One Up on Wall Street by Peter Lynch
Summary by Dr Pragnesh shah
(MD gynec ,laparoscopic surgeon)
Motera ,Ahmedabad
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=I have started my investment journey in 2017 bull run.I have paid my tution fees by learning from my initial losses. Then i started reading books .I am deeply inspired by two books
1…One up on wall street by peter lynch
2…100 baggers by Cristopher mayer
(summary here)
=It is very difficult to summerise all points of " one up on wall street "but i have tried my best.For detail , i recommand reading whole book atleast 3 times .
=I recommand all beginners to read these two books before starting investment in stock market.
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========== 1…WHAT TO BUY============
1…STOCK CATEGORIES
=Stocks are categorised as
- Slow growers,
-Stalwarts,
-Fast growers,
-Cyclical,
-Asset plays, and
-Turnarounds.
=Putting the stock in category(total 6 category) is 1st step in developing stories.
=.lnvestors easily make mistake by misunderstaning difference between cyclicals and stslwarts
=.Companies dont stay in same category forever
=Out of them fast growers are my favourite investment though i had invested in cyclicals ,stalwarts asset plays and turnarounds
A=Stalwarts
…I generally buy stalwarts for 30-50% gain. However successful rotation of several stalwarts for modest gain would give similar result of single big move by small growth stock
B=Slow growers
…One sure sign of slow grower is they pay generous and regular dividend
…People buy them for dividend
C=Cyclicals and turnaround
These category of stocks require very deep industry knowledge and thorough accounting knowledge.
=I had long list of turnaround failures ,better i had not invested in some of them"
D=Fast growers
=This is my most favourite category
=WHILE 20% GROWTH IS SUSTAINABLE OVER LONG DURATION AND THEY GIVE HUGE RETURN ,ESPECIALLY OVER A PERIOD OF TIME. THIS IS THE REASON WHY 20-25% GROWERS ARE MY FAVOURITE STOCKS
=20% grower avilable @20 PE is better than 10%grower available @10 PE
=Moderate growers(20-25%) in nongrowth industry is ideal investment.
=Fast growing company does not necessarily have to belong to fast growing industry. I would like if it is in slow growth or even nongrowth industry as it will not attract competitiors.
=30%CAGR OR MORE GROWTH IS NOT SUSTAINABLE FOR LONG DURATION.
=I m wary of companies growing faster than 25%. Those with 50% cagr usually are found in hot industries
=Be suspicious of companies having growth of 50 to 100% cagr
=Real growth is earning ,it may be by increasing prises,increasing sales or reducing cost
=Ways by which company can increase earning
A…Cost reduction
B…Raise product price
C…Expansion in new market
D…Expansion in same market
E…Dispose of losing operation
2…SMALLCAP
=Small companies have big move
Big companies have small move
=Everything being equal, you will do better with small companies
=Rallies in smallcap stocks can take couple of years to gathear steam, and then several more yrs to fully develop.
=Stay invested in small cap for long duration until fundaments change.
-For example, In 1977 after emerging growth sector had good 2 yrs performance,the prevailing opinion on wallstreet was this sector had played itself out and it is time to abandon small stocks in favour of large stock
-I ignored that opinion and stuck with small stocks and outperformed for next 5 yrs
3…INVEST IN COMPANIES THAT HAVE NOT CAUGHT THE FANCY OF WALL STREET
A…Invest in simple companies that appear dull ,mundane and out of favour
B…I like negative/no growth/slow growth industry because they do not attract competitiors and are not well researched by wallstreet
C…Some recommand contrarian approach .But true contrarian is not investor who takes opposite of popular hot issue but true contrarian buys stocks that nobody cares about.
D…I like companies having little or no
institutional owenership.
=If you invest in such companies before institutional investors, entry of such institutions in future will make stock multibagger.
There are many reasons why small good companies have little or no insttutional owenership.
The reasons are
…Some funds have rules that they can not invest below predefined mcap(e.g below 1000 crcap)
…Some mutual funds does not allow >10% holding in any single company so this will miss small fast growing companies
…Mutual fund managers are answerable if small company doesnot perform
…Some funds have rule of four.
That means that mutual fund can only invest if company is selected by all (4) fund managers
E… If you find company having no institutional investor, you have found potential winner but if there is no analyst following company , you have found double winner.
