ONE UP ON WALL STREET EBOOK
One Up On Wall Street: How To Use What You Already Know To Make Money In by Peter Lynch. Read online, or download in secure EPUB format. Ebook is here - One Up On Wall Street by Peter Lynch The time of reading the book is well spent. I've already made several disastrous. ONE UP on WALL STREET How to Use What You Already Know to Make Money in the Market. PETER LYNCH with John Rothchild. Simon Et Schuster.
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If anybody's responsible for the disappearing dividend, it's the U. To help their shareholders avoid this double taxation, companies have abandoned the dividend in favor of the downloadback strategy, which boosts the stock price. This strategy subjects shareholders to increased capital gains taxes if they sell their shares, but long-term capital gains are taxed at half the rate of ordinary income taxes.
Speaking of long-term gains, in eleven years' worth of luncheon and dinner speeches, I've asked for a show of hands: Long-term investing has gotten so popular, it's easier to admit you're a crack addict than to admit you're a short-term investor.
Stock market news has gone from hard to find in the s and early s , then easy to find in the late s , then hard to get away from. The financial weather is followed as closely as the real weather: People are advised to think long-term, but the constant comment on every gyration puts people on edge and keeps them focused on the short term. It's a challenge not to act on it. If there were a way to avoid the obsession with the latest ups and downs, and check stock prices every six months or so, the way you'd check the oil in a car, investors might be more relaxed.
Nobody believes in long-term investing more passionately than I do, but as with the Golden Rule, it's easier to preach than to practice. Nevertheless, this generation of investors has kept the faith and stayed the course during all the corrections mentioned above. Judging by redemption calls from my old fund, Fidelity Magellan, the customers have been brilliantly complacent.
Only a small percentage cashed out in the Saddam Hussein bear market of Thanks to the day traders and some of the professional hedge fund managers, shares now change hands at an incredible clip.
In , three hundred million shares traded was a hectic session on the New York Stock Exchange; today, three hundred million is a sleepy interlude and eight hundred million is average. Have the day traders given Mr. Market the shakes? Does the brisk commerce in stock indexes have something to do with it? Whatever the cause I see day traders as a major factor , frequent trading has made the stock markets more volatile.
A decade ago stock prices moving up or down more than 1 percent in a single trading session was a rare occurrence. At present we get 1 percent moves several times a month. By the way, the odds against making a living in the day-trading business are about the same as the odds against making a living at racetracks, blackjack tables, or video poker.
In fact, I think of day trading as at-home casino care. The drawback to the home casino is the paperwork. Make twenty trades per day, and you could end up with 5, trades a year, all of which must be recorded, tabulated, and reported to the IRS. So day trading is a casino that supports a lot of accountants.
People who want to know how stocks fared on any given day ask, Where did the Dow close? I'm more interested in how many stocks went up versus how many went down. Never has this been truer than in the recent exclusive market, where a few stocks advance while the majority languish.
Investors who download "undervalued" small stocks or midsize stocks have been punished for their prudence. People are wondering: The same story was repeated in , where the elite group of winners skewed the averages and propped up the multitude of losers.
More than 1, stocks traded on the New York Stock Exchange lost money in This dichotomy is unprecedented. One industry that's teeming with small stocks is biotechnology. My high-tech aversion caused me to make fun of the typical biotech enterprise: Today a long list of biotechs have revenue, and three dozen or so turn a profit, with another fifty ready to do the same.
One of the numerous biotech mutual funds might be worth a long-term commitment for part of your money. Market commentators fill airspace and magazine space with comparisons between today's market and some earlier market, such as "This looks a lot like ," or "This reminds me of ," or when they're. Then, in the bear market of , the Nifty Fifty fell percent! This unsettling decline disproved the theory that big companies were bearproof. If you owned the Nifty Fifty and held on to the lot for twenty-five years preferably you were stranded on a desert island with no radios, TV sets, or magazines that told you to abandon stocks forever , you're not unhappy with the results.
Though it took them a generation to do it, the Nifty Fifty made a full recovery and then some. Even if you bought them at sky-high prices in , your choice was vindicated. Once again, we've got the fifty largest companies selling for prices that skeptics describe as "too much to pay. History tells us that corrections declines of 10 percent or more occur every couple of years, and bear markets declines of 20 percent or more occur every six years.
Severe bear markets declines of 30 percent or more have materialized five times since the doozie. It's foolish to bet we've seen the last of the bears, which is why it's important not to download stocks or stock mutual funds with money you'll need to spend in the next twelve months to pay college bills, wedding bills, or whatever. You don't want to be forced to sell in a losing market to raise cash.
When you're a long-term investor, time is on your side. The long bull market continues to hit occasional potholes. When One up was written, stocks had just recovered from the crash. The worst fall in fifty years coincided with a Lynch golfing vacation in Ireland. It took nine or ten more trips we bought a house in Ireland to convince me that my setting foot on Irish sod wouldn't trigger another panic.
I didn't feel too comfortable visiting Israel, Indonesia, or India, either. Setting foot in countries that begin with "I" made me nervous. But I made two trips to Israel and two to India and one to Indonesia, and nothing happened. So far, hasn't been repeated, but the bears arrived in , the year I left my job as manager of the Fidelity Magellan Fund. While the decline scared a lot of people a 35 percent drop in two days can. In the economy was perking along, and our banks were solvent, so the fundamentals were positive.
