One up on wall street by peter lynch is by far one of my favorite books on investing.
Whether you are a beginner, or whatever level of your investing is, I highly suggest you read this book.
The best part about his book is that, how can anyone pick the best stocks by what he already knows.
While there are lots of lessons in the book, I added here my top 7 key lessons from one up on wall street by peter lynch.
Take benefit from what you already know
The best way to find out stocks is what product you’re using or what product or service you’re seeing people are using the most.
The great investors (like Warren Buffet, Charlee Munger, etc..), don’t own what they don’t understand, neither do peter lynch.
You can find tomorrow’s big winners by paying attention to the new developments at the mall, at the workplace, at the restaurant, or anywhere.
Define your objectives before investing
In One up on wall street by peter lynch, he states that before buying any stocks you should first define your objectives to investing.
- Why do you want to invest in stocks?
- What do you expect to get out from them?
- How long have you wanted to invest money?
- Are you a short-term or long-term investor?
- how would you react to a sudden drop in the price of your stock? etc…
The 6 categories
In one up on wall street by Peter Lynch, he classifies stocks into 6 categories that cover all of the useful distinctions that any investor has to make.
The 6 categories are:
1. The Slow growers: These are big companies. A sure sign of a slow grower is that it pays regular dividends.
Companies pay dividends when a company doesn’t seem an opportunity to invest money in any project.
2. The stalwarts: Not so big and not small, these are medium size entities that tend to rise faster than slow growers.
Depending on when you buy, and at what price, decide your profit in stalwarts.
3. The fast growers: These are small, fast-growing companies that grow at the rate of 20 to 30 percent a year. Here’s where you find multibagger stocks.
And one up on wall street by peter lynch book is all about finding multibagger stocks.
Fast growers do not necessarily have to belong to a fast-growing industry.
4. The cyclical: These companies react based on economic conditions and the business cycle. When the economy is good, companies rise. When the economy is in recession, companies fall.
Timing is everything in the cyclical.
5. Turnarounds: Turnarounds are no growers. These companies are in their financial recovery stage.
6. The asset plays: The assets play companies are sitting with something valuable assets that you know but other participating are unaware of.
The valuable assets may be anything it can be cash, real estate, something intangible, etc…
They move from one another.
Big companies, small moves
The size of a company can give you an idea of what you can get out of stock.
Big companies don’t have big movies and it’s hard to get multibagger from them. Big companies are mathematically impossible to double or triple in a few years.
You can only get multibagger in smaller companies.
There’s nothing wrong with big companies.
But you just have to know these are big companies so you won’t have wrong hopes or unrealistic expectations.
13 Attributes of a perfect company
The best attribute of a company is that “any idiot can run this business.” In one up on wall street by peter lynch, he states 13 attributes of a perfect company.
The 13 most important attributes of a perfect company are as follows:
1. It has a dull or even ridiculous name: The perfect stock would be attached to a perfect company, the perfect company would be in a simple business, and the perfectly simple business has to be a boring name.
The more boring it is, the better.
2. It does something dull: Get even more excited when a company with a boring name also does something dull or ridiculous. Such as making a bottle cap.
3. It does something disagreeable: The boring name and doing something disgusting at the same time.
4. It is a spinoff: spinoff is a creation of a new company with an existing business or a part of companies into separate.
5. The big companies don’t own it, and the analyst doesn’t follow it: Find a company with very small or no institutional ownership, then you’ve found a potential winner.
If you find a company that no analyst ever visited or no analyst wants to know about, you’ve got a double winner.
6. Its involve with toxic waste: The waste management companies are the perfect example of toxic waste.
7. Something depressing about it: If there’s something stock market participants ignore besides toxic waste, it’s morality.
8. It is a no-growth industry: Many people prefer to invest in a high-growth industry. But not peter lynch.
He prefers to invest in no-growth industries like plastic, bottle cap. because there’s no problem with competition.
9. It has a niche: Prefer investing in companies that have a niche.
Here’s also no problem with competition. Chemical and drug companies have niches because its product no one else is allowed to make.
10. People have to keep buying it: Invest in companies where most people go again and again for buying the product of a company.
Example cigarettes companies.
11. It is using technology: Rather than investing in high-growth industry companies, why not invest in companies that benefit from them.
12. The insiders are buyers: The very reason insiders are buying is because they think the stock price is undervalued.
And if you buy the stock before insiders then you’ll make a potential profit.
13. The company is buying back shares: Buying back shares is the best way to reward its shareholders.
When a company buys half of its share, then your earnings per share also got double if earnings remain the same.
The 2-minute drill
This is one of my favorite lessons from the one up on wall street by peter lynch.
After you get the idea of what kind of stock is it, and whether the stock is undervalued or valued relative to its fundamentals, the next step is to research as much as you can about the company.
This is known as the story.
Before buying the stock, you have to be able to give a 2-minute monologue of a company. Such as:
- why you’re interested in it
- what are the pros of a company
- what are cons
- what company have to do for succussed, etc…
5 Stocks to avoid
Beware the next something: The companies that touted as next apple, the next TCS, the next Reliance. Avoid it.
Avoid diworsifications: The companies instead of paying dividends or buying back shares, they investing money in foolish acquisitions.
Beware the whisper stock: Avoid the stock despite you getting suggestions from the best investors you know.
Beware the middleman: Don’t invest in companies whose most of the sales come from one or few clients.
Beware the exciting name of stock: A flashy name in a bad company attracts investors, and gives them a false sense of urgency.
Other than these 5 stocks if you could avoid a single stock, it would be the hottest stock in the hottest industry, the one that gets the most favorable attention from the stock market.
These are 7 key lessons from one up on wall street by peter lynch that I thoroughly loved it.
But the book contains more lessons than this so make sure you check it out.
Tell me in the comment. What is the best lesson you learned from the book one up on wall street by peter lynch?