=I am equally enthusiastic about once popular stocks the professionals have abandoned
4…COMANY HAVING NICHE/MOAT
=Find out niche in business why company is growing better than rivals
=Moat, even a narrow moat, is a necessity for multibagger
5…INVEST IN WHICH YOU HAVE GOT EDGE
Sometimes you may have Double edge
A…Proffesional edge
B…Consumer edge
=INVEST IN THINGS YOU KNOW ABOUT IT
=The person with the edge is always in position to outguess the person without an edge - who after all will be the last to learn of important changes in a given industry
6…CONSISTANTLY DOING BUYBACK
=Buyback is simplest and best way to reward shareholders
7…INSIDER BUYING/SELLING
…There is only one reason for insider buying:They think the stock price is undervaluated and will eventually go up
…Insider buying,very good sign of undervaluation and good potential, especially when employees are buying.
…When management is heavily invested, rewarding to share holders become first priority.I like companies where promoter holding is high
…Insider selling is not much signigicant except major selling at high share price
…Not buying stock because insider is selling may become huge mistake.
Insider may be selling to diversify their asset or may have cash requirement .
8…SPIN OFF
=Always look for recently spinned off company especially when there is insider buying
9…THE BEST STOCK TO BUY MAY BE THE ONE YOU ALREADY OWN
=Because you had learned industry and its behaviour in recession, you can buy same stock when its price fall
=A stock u have bought 2 yrs or 10 yrs before may be worth buying again
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=========2… WHAT TO NOT BUY========
1…IF I HAVE TO AVOID ONE STOCK,
IT WILL BE HOTTTEST STOCK IN HOTTEST INDUSTRY.
=These stocks get most attention and everywhere these stocks are discussed
=Why i will never invest in hot stocks?
Reasons are
A…Hot stocks are usually expensive to their true valuation because everyone want them in their portfolio
B…That’s where promoters and shysters go because
that’s where they can get the biggest bang for the buck. The sector is rife
with fraud.
C…High growth and Hot industry attract smart crowd that awake day and night to get into buisness.If you dont have niche/patent ,profit margin will be shrunken by huge competition.
=When analyst expect double digit growth forever, the industry(so called hot industry) go into decline
=I like no growth/ low growth industry
=There is nothing thrilling about high growth industry,only to watch stock going down because for any single product ,there are thousands of companies to make it cheaper
=e.g. disk drive
Experts said industry will grow at 52%.
Industry did it, but 35 companies in competition, no one made profit
=e.g. Carpet was once a hottest industry and every american want it.
Huge competition occured and only few of thousands companies made profit
2…AVOID HIGH PE STOCKS
=IF U REMEMBER NOTHING ABOUT PE,REMEMBER ONLY FOLLOWING
…“.If you avoid investing in excessively high PE stocks, you will save youself a lot of grief and your money”
3…AVOID LISTENING TO PROFFESIONALS
=Rule no 1 in book
=20 yrs in this business convince me that normal person using 3% of brain can pick as good stock as wallstreet expert
=There are 3 reasons to not follow experts
A…expert may be wrong(40% chances)
B…You never know when they had sold
C…You can select as good stocks as experts
4…FUTURE EARNING
=it is rub.How do u predict?
=If you dont believe future earning, you will never buy polaroid at 40 pe or any other stock at high pe
=if you can not predict future earning ,atleast you can predict how the company is planning to increase its earning
5…AVOID WHISPER STOCKS
6…AVOID START UPS
=If you want to invest in future multibagger,wait until good earning started
7…AVOID IPO
=3 out of 4 ipo , I have disappointments
8…AVOID HIGH CUSTOMER CONCENTRATION
=If company has 25 to 50% revenue from single customer,stay away because of too much dependancy
=Good investment are rarely made from such customer concentration
9…AVOID TECHNOLOGY STOCKS
if u dont have edge
=In Electronic and technolgy
buisness ,things changes so fast with newer technology
10…AVOID CYCLICALS
if u dont have edge
=U can loose more than 50% if u buy cyclicals in wrong part of cycle and it may take years before upswing
11…AVOID TURNAROUND
if you dont have deeper knowledge of accounting and company
=As per warren buffet,“turnaround hardly turns around”
=I have long list of failed turnarounds i wish i dont bought
9…AVOID SERIAL ACQUSITIONS
=It is diworsificqtion
=I like buyback than aqusition when company has cash
=If company must acquire something,it is best to acquire related buisness(synergy).Otherwise most company will overpay and mostly unrelated business in acqusition.
10…AVOID NEXT
Another stock i would avoid is NEXT someyhing like next IBM, next microsoft
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======== 3.....WHEN TO BUY========
(TIMING MARKET)
=Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves
=I dont want to sound like market timer and tell you when to buy.
=THE BEST TIME TO BUY IS THE DAY YOU FIND SOLID COMPANY AT REASONABLE VALUATION
=You dont have to able to predict market to make money
=I dont believe in timing/predicting market.I believe in buying great companies at reasonable valuation weather dow jones is 1000/2000 or 3000
=There is no point in worrying about overvaluated market.The way you will know when the market is overvaluated is when you cannot find single company that is reasonably priced or that does match your investment criteria
=The only buy signal i need is to find company I like at reasonable valuation.In that case it is never too late or too soon to buy shares.