In the country was falling into recession, our biggest banks were on the ropes, and we were preparing for war with Iraq. But soon enough the war was won and recession overcome, the banks recovered, and stocks took off on their biggest climb in modern history. More recently we've seen 10 percent declines in the major averages in the spring of , the summers of and , and the fall of What's my point in recounting all this? It would be wonderful if we could avoid the setbacks with timely exits, but nobody has figured out how to predict them.
Moreover, if you exit stocks and avoid a decline, how can you be certain you'll get back into stocks for the next rally? Here's a telling scenario: By staying in the market, you more than doubled your reward.
As a very successful investor once said: The obituary for this bull market has been written countless times going back to its start in Among the likely causes: Japan's sick economy, our trade deficit with China and the world, the bond market collapse of , the emerging market collapse of , global warming, ozone depletion, deflation, the Gulf war, consumer debt, and the latest, Y2K.
The day after New Year's, we discovered that Y2K was the most overrated scare since Godzilla's last movie. To some, stocks looked too expensive in , at Dow 2, To others, they looked extravagant in , above Dow 3, A chorus of naysayers surfaced in , above Dow 4, Someday we'll see another severe bear market, but even a brutal 40 percent sell-off would leave prices far above the point at which various pundits called for in-.
One Up On Wall Street Books
As I've noted on prior occasions: Lately we've worried our way through various catastrophic "unthinkables": World War III, biological Armageddon, rogue nukes, the melting of the polar ice caps, a meteor crashing into the earth, and so on.
Meanwhile we've witnessed several beneficial "unthinkables": The downsizing caused disruption and heartache to the recipients of the pink slips, but it also freed up millions of workers to move into exciting and productive jobs in fastgrowing small companies.
This astounding job creation doesn't get the attention it deserves. America has the lowest unemployment rate of the past half century, while Europe continues to suffer from widespread idleness. Big European companies also have downsized, but Europe lacks the small businesses to take up the slack. They have a higher savings rate than we do, their citizens are well educated, yet their unemployment rate is more than twice the U.
Here's another astounding development: Fewer people were employed in Europe at the end of than were employed at the end of the prior decade. The basic story remains simple and never-ending.
Stocks aren't lottery tickets. There's a company attached to every share. Companies do better or they do worse. If a company does worse than before, its stock will fall. If a company does better, its stock will rise.
If you own good companies that continue to increase their earnings, you'll do well. Corporate profits are up fifty-five-fold since World War II, and the stock market is up sixtyfold. Four wars, nine recessions, eight presidents, and one impeachment didn't change that. In the following table, you'll find the names of 20 companies that made the top list of winners in the U. The number in the left-hand column shows where each of these companies ranked in total return on the investor's dollar. Many high-tech enterprises the likes of Helix, Photronics, Siliconix, Theragenics that cracked the top are omitted here, because I wanted to showcase the opportunities that the average person could have noticed, re-.
Dell Computer was the biggest winner of all, and who hasn't heard of Dell? Anybody could have noticed Dell's strong sales and the growing popularity of its product.
People who bought shares early were rewarded with an amazing bagger: You didn't have to understand computers to see the promise in Dell, Microsoft, or Intel every new machine came with an "Intel Inside" sticker. You didn't have to be a genetic engineer to realize that Amgen had transformed itself from a research lab into a pharmaceutical manufacturer with two best-selling drugs.
His success was hard to miss. Home Depot? It continued to grow at a rapid clip, making the top list for the second decade in a row. Harley Davidson? All those lawyers, doctors, and dentists becoming weekend Easy Riders was great news for Harley. Home Depot all over again.
Who would have predicted two monster stocks from the same mundane business? Small businesses everywhere were curing a headache by letting Paychex handle their payroll. My wife, Carolyn, used Paychex in our family foundation work, and I missed the clue and missed the stock. Some of the best gains of the decade as has been the case in prior decades came from old-fashioned retailing.
The Gap, Best download, Staples, Dollar General—these were all megabaggers and well-managed companies that millions of shoppers experienced firsthand. That two small banks appear on this list shows once again that big winners can come from any industry—even a stodgy slow-growth industry like banking. My advice for the next decade: Keep on the lookout for tomorrow's big baggers. You're likely to find one.
Dell Computer Clear Channel Comm. Ned Davis Research. You can't bring up the stock market these days without analyzing the events of October , It was one of the most unusual weeks I've ever experienced. More than a year later, and looking back on it with some dispassion, I can begin to separate the sensational ballyhoo from the incidents of lasting importance. What's worth remembering I remember as follows: I rarely take vacations, so the fact that I was traveling at all was extraordinary in itself.
You get to lie on your back, wiggle your way across the metal grating that comes between you and a fatal drop, and then while gripping a guardrail for emotional support, you kiss the leg-. Kissing the Blarney stone is as big a thrill as they say— especially the getting out alive.
I must have been tired. I never left the hotel room for the entire afternoon. The next day, the 20th, we flew home. In hindsight they hardly seem worth mentioning. One year later you're supposed to remember the Sistine Chapel, not that you got a blister from running through the Vatican.
