Peter Lynch's Investing Insights (from One Up On Wall Street)

Recently I read book "One Up on Wall Street" by Peter Lynch. This book is a excellent read. a must read for investor community. I have collected some insights from book while going through pages so I can go through them whenever I need or want.

Peter Lynch insights (from One Up On Wall Street)


-          You don’t need  to make money on every stock you pick

-          Advance/declines numbers paints more realistic picture about market movements.

-          You don’t want to be forced to sell in losing market to raise cash. Time is on your side, when you are a long term investor.

-          An successful investor once said: “bearish arguments always sounds more intelligent”

-          Rule number one is “Stop listening to professionals”.

-          Finding promising company is only first step. The next step is doing research. It is research which helps you to sort out good company from bad companies.

-          Newton once said, “If I have seen firther… it is by standing upon the shoulders of Giants”

-          Logic is very important in stock picking as it helps you to identify peculiar illogic of Wall Street.

-          Will Rogers once said, “Don’t gamble. Take all your savings and buy some good stock and hold it till it goes up, then sell it. If it doesn’t go up, don’t buy it.”

-          You can find terrific opportunities in neighborhood or at the workplace, months or even years before news has reached to analyst and fund managers they advice.

-          Historically, investing in stocks is more undeniably more profitable than investing bonds.

-          Buy the right stocks at wrong price at wrong time and you would suffer great losses.

-          Stocks are most likely to be accepted as prudent at the moment they are not.

-          Once the unsettling fact of risk in money is accepted, we can begin to separate gambling from investing not by type of activity but by skills, dedication and enterprise of the participant.

-          To me, the investment is simply a gamble where you managed to tilt the odds in your favor.

-          There is a lot of information in open hands, if you know where to look for it.

-          By asking some basic questions about companies, you can learn which are likely to grow and prosper, which are unlikely to grow and prosper, and which are entirely mysterious.

-          Consistent winners raise their bet as their position strengthens, and they exit the game when the odds are against them,

-          Over the time, risks in stock markets can be reduced by proper play just as risk in stud poker is reduced.

-          Risks have more to with investors rather than investment.

-          You have to be able to make decision without complete or perfect information. Things are almost never clear on Wall Street and when they are it’s too late to take profit from it.

-          It’s crucial to be abele to resist your human nature and “gut” feelings.

-          It’s that by the time signal is received; the message has already been changed.

-          Things inside human mind make them terrible stock market timers. The unwary investor continuously passes in and out of three emotional states: concern, complacency, and capitulation. He is concerned after the stock market has dropped or economy has seemed to falter, which keeps him from buying good companies at bargain prices. Then when he buys at higher prices, he gets complacent as his stocks are going up. This is precisely the time he ought to be concern enough to check fundamentals, but he isn’t. Then when his stocks fall on hard times and prices fall below to his purchase price he capitulates and sells in a snit.  

-          The true contrarians investor waits for the things to cool down and buys stocks that nobody pays attention. Especially those that make Wall Street yawn.

-          The trick is not to trust your gut feelings but rather to discipline you to ignore them. Stand by your stocks until the fundamental story of the company hasn’t changed.

-          Forecasting does not work in stock market.

-          Remember, things are never clear until it is too late

-          Pick the right stocks, and stock market takes care of itself.

-          Take advantage of what you already know.

-          Look for opportunities that are not in radar of Wall Street.

-          Invest in companies, not in stock market.

-          Ignore short term fluctuations.

-          The person in edge is always in a position to outguess the person with no edge.

-          Six general categories:

o       Slow growers

o       Stalwarts

§         They offer pretty good protection during recessions and hard times. So always keep some stocks from this category.

o       Fast growers

§         Small, aggressive enterprise that grow at 20-25% a year.

§         This is land for 10-40 baggers

§         A fast growing company does not necessarily to be in fast growing industry.

§         When an underfinanced company headaches, it usually end up in bankruptcy.

§         As long as they keep it up, fast growers are big winner in stock market. Look for stocks having strong balance sheets and making substantial profits. The trick is to figure out when they will stop growing and how much to pay for the growth.


o       Cyclical

§         A cyclical is a company whose sales and profits rise and fall in regular if not completely predictable fashion.

§         In cyclical industry, business expands and contracts, then expands and contracts again.

§         Autos, airlines, tire companies, steel companies, chemical companies are all cyclical. Even defense companies fall in this category.

o       Asset plays

§         An asset play is any company that’s sitting on something valuable that you know about, but that Wall Street crowd overlooked.

§         The asset play is where local edge can be used to great advantage

§         The asset may be as simple as cash, or in  real estate, oil, metals, newspapers, TV stations, radio. etc

o       Turnarounds

§         They are depressed, battered, and often can go for bankruptcy.


