One Up On Wall Street

Source: thesimpledollar.com

Peter Lynch is a Wall Street legend. He drove Fidelity’s Magellan mutual fund to some incredible returns in the 1970s and 1980s, year after year. From 1977, when he took over the fund, to 1990, when he retired, that fund grew from $18 million in assets to $14 billion. In those thirteen years, a single share of the Magellan fund increased 900% in value - a 29.2% annual return - and outperformed the stock market by 13.4% annually. That’s an incredible run, without much question the best run of more than ten years ever by a mutual fund manager.

Looking Into One Up On Wall Street
The book opens with an impassioned argument from Lynch on behalf of seeking out “tenbaggers,” which refers to stocks that increase in value ten times from their initial investment - buy a stock at 10, when it goes to 100 you have a tenbagger. Lynch makes the astute point that if you buy six stocks, five of them go to zero, and one is a tenbagger, your rate of return is still 66% - an utter killing. Clearly, Lynch’s argument for individual stock investing is that you can occasionally hit a grand slam and make up big time for a few strikeouts.

Preparing to Invest
Most of this section focuses on one key point: ignore the analysts and “experts.” Instead of tuning into CNBC for the “hot” picks, do your own research and find the stocks that you understand and believe in. Also, don’t try to time the market or predict the economy. Very few people can do that well - if Ben Bernanke can’t do it all the time, how can you? The economy is incredibly complex - don’t get egotistical and believe that you know how it works.

Instead, focus on what you know (circle of competence). Look at companies and industries that you’re familiar with. Listen to what people you know are talking about and follow that to your investments. I know personally that I strongly encouraged one investor to buy Google at the IPO because I knew the search engine business pretty well. A friend of mine swore up and down that Starbucks was going to be huge circa 1992. Just listen to what people say, do your own investigating, and follow up on what you find.

Most important of all, Lynch offers three questions that you need to seriously answer before you start investing in individual stocks.

1. Do I own a house? If you don’t, buy a house first. It provides you a stable and permanent place to hang your hat. Some might argue with this advice, but the permanence and investment qualities of a home, the advice does make a lot of sense. That doesn’t mean fully owning a house, but just to be in one and have a stable non-adjustable mortgage that is building equity.

2. Do I need the money? Don’t invest with money that will leave you feeling sick if you lose it. Use extra money, money that won’t devastate you with each loss. You need to be able to stomach big losses with the money without breaking a sweat if you’re going to swing for the fences.

3. Do I have the personal qualities it takes to succeed? Lynch lists patience, self-reliance, common sense, a tolerance for pain, open-mindedness, detachment, persistence, humility, flexibility, a willingness to do independent research, an equal willingness to admit mistakes, and the ability to ignore general panic. Notice that among these traits, a high level of intelligence is not found - you don’t have to be a genius to succeed at investing.

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