But in the spirit of full disclosure, I'll tell you what was bothering me: This made me wonder if we should be on vacation at all. Throughout the weekend, between the rounds of golf, I sought out several phones and talked to my office about which stocks to sell, and which stocks to download at bargain prices if the market fell further. Thanks to the time difference, I finished the round a few hours before the opening bell rang on Wall Street, or else I would probably have played worse.
As it was, a sense of gloom and doom carried over from Friday, and perhaps that explained my 1 putting worse than I. My fixation on this mishap caused me to ignore the scenery on the way to Dingle. It could have been Forty-second and Broadway, for all I knew. I wasn't napping all afternoon at the Sceilig Hotel, as the earlier paragraph may have implied.
Instead, I was on the phone with my home office, deciding which of the 1, stocks in my fund should be sold to raise cash for the unusual number of fund redemptions. There was enough cash for normal circumstances, but not enough for the circumstances of Monday the 19th.
At one point I couldn't decide if the world was coming to an end, if we were going into a depression, or if things weren't nearly as bad as that and only Wall Street was going out of business. My associates and I sold what we had to sell. First we disposed of some British stocks in the London market. On Monday morning, stock prices in London were generally higher than prices in the U.
Then we sold in New York, mostly in the early part of the session, when the Dow was down only points but well on its way to the nadir of That night at Doyle's, I couldn't have told you what sort of seafood meal I ate. It's impossible to distinguish cod from shrimp when your mutual fund has lost the equivalent of the GNP of a small, seagoing nation.
We came home on the 20th because all of the above made me desperate to get back to the office. This was a possibility for which I'd been preparing since the day we arrived. Frankly, I'd let the upsets get to me. Fortunately the vast majority of them paid little heed to the distractions cited above. If this is any example, less than three percent of the million account-holders in Fidelity Magellan switched out of.
When you sell in desperation, you always sell cheap. You could gradually have reduced your portfolio of stocks and come out ahead of the panic-sellers, because, starting in December, the market rose steadily. To all the dozens of lessons we're supposed to have learned from October, I can add three: Probably I could go on for several chapters with further highlights, but I'd rather not waste your time.
I prefer to write about something you might find more valuable: Whether it's a point day or a point day, in the end, superior companies will succeed and mediocre companies will fail, and investors in each will be rewarded accordingly.
But as soon as I remember what I ate at Doyle's, I'll let you know. This is where the author, a professional investor, promises the reader that for the next pages he'll share the secrets of his success. But rule number one, in my book, is: Stop listening to professionals! Twenty years in this business convinces me that any normal person using the customary three percent of the brain can pick stocks just as well, if not better, than the average Wall Street expert.
I know you don't expect the plastic surgeon to advise you to do your own facelift, nor the plumber to tell you to install your own hot-water tank, nor the hairdresser to recommend that you trim your own bangs, but this isn't surgery or plumbing or hairdressing. This is investing, where the smart money isn't so smart, and the dumb money isn't really as dumb as it thinks. Dumb money is only dumb when it listens to the smart money. In fact, the amateur investor has numerous built-in advantages that, if exploited, should result in his or her outperforming the experts, and also the market in general.
Moreover, when you pick your own stocks, you ought to outperform the experts. Otherwise, why bother? I'm not going to get carried away and advise you to sell all your mutual funds.
If that started to happen on any large scale, I'd be out of a job. Besides, there's nothing wrong with mutual funds, especially the. Honesty and not immodesty compels me to report that millions of amateur investors have been well-rewarded for investing in Fidelity Magellan, which is why I was invited to write this book in the first place. The mutual fund is a wonderful invention for people who have neither the time nor the inclination to test their wits against the stock market, as well as for people with small amounts of money to invest who seek diversification.
It's when you've decided to invest on your own that you ought to try going it alone. It means ignoring the stocks that you hear Peter Lynch, or some similar authority, is downloading. There are at least three good reasons to ignore what Peter Lynch is downloading: A long list of losers from my own portfolio constantly reminds me that the so-called smart money is exceedingly dumb about 40 percent of the time ; 2 even if he's right, you'll never know when he's changed his mind about a stock and sold; and 3 you've got better sources, and they're all around you.
What makes them better is that you can keep tabs on them, just as I keep tabs on mine. If you stay half-alert, you can pick the spectacular performers right from your place of business or out of the neighborhood shopping mall, and long before Wall Street discovers them.
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This is where you'll find the tenbaggers. I've seen it happen again and again from my perch at Fidelity. I suspect this highly technical term has been borrowed from baseball, which only goes up to a fourbagger, or home run. In my business a fourbagger is nice, but a tenbagger is the fiscal equivalent of two home runs and a double. If you've ever had a tenbagger in the stock market, you know how appealing it can be.
I developed a passion for making ten times my money early in my investing career. The first stock I ever bought, Flying Tiger Airlines,.
In a small portfolio even one of these remarkable performers can transform a lost cause into a profitable one. It's amazing how this works. Let's go back to , two years before the dawn of the great bull market.
