Avid investor that I am, I’ve been reading quite a bit about investing. Especially over the last year, I’ve been trying to read at least one or two investing books each month. I’ve finally gotten around to one my friends have been telling me would be just my type. Not only that, but it’s a book famous enough that I’ve seen hundreds of websites refer to it- One up on Wall Street, by Peter Lynch.
For those of you who don’t know who Peter Lynch is, he’s was the former manager of the Magellan Fund. It averaged a 29% return over 14 years, and did so without a single down year. Interestingly, Lynch crushed the market by investing in literally thousands of companies, many of which were picked due to his own (or his wife’s) personal experience with their products or services. He invested in things like L’eggs, Taco Bells, La Quinta Inns, and countless other “boring” businesses.
I have to say, I wasn’t disappointed at all. I can see why so many of my friends have been recommending it. Peter Lynch advocates exactly the kind of investing I believe in. There isn’t any technical analysis, there any convoluted models for determining the “resistance” of a stock to pass certain price thresh-holds. No, the whole book is about making long term investments based on the idea that one is buying a piece of a company as opposed to a lottery ticket. Lynch clearly beleives that despite short term price fluctuations due to hype or fear, the market does reward performance in the long run. Once, the great investor Benjamin Graham said
“In the short-term the market is a voting machine, in the long-term, a weighing one.”
Peter Lynch expressed the same sentiment as:
People may bet on the hourly wiggles in the market, but it’s the earnings that waggle the wiggles, long term.
Beyond being a long term investor, there are several other things Lynch talked about that resonated strongly with me. He noted that there are many ways in which individual investors have an advantage against Wall Street. First of all, since we aren’t investing billions, we have more companies in which to choose from. I can put 20% of my savings into a stock with a market cap of $100 million; most fund managers don’t have that option. Even if there weren’t usually restrictions on what percentage of a funds money can be put into any one stock, most funds are big enough that they’d wildly distort the price of whatever small-cap they tried to invest heavily in. Beyond this, most fund managers have to try to beat the market every quarter. We don’t. They have to worry about buying things that are defensible, when they do lose money. We don’t.
Besides talking about general investment ideas, Lynch also laid out the six general types of companies a person might want to invest in:
- Slow Growers with Dividends
- Fast Growers
- Asset Plays
He then went into dozens of examples of various investments he made during his career and explained why they were or weren’t successful. The story is pretty much the same, buy companies that offer a some combination of strong earnings and/or growth relative to their price and wait. Don’t try to time the market, don’t buy or sell based on movements in the price of a stock, and don’t pay attention to what the analysts are saying. The book had great, great advice, and it was a pretty good read, too. It also had one unexpected and likely unintended gem of Engrish.
Diworseification: making one’s business (or portfolio) weaker by diversifying into markets one doesn’t sufficiently understand.