=Some people try to time market by way how is economy like recession .
But Remember, things are never clear until it is too late
=However there is one perticular time when u buy ,u will have huge gain.That is when market crash ,free fall ,hicupps that occur every few yrs in stock market
=IGNORE MACRO AND DONT TIME MARKET FOR INVESTMENT
Ignore
=Interest rate
=crude price
=Foreign investment
=Fed’s policy
=Federal reserves
=Prediction of inflation and recession
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======== 4...WHEN TO SELL========
=Over the years i learned to think about when to sell the same way i think about when to buy.
=I pay no attention to external economic conditions except in few obvious cases where it is obvious that specific business will be affected in specific way.
So when to sell
1…Mistake in original purchase
=When stock has not given return,i try to find out weather there is any mistake in origional purchase?
=Whenever i had stock that has not given return ,i remind myself that unless i am confident enough in the company to buy more shares,i ought to be selling immediately
2…Slowing of growth rate
It means at end of second phase growth
3…Change in business fundaments/Management
4…Very high PE
5…WHEN TO SELL CYCLICAL
…Sell at the end of cycle but problem is who knows when the cycle will end?
… So Sell when
-Falling commodity price.
Price of steel n oil starts falling before it is obvious in net profit
-plant at full capacity
-Company is adding capacity
-Rising inventory.It means lower price at end of cycle.I always pay attention to inventory
6…STAY INVESTED
DONT GO INTO CASH
=No one can exactly predict when market will crash .Many so called experts predict such crash and sell before crash.Many times market dont fall at all and they lose multibagger opportunity as it is very difficult to re enter in perticular stock once you exit.
So better you stay invested in same stocks until fundaments change and best is to buy stocks when market crash.
=I constantly recheck stocks and stories and thereby adding and substracting stocks. But i dont go into cash. Going into cash would be getting out of market
=My idea is to stay in market forever and to rotate stocks depending on fundamental situations
=I think if u decide that certain amount you have invested in stock market will always be invested in stock market, you will save yourself a lot of mistimed moves and general agony
=Some people sell their losers and hold on winners. Some sell winners and hold losers. Both strategy fails because they track current price movement as performance of company. When Tecobell was beaten down in1972 ,it was stock and not company in bad shape.
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======== 5...DIVERSIFICATION========
=Following are quotes on
diversification which are presented on various pages of “one up on wall street” .I have summerized them on single topic as below
A=It is best to own as many stocks as there are situations in which
-you have edge
-you have uncovered an exciting company that passes all tests of research
B=If u are looking for 10 baggers,the more stocks you own ,the more likely that one of them become 10bagger
C=Since there is no way to anticipate when pleasent surprise occur, you increase odds of benefiting by owning several stocks
D=You have to findout 1 big winner out of 11 stocks
=e.g.
Strategy A…10 stocks@30% total return in 3 yrs@very medicore
Strategy B@add stop n shop to that 10 stocks @110% return
E=However, there is no use of diversification in unkown companies for sake of diversity .
F=In small portfolio ,i would like to invest between 3 to 10 stocks
G=How optimal diversification works?
…You dont have to be right all time,or even majority times
…The more right you are about any one stock,the more wrong you can be on all others and still triumph as an investor.
…If six out of ten stocks perform as expected,then i am delighted.
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========l 6.....LONG TERM VISION========
=FRANKLY I M NEVER ABLE TO PREDICT WHICH/WHEN STOCK WILL GO 10 BAGGER OR WHICH/WHEN ONE WILL BE 5 BAGGER ,I TRY TO STICK WITH THEM AS LONG AS STORY IS INTACT
=SHAME ON EXPERTS WHO ADVISE SELL AFTER DOUBLING
=Stocks are relatively predictable over 10 to 20 yrs, not in 2 to 5 yrs,even bluechip also not predictable
…Weather stock will go higher or lower in next 2 to 3 yrs, you might as well flip a coin to decide
=It take years not months to produce big results
=Sometimes ,it take years for stock price to catch up company 's value and down period lasts so long that investor begins doubt that will ever happen.But value always wins in most cases
=It is harder to stick with stock when price goes up.At that time review the reasons why i bought in first place otherwise you may loose opportunity of 10 bagger or even 25 bagger
=Despite of crashes ,recession,wars,
stock market has given superb return over long term than bonds
…I was stuck in merck which was going nowhere for 9 years and later it went 4 fold up
…I M USED TO HANG AROUND STOCK WHEN IT IS GOING NO WHERE
=EKG OF ROCK
…This going nowhere for years is i called EKG OF ROCK which is actually a favourable omen
…Whenever i see EKG of rock on charts to which i am already attracted, i take it as strong hit that next move will be up.