That's Strategy A. You'd have a perfect right to look at this and say: Why don't I leave the investing to the pros. To make this spectacular showing, you only had to find one big winner out of eleven. The more right you are about any one stock, the more wrong you can be on all the others and still triumph as an investor. Actually there are numerous tenbaggers in companies you'll recognize: These are companies whose products you've admired and enjoyed, but who would have suspected that if you'd bought the Subaru stock along with the Subaru car, you'd be a millionaire today?
Yet it's true. This serendipitous calculation is based on several assumptions: Instead of owning a battered trade-in, you'd now have enough money to be able to afford a mansion and a couple of Jaguars in the garage. To conform with this price, all presplit levels must be divided by 8. Companies generally prefer not to have their share prices too high in absolute dollar terms, which is one reason why stock splits are declared.
But even if you missed the highs or the lows, you would have done better to have invested in any of the familiar companies mentioned above than in some of the esoteric enterprises that neither of us understands.
There's a famous story about a fireman from New England. Apparently back in the s he couldn't help noticing that a local Tambrands plant then the company was called Tampax was expanding at. Whether or not our fortunate investor asked any brokers or other experts for advice I'm not certain, but many would have told him his theory was flawed, and if he knew what was good for him, he'd stick with the blue chips the institutions were downloading, or with the hot electronics issues that were popular at the time.
Luckily the fireman kept his own counsel. You might have assumed it's the sophisticated and high-level gossip that experts hear around the Quotron machines that gives us our best investment ideas, but I get many of mine the way the fireman got his. I talk to hundreds of companies a year and spend hour after hour in heady powwows with CEOs, financial analysts, and my colleagues in the mutual-fund business, but I stumble onto the big winners in extracurricular situations, the same way you could: Taco Bell, I was impressed with the burrito on a trip to California; La Quinta Motor Inns, somebody at the rival Holiday Inn told me about it; Volvo, my family and friends drive this car; Apple Computer, my kids had one at home and then the systems manager bought several for the office; Service Corporation International, a Fidelity electronics analyst who had nothing to do with funeral homes, so this wasn't his field found on a trip to Texas; Dunkin' Donuts, I loved the coffee; and recently the revamped Pier 1 Imports, recommended by my wife.
In fact, Carolyn is one of my best sources. She's the one who discovered L'eggs. L'eggs is the perfect example of the power of common knowledge. It turned out to be one of the two most successful consumer products of the seventies. In the early part of that decade, before I took over Fidelity Magellan, I was working as a securities analyst at the firm.
But none of this information was as valuable as Carolyn's. I didn't find L'eggs in my research, she found it by going to the grocery store. Right there in a freestanding metal rack near the checkout counter was a new display of women's panty hose, packaged in colorful plas-. The company, Hanes, was test-marketing L'eggs at several sites around the country, including suburban Boston. When Hanes interviewed hundreds of women leaving the test supermarkets and asked them if they'd just bought panty hose, a high percentage answered yes.
Yet most of them couldn't recall the name of the brand. Hanes was ecstatic. If a product becomes a best-seller without brandname recognition, imagine how it will sell once the brand is publicized. Carolyn didn't need to be a textile analyst to realize that L'eggs was a superior product.
All she had to do was download a pair and try them on. These stockings had what they call a heavier denier, which made them less likely to develop a run than the normal stockings.
They also fit very well, but the main attraction was convenience. You could pick up L'eggs right next to the bubble gum and the razor blades, and without having to make a special trip to the department store. Hanes already sold its regular brand of stockings in the department stores and the specialty stores. However, the company had determined that women customarily visit one or the other every six weeks, on average, whereas they go to the grocery store twice a week, which gives them twelve chances to download L'eggs for every one chance to download the regular brand.
Selling stockings in the grocery store was an immensely popular idea. You could have figured that out by seeing the number of women with plastic eggs in their grocery carts at the checkout counter. You could just imagine how many L'eggs were going to be sold nationwide, after the word got out. How many women who bought panty hose, store clerks who saw the women downloading panty hose, and husbands who saw the women coming home with the panty hose knew about the success of L'eggs?
Two or three years after the product was introduced, you could have walked into any one of thousands of supermarkets and realized that this was a best-seller. Once Carolyn alerted me to Hanes, I did the customary research into the story. The story was even better than I'd thought, so with the same confidence as the fireman who bought Tambrands, I recommended the stock to Fidelity's portfolio managers.
Hanes turned out to be a sixbagger before it was taken over by Consolidated Foods, now Sara Lee. L'eggs still makes a lot of money for Sara Lee and has grown con-. I'm convinced Hanes would have been a bagger if it hadn't been bought out.
The beauty of L'eggs is that you didn't have to know about it from the outset. You could have bought Hanes stock the first year, the second year, or even the third year after L'eggs went nationwide and you'd have tripled your money at least.
But a lot of people didn't, especially husbands. Husbands usually also known as the Designated Investors probably were too busy downloading solar-energy stocks or satellite-dish company stocks and losing their collective shirts. Consider my friend Harry Houndstooth—whose name I've changed to protect the unfortunate.
Actually there's a little bit of Houndstooth in all of us. He's looking for another exciting stock play, something with limited risk but big potential on the upside. In both the Journal and his newsletter there's a favorable mention of Winchester Disk Drives, a headstrong little firm with a dandy future.