§         The best thing to invest in successful turnaround is that their ups and downs are least related to general market.

§         The occasion major success makes the turnaround business very exciting and very rewarding as well.

§         In this category, you have to be patience, keep with news and read with dispassion.

§         The only possible aspect is that some companies that diworseify themselves into sorry shape are future candidates for


-          Smaller fast company risk extinction, while larger fast grower risk a rapid devaluation, when they begin to falter.

-          Once a fast grower gets too big, it faces the same dilemma as Gulliver in Lilliput. There is simply no place for it to stretch out.

-          turnarounds,

-          Look for company which has “any idiot can run this” characteristic.

-          13 attributes of perfect company:

o       It sounds dull or ridicules

o       It does something dull

o       It does something disagreeable

o       It’s a spinoff

o       The institution don’t own it and analyst don’t follow it

o       The negative rumors abound.

o       There is something depressing about it

o       It’s a no growth industry

o       It’s got a niche

o       People have to keep buying it’s product or service.

o       It’s a user of technology

o       The insiders are buying

§         The only one reason that insiders buy: they think stock price is undervalued and will eventually go up.  

o       The company is buying back shares

§         Buy backs can not help but rewards investors


-          Avoid hottest stock in hottest industry.

-          Avoid diworseifications: the only good thing for investors about this: 1) buy company being acquired 2) finding turnarounds candidate from company which are victims of diworsification.

-          If stock prices sways away from earnings line then sooner or late it will come back to earnings line.

-          Avoid excessively high p/e ratio stocks. Excessively high P/E ratio is a handicap to stock.

-          Try to learn as much as possible about what the company is doing to bring added prosperity, the growth spurt, or whatever happy event is expected to occur.

-          Two-minute monologue

o       Sample for Asset play:

§         “The stock sells for $8, but the videocassette division alone is worth $4 a share and real estate is worth $7. That’s a bargain in itself.. And I’m getting rest of a company in minus $3. Insiders are buying, and company has steady earnings, and there is not debt also. ”

o       Sample for fast growers:

§         “La Quinta is a motel chain that started out in Texas. It was very profitable there. The company has successfully duplicated its successful formula in Arkansas and Louisiana. Last year it added 20% more motel units than year before. Earnings have increased every quarter. The company plans very rapid expansion. The debt is not excessive. Motels are a low growth industry, and very competitive, but La Quinta has found something of a niche. It has a long way to go before it has saturated the market. ”


o       Sample for stalwarts:

§         “Coca-cola is selling at low end of its p/e range. The stock has not gone anywhere in two years. The company has improved itself in several ways. It sold half of its interest in Columbia Pictures to the public. Diet coke has sped up growth rate dramatically. Last year Japanese drank 36% more coke than year before, and Spanish upped their consumption by 26%. That’s phenomenal progress. Foreign sells are excellent in general. Through a separate stock offering, Coca cola has bought many of its independent regional distributers. Now company has better control over distribution and domestic sales. Because of these factors, coca cola may do better than people think.”

o       Sample for turn arounds:

§         “General Mills has made great progress in curing its diworsification. It’s gone from eleven basic businesses to two. By selling Eddie, Kenner etc and getting top dollars for these excellent companies, General Mills has returned to doing what it does best: restaurants and packaged foods. The company has been buying back millions of it shares. The seafood subsidiary has grown from 7% to 25% in seafood market. They are coming with great health conscious products. Earnings are up sharply”


o       Sample for cyclical company:

§         “There has been a three year business slump in auto industry but this year things have turn around. I know that because car sales are up across board for the first time in recent memory. I notice that GM’s new models are selling well and in last eighteen months the company has closed five inefficient plants, cut twenty percent labor cost, and earnings are about to turn sharply higher.”

o       Sample for slow grower company:

§         “This company has increased earnings every year for last ten years, it offers and attractive yield, it’s never reduced or suspended dividend, and in fact it raised the dividend yield in good times and bad times, including last three recessions. Its telephone utility and the new cellular operations may add a substantial kicker to the growth.”


-          When looking at same sky, people in mature industry see clouds and people in immature industry see pie.

-          When cash is improving relative to its debt. It’s improving balance sheet. When cash exceeds debt its very favorable.

-          In general, a p/e ration that’s half the growth rate is very positive and double the growth rate is very negative.

-          A normal corporate balance sheet has 75% equity and 25% debt.

-          Among turnarounds and Trouble Company always pay more attention to debt. More than anything else its debt that determines which company will survive and which company will bankrupt in a crisis. Young companies with heavy debts are always at risk.

-          A company with a 10-20 years record of dividend paying is best bet for dividend companies.

-          Cyclical are not always reliable dividend payers.

-          In manufacturing or retail, check inventories. If they are piling up then it’s bad. If inventories grow faster than sales, it’s red flag.