…Most of money i make in 3rd/4th yr. However some stocks may take years
…If all is right with company and what had attracted me in first place has not changed,then i am confident enough that sooner or later patience will be rewarded.
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======= 7…PRICE FALL /RISE OF STOCK======
=Price drop in stock is only tragedy if you sell and dont buy
=To me price drop is opportunity to load up on bargains from amongst your worst performers and laggards that show promise
=IF YOU DONT BUY STOCKS WHEN THEY ARE 25% DOWN, YOU WILL NEVER MAKE DESCENT PROFIT IN STOCK MARKET
=Dont follow stock price,follow funfaments
=Market can drive stock very very low even if company is good or bad
(Myth =stock is down,it cannot go much lower)
=Never catch falling knife, you may have surprise, catch after it settles on ground if you want to catch
=Stock can go higher even it is high
…I have purchsed share even it was up 25 times and then made 7 times return
=When stock market fall,my stocks fall more and when rise my stocks more rebound
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======== 8....STOCK MARKET========
=The market is ought to be irrelevant.If i could convience you of this one thing ,i would feel this book has done its job.
=If u dont believe me,believe warren buffet.He told stock market does not exist.It is there only as a reference to see if anybody is offering to do anything foolish
=In short term market is unpredictable and sometime go opposite to fundaments
= In long run,it is prediclable
=MARKET PE
When market pe is elevated and most stocks pe are elevated,it may be overvaluated market.
=Stocks are most likely to be accepted as prudent at the moment they are not.
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======== 9.......MUTUAL FUND========
…Put as much money into stock funds as you can
…Mutual fund is wonderful investment for those who dont have time or dont want to take risk of stock market
…The bigger the mutual fund,it is harder to outperform.This is because ,Each fund invest in around say, 50 companies.
Now large fund,if invest in very small companies then their holding may rise 10 to 20% of outstanding shares that is mostly not allowed
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========10......ART OF INVESTMENT=======
=Investing in stock market is art not science,people who rigidly quantify everything have big disadvantage
=You dont need to make money on every stock you pick
…In my experience 6 out of 10 winners can produce satisfying result.
…Why is this?
Because your losses are limited to amount you invest in each stock(it canot go lower than zero),while your gains have no absolute limit
= While a stock become 0, you would lose 100% of its value, But if the stocks rise , you can have 1,000% ,5000% ,10000% or more.
. So a few big winners can more than make up for your losers.
= There are hundreds of losers in my portfolio…There is no shame on losing money.What is shameful is to hold or worse,to buy more when fundaments deteriorate
=People who succeed in market also accept periodic losses,setback and unexpected occurances.They realize the stock market is not pure science.
=If 7 out of 10 stocks perform as expected then i m delighted.
If 6 out of 10 stocks perform as expected, i am thankful.
=SIX OUT OF TEN IS ALL IT TAKES TO PRODUCE AN ENVIABLE RECORD ON WALLSTREET
=Common practice of buying and forgetting will not be successful
=The more you know about company it is better but it is not imperative that you call company.Nor do you have to study annual report with concentration of Dead sea scroll scholar
=20 yrs in this business convinces me that any normal person using the customary 3%of brain can pick stocks just well,if not better,than avg wallstreet expert
=Invest only what you can afford to lose without that loss having effect on your daily life in the foreseeable future
=Before buying stock,three issues should be addressed
A…Do i Own house
B…Do i need money
C…Do i have personal qualities
Like
-patience,
-self reliance,
-common sense
-tolerance of pain,
-open mindness,
-flexibility,
-admit mistake,
-ignore general panic
=Financial outcome is a soft skill, where your behaviour is more
important than what you know.
=I had never used stoploss or never done option/future
HOW MUCH RETURN ONE SHOULD EXPECT
=Warren buffet has 20% cagr over very long duration.One should expect 12 to 18% cagr return after 3 to 5 yrs
=What if one expect huge return?
That will make irratiinal decisions
=One should expect minimum 12 to 15% CAGR return after 3 to 5 yrs investment.
=After 3 to 5 yrs, if you dont get 12 to 15%cagr ,invest in index fund or well managed mf
=Frequent traders have to earn 16-19% for same return
=HEALTHY THINKING
…Dont worry for missing 10 baggers
You dont have to kiss all girls.
I have missed many tenbagger but that had not stopped me from beating market
…When more stocks you study, you will have more missed opportunity.
When someone’s stock rise, you should not think you have lost that much money. Because such type of thinking can make you at loss by investing with unrealistic expectations
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This is my latest portfolio