Houndstooth doesn't know a disk drive from a clay pigeon, but he calls his broker and learns that Merrill Lynch has put Winchester on its "aggressive download" list. All this can't be pure coincidence, thinks Houndstooth. After all, he's done the research! Houndstooth's wife, Henrietta—also known as the Person Who Doesn't Understand the Serious Business of Money these roles could be reversed, but usually aren't —has just returned from the shopping mall where she's discovered a wonderful new women's apparel store called The Limited.
The place is mobbed with customers. She can't wait to tell her husband about the friendly salespeople and the terrific bargains. Winchester Disk Drives is the answer. As near to a sure thing as you could get. We're putting three thousand dollars into it. Photo Cell? That sure thing went from seven dollars to three dollars and fifty cents. We lost fifteen hundred dollars. This is Winchester. The Wall Street Journal calls disk drives one of the major growth industries of this decade.
Why should we be the only ones not to get in on it? More realistically, if Mrs. But our Designated Investor, who had plenty of time to download into The Limited even after he sold out on Winchester, continued to ignore the great spousal tip. By then there were four hundred Limited stores in the country, and most of them crowded, but Houndstooth was too busy to notice. He was following what Boone Pickens was doing with Mesa Petroleum. Sometime near the end of , and probably just before the point jiggle, Houndstooth finally discovers that The Limited is on his brokerage firm's download list.
Furthermore, there have been promising articles in three different magazines, the stock has become a darling of the big institutions, and there are thirty analysts on the trail.
It occurs to the Designated Investor that this is a solid, respectable download. Turns out to be a public company. That means we can download the stock. Pretty good stock, to boot, judging by the special. I just saw on PBS. I heard Forbes even had a cover story on it.
Anyway, the smart money can't get enough of it. Gotta be worth at least a couple of thousand from the retirement fund. Other stores carry the same thing now. I'm talking about investing. I'm a fine one to chide Houndstooth for missing The Limited. I didn't download any shares on the way up, either, and my wife saw the same crowds at the shopping mall as his wife did. I, too, bought into The Limited when the story got popular and the fundamentals had begun to deteriorate, and I'm still holding on at a loss.
Actually I could go on for several pages about the tenbaggers I've missed, and more sorry examples will crop up further along in the book. When it comes to ignoring promising opportunities, I'm as adept as the next person. Once I was standing on the greatest asset play of the century, the Pebble Beach golf course, and it never occurred to me to ask if it was a public company.
I was too busy asking about the distance between the tees and the greens. Luckily there are enough tenbaggers around so that both of us could fail to notice the majority and we'll still hit our share.
In a large portfolio such as mine I have to hit several before it makes an appreciable difference. In a small portfolio such as yours, you only have to hit one. Moreover, the nice thing about investing in familiar companies such as L'eggs or Dunkin' Donuts is that when you try on the stockings or sip the coffee, you're already doing the kind of fundamental analysis that they pay Wall Street analysts to do. Visiting stores and testing products is one of the critical elements of the analyst's job.
During a lifetime of downloading cars or cameras, you develop a sense of what's good and what's bad, what sells and what doesn't. If it's not cars you know something about, you know something about something else, and the most important part is, you know it before Wall Street knows it. Why wait for the Merrill Lynch restaurant expert to recommend Dunkin' Donuts when you've already seen eight new franchises opening up in your area? People seem more comfortable investing in something about which they are entirely ignorant.
There seems to be an unwritten rule on Wall Street: If you don't understand it, then put your life savings into it. Shun the enterprise around the corner, which can at least be observed, and seek out the one that manufactures an incomprehensible product. I heard about one such opportunity just the other day. If it were that simple, I wouldn't have lost money on Bildner's, the yuppie 7-Eleven right across the street from my office.
If only I'd stuck to the sandwiches and not to the stock, fifty shares of which would scarcely download you a tuna on rye. More on this later. And how about Coleco? Finding the promising company is only the first step. The next step is doing the research. Maybe then I wouldn't have bought that one, either. I'm confident that any investor can benefit from the same tactics. It doesn't take much to outsmart the smart money, which, as I've said, isn't always very smart. This book is divided into three sections.
The first, Preparing to Invest Chapters 1 through 5 , deals with how to assess yourself as a stockpicker, how to size up the competition portfolio managers, institutional investors, and other Wall Street experts , how to evaluate whether stocks are riskier than bonds, how to examine your financial needs, and how to develop a successful stockpicking routine.
The third, The Long-term View Chapters 16 through 20 , deals with how to design a portfolio, how to keep tabs on compa-.
Part I PREPARING TO INVEST Before you think about downloading stocks, you ought to have made some basic decisions about the market, about how much you trust corporate America, about whether you need to invest in stocks and what you expect to get out of them, about whether you are a shortor long-term investor, and about how you will react to sudden, unexpected, and severe drops in price.
It's best to define your objectives and clarify your attitudes do I really think stocks are riskier than bonds? It is personal preparation, as much as knowledge and research, that distinguishes the successful stockpicker from the chronic loser. Ultimately it is not the stock market nor even the companies themselves that determine an investor's fate. It is the investor. There's no such thing as a hereditary knack for picking stocks.