-          Business that can get away by rising prices year over year without losing customers is a terrific investment.

-          Pretax profit margin is a good tool to compare companies in same industry.  While it is not useful for across industry.

-          While in hard times companies with high profit margins fights well, when business rebounds, companies with low pretax profit margin are highest beneficiary. This is why business in depressed enterprise on the edge of disaster becomes very big winners on rebound. It happens again and again in auto, steel, cement, chemical, paper, airline, electronics, and nonferrous metals.

-          You want relatively high profit margin stock which you want to hold in good times and bad times. And low profit margin stock in a successful turnaround situation.

-          Checklist

o       General checklist:

§         The p/e ration is high or low for this specific company and for similar companies in industry.

§         % of intuitional ownership, the lower the better.

§         If insider buying great. Company buy great. Both are positive sign.

§         Record of earning growth and whether earnings are consistent or sporadic. (in Asset play, this check does not matter much)

§         Whether the company has a strong balance sheet or a week balance sheet (debt-to-equity ratio) and how its rated for financial strength.

§         The cash position.

o       Slow growers:

§         You buy this for dividend purpose, so see if dividend always been paid. And whether they are routinely raised.

§         Find out what % earnings is being paid out dividend.

o       Stalwarts:

§         These are big company which is not likely to go out of business. You might not get this company at dirt cheap price but try buy at moderate p/e. market throws opportunity to buy such company from time to time.

§         Check for possible diworsification that may reduce earnings in future.

§         Check for company’s long term growth and whether it kept momentum or not.

§         If you want to hold for very long time than check how the company fared in last couple of recessions and hard times.

o       Cyclical

§         Keep a close watch on inventories, demand-supply relationships. Watch for new entrants in market, which is dangerous development.

§         Anticipate shrinking p/e as business recovers and investors look ahead to end of cycle, when peak earning are achieved.

§         If you know cyclical, you have advantage in identifying cycles.

o       Fast growers:

§         Investigate product which suppose to enrich company is major part of its business.

§         Check growth rate in recent times.

§         Company has duplicated its success in other city or town, to prove that expansion works.

§         Does Company still have room to grow?

§         P/E ration should be near to growth rate and never more.

§         Whether expansion is speeding up or slowing down.

§         Few institutions hold the stock and few analyst cover it.

o       Turnarounds

§         Look at debt structure

§         If already bankrupt what’s left for share holders?

§         How companies can turnaround?

§         Is business coming back?

§         Are cost being cut?

o       Asset play:

§         What’s the value of assets?

§         Is company taking new debt, making assets less valuable?

§         Is there a raider in wings to help shareholders reap the benefits for the assets?


-          Put your stocks in category, so you know what to expect from them.

-          Big companies have small moves and small companies have big moves

-          Consider sixe of company if you want to profit from a specific product.

-          Look for companies which are already profitable and have proven that their concept can be replicated.

-          Be suspicious of companies with growth rate 50 to 1oo %

-          Distrust diversification which can turn out as diworsificaion.

-          Invest in simple companies that appear dull, mundane, boring, out of favor and haven’t caught Wall Street’s attention.

-          When investing in depressed stocks in trouble companies look for financial strength of companies and avoid with loads of bank debt.

-          Company that have no dent, can not go bankrupt

-          Base your purchase on company‘s prospect not on management’s resume or speaking ability.

-          A lot of money can be made when Trouble Company turns around.

-          Being all equal, invest in company where management have significant stake.

-          When in doubt. Tune in later.


Portfolio construction insights

-          Invest in 5-15 company is advisable. It is moderate diversification.

-          The more stocks you own the more flexibility you have to rotate fund between them.

-          Make value integral part of portfolio.

-          You portfolio design changes with your age. Young people can have aggressive portfolio while for old people defensive portfolio is advisable.

-          Let the winners run, and get rid of losers from portfolio. Distinct winner and loser from fundamental perspective and not based on stock price movement.

-          Rotate in and out of stock based what happened to its price as it related to story.

-          Have a list of good companies, and buy during free falls, hiccups, collapse, drops etc

-          When to sell a slow growers:

o       When fundaments are deteriorated then sell even in loss. Generally 30-50% appreciation is good profit in this category.

o       No new products are being developed.

o       Company has lost its market share for two years.

o       New acquisition  looks like diworsification

o       Company paid so much for its acquisition that balance sheet deteriorate from no debt and million into cash to milling into debt and no cash.

o       Even at lower stock price, dividend yield is not high enough to attract investor’s attraction.

-          When to sell stalwarts

o       When stock price goes above earnings line. Replace it with other stalwarts in same category.


1 comment:

pragnesh said...

how indian industries sectors are classified according to peter lynch classification in 2011