the same solution to a problem, that is the way to go. However, when 10 financial experts suggest the same stock, stay away from that (probably, that is too hot!). It reminds me of the time when Strategy Guru, Garry Hamel, said, “Most of us are blind the same way. We look at the same thing and ignore the same thing”.
It also means being a ‘contrarian investor’. However, this implies being contrarian for a reason and not for the sake of being contrary to ‘Mr. Market’. He states “It takes remarkable patience to buy and hold on to a stock in a company that excites you, but which everybody else seems to ignore. You begin to think everybody else is right and you are wrong. But, where the fundamentals are promising, patience is often rewarded”.
Always write a thesis
When buying shares, always write the thesis on the company. It doesn’t need to be lengthy; one paragraph covering the rationale would suffice. Hold on to the stock as long as the thesis is in play, irrespective of the highs or lows of the market. He emphasizes that selling decisions should not be based on the price moves of the stocks. Instead, it should be based on the changes in the fundamentals of the company.
Remember: Predicting stock market movements is futile as no one can do it. Money is made with ‘time in the market’ not by ‘timing the market’.
Competence and mindset to define your investment approach
Segregate businesses into various categories – Slow growers (very large corporations), Stalwarts (Large corporations with very strong pedigree), Fast growers (small, aggressive, new entrants growing at 20-25% per annum), Recession Protection (Education, Medical etc.), Turnarounds, Cyclicals and Asset Plays. These categories would demand different competence and produce different kinds of returns. For example, small fast growers can compound faster than large corporations growing at a slow rate. Turnarounds can be quite risky compared to stalwarts.
Define your area of competence and category of operation, clearly. No one is required to operate in all categories. Also, by putting stocks into different baskets, you would better understand what to expect from your investments.
Lynch’s approach to investing was a “catch them young” approach (early-stage investing, fast growers). It may be noteworthy that risks with early-stage investing could be significantly higher than investing in slow growers and stalwarts. But, that is where one would spot so-called “multi-baggers”, a term coined by Peter.
Look for simple businesses
“Any idiot can run this business” is one characteristic of a perfect company. Look for simple businesses, serving necessity, and having a clearly defined competitive advantage/niche. It reminds me of the time when Warren Buffett said, “We like mundane businesses with an ultra-slow rate of change”.
Peter avoided the hottest stocks in hottest industries, stocks that are believed to be the next something (next Amazon, next Tesla). He liked the stocks, which were successful in a no-growth industry; where users of technology and company & the insiders were buyers of their own shares.
Focus on building ‘Behavioral competitive advantage’
An investor can have any of the three competitive advantages to win in investing – informational, analytical or behavioural. This information is commoditized and available to all at equal footing, there is no competitive advantage here (until you play foul on insider trading).
People rarely have some extraordinary insights or analytical advantage over and above others. However, the behavioural competitive advantage could be significant for any investor. He stresses the personal qualities of homework, common sense, self-reliance, discipline, patience, tolerance for pain, humility and willingness to admit mistakes to make money in the stock markets.
To keep up with dynamic market trends, businesses tend to diversify their offerings in new unrelated areas. However, this decision may not always be a good thing. For example, if Asian Paints were to expand their business into shoemaking, it doesn’t make logical business sense. In this case, they are diworseifying. It is vital to steer clear of such businesses and invest in shares of companies that are focused on creating new products within their established domain.
Lynch advises to suspend some of the following common thoughts from the mind:
- If it has gone down this much already, it can’t go much lower (It may go, probably, to 0)
- The stock has already hit bottom. (New bottoms may surprise you!)
- If it has gone up this much already, how can it possibly go higher (New heights may surprise you!)
- It is so low priced stock, what can I lose (probably, entire invested capital!)
- When it rebounds to Rs. 100 (say), I would sell. Absolutely frivolous. The question to ask is whether it is a good business at the current price to buy? If yes, hold. Otherwise, just sell and free up capital. That is the reason, ‘hold’ is a frivolous recommendation.
- Look at all the money I have lost: I did not buy it (It was someone else’s money. No point wasting time on this thought!)
- The stock has gone up, so I must be right. Or, The Stock has gone down, so I must be wrong (You are not right or wrong just because others are willing to take the prices up/down!)
To summarize, Mr Lynch provides a complete guide to investors – what to invest in, how to invest, how to analyze businesses, when to sell, qualities of investors and more. There are reflections of contrarians and value investing philosophies as well in his approach. In the end, this book is a guide and one needs to carve out his or her approach to investing based on lessons from the book.