Though many would like to blame their losses on some inbred tragic flaw, believing somehow that others are just born to invest, my own history refutes it.
There was no ticker tape above my cradle, nor did I teethe on the stock pages in the precocious way that baby Pele supposedly bounced a soccer ball. As far as I know, my father never left the pacing area to check on the price of General Motors, nor did my mother ask about the ATT dividend between contractions.
Only in hindsight can I report that the Dow Jones industrial average was down on January 19, , the day I was born, and declined further the week I was in the hospital.
Though I couldn't have suspected it then, this was the earliest example of the Lynch Law at work. The Lynch Law, closely related to the Peter Principle, states: Whenever Lynch advances, the market declines.
The latest proof came in the summer of , when just after the publisher and I reached an agreement to produce this book, a high point in my career, the market lost 1, points in two months.
I'll think twice before attempting to sell the movie rights. Most of my relatives distrusted the stock market, and with good reason. My mother was the youngest of seven children, which meant that. Nobody was recommending stocks around our household. The only stock download I ever heard about was the time my grandfather, Gene Griffin, bought Cities Service.
He was a very conservative investor, and he chose Cities Service because he thought it was a water utility. When he took a trip to New York and discovered it was an oil company, he sold immediately.
Cities Service went up fiftyfold after that. Distrust of stocks was the prevailing American attitude throughout the s and into the s, when the market tripled and then doubled again. This period of my childhood, and not the recent s, was truly the greatest bull market in history, but to hear it from my uncles, you'd have thought it was the craps game behind the pool hall. You'll lose all your money. This taught me not only that it's difficult to predict markets, but also that small investors tend to be pessimistic and optimistic at precisely the wrong times, so it's self-defeating to try to invest in good markets and get out of bad ones.
My father, an industrious man and former mathematics professor who left academia to become the youngest senior auditor at John Hancock, got sick when I was seven and died of brain cancer when I was ten. This tragedy resulted in my mother's having to go to work at Ludlow Manufacturing, later acquired by Tyco Labs , and I decided to help out by getting a part-time job myself.
At the age of eleven I was hired as a caddy. That was on July 7, , a day the Dow Jones fell from to To an eleven-year-old who'd already discovered golf, caddying was an ideal occupation. They paid me for walking around a golf course.
In one afternoon I would outearn delivery boys who tossed newspapers onto lawns at six A. What could be better than that? In high school I began to understand the subtler and more important advantages of caddying, especially at an exclusive club such as Brae Burn, outside of Boston.
My clients were the presidents and CEOs of. Gillette, Polaroid, and more to the point, Fidelity. In helping D. George Sullivan find his ball, I was helping myself find a career. I'm not the only caddy who learned that the quickest route to the boardroom was through the locker room of a club like Brae Burn. If you wanted an education in stocks, the golf course was the next best thing to being on the floor of a major exchange. Especially after they'd sliced or hooked a drive, club members enthusiastically described their latest triumphant investment.
In a single round of play I might give out five golf tips and get back five stock tips in return. Though I had no funds to invest in stock tips, the happy stories I heard on the fairways made me rethink the family position that the stock market was a place to lose money. Many of my clients actually seemed to have made money in the stock market, and some of the positive evidence actually trickled down to me.
Mostly I caddied for average golfers and average spenders, but if it came down to a choice between a bad round with a big tipper, or a great round with a bad tipper, I learned to opt for the former. Caddying reinforced the notion that it helps to have money. I continued to caddy throughout high school and into Boston College, where the Francis Ouimet Caddy Scholarship helped pay the bills.
I was on the arts side of school, and along with the usual history, psychology, and political science, I also studied metaphysics, epistemology, logic, religion, and the philosophy of the ancient Greeks. As I look back on it now, it's obvious that studying history and philosophy was much better preparation for the stock market than, say, studying statistics.
Investing in stocks is an art, not a science, and people who've been trained to rigidly quantify everything have a big disadvantage. If stockpicking could be quantified, you could rent time on the nearest Cray computer and make a fortune. But it doesn't work that way.
Logic is the subject that's helped me the most in picking stocks, if only because it taught me to identify the peculiar illogic of Wall Street. Actually Wall Street thinks just as the Greeks did. The early Greeks used to sit around for days and debate how many teeth a horse has. They thought they could figure it out by just sitting there, instead of checking the horse. A lot of investors sit around and debate whether a stock is going up, as if the financial muse will give them the answer, instead of checking the company.
In centuries past, people hearing the rooster crow as the sun came up decided that the crowing caused the sunrise. It sounds silly now, but every day the experts confuse cause and effect on Wall Street in offering some new explanation for why the market goes up: When I hear theories like these, I always remember the rooster.
After all the tips that I'd had to ignore, I finally was rich enough to invest! Flying Tiger was no wild guess. I picked it on the basis of some dogged research into a faulty premise. In one of my classes I'd read an article on the promising future of air freight, and it said that Flying Tiger was an air freight company.
That's why I bought the stock, but that's not why the stock went up. It went up because we got into the Vietnam War and Flying Tiger made a fortune shunting troops and cargo in and out of the Pacific. Little by little I sold it off to pay for graduate school. I went to Wharton on a partial Flying Tiger scholarship. If your first stock is as important to your future in finance as your first love is to your future in romance, then the Flying Tiger pick was a very lucky thing.
It proved to me that the big-baggers existed, and I was sure there were more of them from where this one had come. During my senior year at Boston College I applied for a summer job at Fidelity, at the suggestion of Mr. It was the Cluny of investment houses, and like that great medieval abbey to which monks were flattered to be called, what devotee of balance sheets didn't dream of working here? There were one hundred applications for three summer positions.
That fund, run by Gerry Tsai, was one of the two famous go-go funds of this famous go-go era. The other was Fidelity Trend, run by Edward C. Johnson III, also known as Ned. Ned Johnson was the son of the fabled Edward C.
Johnson II, also known as Mister Johnson, who founded the company. Ned Johnson's Fidelity Trend and Gerry Tsai's Fidelity Capital outperformed the competition by a big margin and were the envy of the industry over the period from to With these sorts of people training and supporting me, I felt as if I understood what Isaac Newton was talking about when he said: Mister Johnson believed that you invest in stocks not to preserve capital, but to make money.
Then you take your profits and invest in more stocks, and make even more money.
He wouldn't have won any awards from Ms. I was thrilled to be hired at Fidelity, and also to be installed in Gerry Tsai's old office, after Tsai had departed for the Manhattan Fund in New York.
Of course the Dow Jones industrials, at when I reported for work the first week of May, , had fallen below by the time I headed off to graduate school in September, just as the Lynch Law would have predicted.
I was assigned to the paper and publishing industry and set out across the country to visit companies such as Sorg Paper and Interna-. Since the airlines were on strike, I traveled by bus. By the end of the summer the company I knew most about was Greyhound. After that interlude at Fidelity, I returned to Wharton for my second year of graduate school more skeptical than ever about the value of academic stock-market theory. It seemed to me that most of what I learned at Wharton, which was supposed to help you succeed in the investment business, could only help you fail.
I studied statistics, advanced calculus, and quantitative analysis. Quantitative analysis taught me that the things I saw happening at Fidelity couldn't really be happening.
I also found it difficult to integrate the efficient-market hypothesis that everything in the stock market is "known" and prices are always "rational" with the random-walk hypothesis that the ups and downs of the market are irrational and entirely unpredictable. Already I'd seen enough odd fluctuations to doubt the rational part, and the success of the great Fidelity fund managers was hardly unpredictable.
It also was obvious that Wharton professors who believed in quantum analysis and random walk weren't doing nearly as well as my new colleagues at Fidelity, so between theory and practice, I cast my lot with the practitioners. It's very hard to support the popular academic theory that the market is irrational when you know somebody who just made a twentyfold profit in Kentucky Fried Chicken, and furthermore, who explained in advance why the stock was going to rise.
My distrust of theorizers and prognosticators continues to the present day. Some Wharton courses were rewarding, but even if they'd all been worthless, the experience would have been worth it, because I met Carolyn on the campus.
We got married while I was in the Army, on May 11, , a Saturday when the market was closed, and we had a week-long honeymoon during which the Dow Jones lost This is something I looked up later.
Lieutenants in the artillery mostly wound up in Vietnam. The only drawback to Korea was that it was far away from the stock exchange, and as. By this time I was suffering from Wall Street withdrawal. I made up for lost time during infrequent leaves, when I'd rush home to download the various hot stocks that friends and colleagues recommended.
They were downloading high-flying issues that kept going up, but for me they suggested conservative issues that kept going down. The Maine Sugar people had gone around to all the Maine potato farmers to convince them to grow sugar beets in the off-season. This was going to be extremely profitable for Maine Sugar, not to mention for the Maine farmers. Moreover, Maine Sugar was footing the bill for planting the beets. All the farmers had to do was haul the grown-up beets to the huge new refinery that Maine Sugar had just built.
The hitch was that these were Maine farmers, and Maine farmers are very cautious. Instead of planting hundreds of acres of sugar beets, the first year they tried it on a quarter acre, and then when that worked, they expanded to a half acre, and by the time they got to a full acre, the refinery was shut for lack of business and Maine Sugar went bankrupt.
The stock fell to six cents, so one share could download you six gumballs from a Lions Club machine. After the Maine Sugar fiasco I vowed never to download another stock that depended on Maine farmers' chasing after a quick buck. I returned from Korea in , rejoined Fidelity as a permanent employee and research analyst, and the stock market promptly plummeted. Lynch Law theorists take note. In June of , I was promoted from assistant director of research to director of research, and the Dow Jones lost points in the next three months.
In May of , I took over the Fidelity Magellan fund. The market stood at and promptly began a five-month slide to There were only 40 stocks in the portfolio, and Ned Johnson, Fidelity's head man, recommended that I reduce the number to I listened politely and then went out and raised the number to 60 stocks, six months later to stocks, and soon after that, to stocks.
I didn't do it to be contrary.
The open-minded Ned Johnson watched me from a distance and cheered me on. Instead of settling for a couple of savings-and-loans, I bought them across the board after determining, of course, that each was a promising investment in itself. It wasn't enough to invest in one convenience store.
downloading hundreds of stocks certainly wasn't Ned Johnson's idea of how to run an equity fund, but I'm still here. Soon enough I became known as the Will Rogers of equities, the man who never saw a stock he didn't like.
Since I own 1, at present, I suppose they have a point. Certainly I can name plenty of stocks I wish I hadn't owned. In terms of return on investment, Fidelity Magellan has done much better than Greece over the eleven years, although Greece has an enviable record over the preceding 2, As for Will Rogers, he may have given the best bit of advice ever uttered about stocks: If it don't go up, don't download it.
The Wall Street Oxymorons ,Se6, It's important for amateurs to view the profession with a properly skeptical eye. At least you'll realize whom you're up against. Since 70 percent of the shares in major companies are controlled by institutions, it's increasingly likely that you're competing against oxymorons whenever you download or sell shares. This is a lucky break for you. Given the numerous cultural, legal, and social barriers that restrain professional investors many of which we've nailed up ourselves , it's amazing that we've done as well as we have, as a group.
Of course, not all professionals are oxymoronic. There are great fund managers, innovative fund managers, and maverick fund managers who invest as they please. John Templeton is one of the best. He is a pioneer in the global market, one of the first to make money all around the world. His shareholders avoided the collapse in the U. Not only that, he was one of the first to take advantage of the fact that the Japanese Dow Jones the Nikkei average is up seventeenfold from to , while the U.
Dow Jones has only doubled. Max Heine now deceased at Mutual Shares fund was another ingenious freethinker. He's done a brilliant job. John Neff is a champion investor in out-of-favor stocks, for which he's constantly sticking his neck out.
Ken Heebner at Loomis-Sayles sticks his neck out, too, and the results have been remarkable. Peter deRoetth is another friend who has done extremely well with small stocks. DeRoetth is a Harvard Law School graduate who developed an incurable passion for equities. He's the one who gave me Toys "R" Us. The secret of his success is that he never went to business school—imagine all the lessons he never had to unlearn.
George Soros and Jimmy Rogers made their millions by taking esoteric positions I couldn't begin to explain—shorting gold, downloading puts, hedging Australian bonds. And Warren Buffett, the greatest investor of them all, looks for the same sorts of opportunities I do, except that when he finds them, he downloads the whole company. These notable exceptions are entirely outnumbered by the run-ofthe-mill fund managers, dull fund managers, comatose fund managers, sycophantic fund managers, timid fund managers, plus other assorted camp followers, fuddy-duddies, and copycats hemmed in by the rules.
You have to understand the minds of the people in our business. We all read the same newspapers and magazines and listen to the same economists. We're a very homogeneous lot, quite frankly. There aren't many among us who walked in off the beach. If there are any high school dropouts running an equity mutual fund, I'd be surprised. I doubt there are any ex-surfers or former truck drivers, either.
You won't find many well-scrubbed adolescents in our ranks. My wife once did some research into the popular theory that great inventions and great ideas come to people before they reach thirty. On the other hand, since I'm now forty-five and still running Fidelity Magellan, I'm eager to report that great investing has nothing to do with youth— and that the middle-aged investor who has lived through several kinds of markets may have an advantage over the youngster who hasn't.
Nevertheless, with the vast majority of the fund managers being middle-aged, it cuts out all the potential genius on the earlier and the later ends of the geriatric spectrum. STREET LAG With every spectacular stock I've managed to ferret out, the virtues seemed so obvious that if professionals had been free to add it to their portfolios, I'm convinced that 99 would have done so.
But for reasons I'm about to describe, they couldn't. There are simply too many obstacles between them and the tenbaggers. Under the current system, a stock isn't truly attractive until a number of large institutions have recognized its suitability and an equal number of respected Wall Street analysts the researchers who track the various industries and companies have put it on the recommended list.
With so many people waiting for others to make the first move, it's amazing that anything gets bought. The Limited is a good example of what I call Street lag. When the company went public in , it was all but unknown to the large institutions and the big-time analysts.
Peter describes how he came about developing his strategy for success. He talks about his past, his victories, and some of his failures. He describes everything that happened in an easy way to read. Anyone, including non-financial folks, can understand t I originally picked this book because after I read a lot about Warren Buffett's investing I decided to see other people's style.
Anyone, including non-financial folks, can understand this. The book emphasizes through numerous examples the importance of understanding the companies you invest in, picking winners, and collecting the important facts. Although some of the companies mentioned are no longer in existence, the reasoning and the thought process is as valuable as it was when the book was written.
I particularly liked the list of questions to ask before downloading a stock and for identifying suitable times to download or sell a stock. In the end this was a good read but many of the topics are outdated.
This book is significant to people staring on investment because it teaches you that the average investor can get rich.Flying Tiger was no wild guess.
Selling long-term winners subjects you to an IRS bear market -- a 20 percent tax on the proceeds. Treasury bonds with year maturities in have seen the face value of their bonds nearly double, and meanwhile they've still been collecting the 16 percent interest on their original investment. As I'll explain in later chapters, if a stock is down but the fundamentals are positive, it's best to hold on and even better to download more. If you took the Missouri "show me" approach and waited to download Microsoft until it triumphed with Windows 95, you still made seven times your money.
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