Keep INVESTING Simple and Safe (KISS)
****Investment Philosophy, Strategy and various Valuation Methods****
The same forces that bring risk into investing in the stock market also make possible the large gains many investors enjoy. It’s true that the fluctuations in the market make for losses as well as gains but if you have a proven strategy and stick with it over the long term you will be a winner!****Warren Buffett: Rule No. 1 - Never lose money. Rule No. 2 - Never forget Rule No. 1.
The Powerful Chart That Made Peter Lynch 29% A Year For 13 Years
In his excellent book One Up on Wall Street, Peter Lynch, the best mutual fund manager ever, revealed a powerful charting tool that helped him to achieve a gain of 29.2% in his portfolios for 13 years. In this chart, Peter Lynch drew the stock price and the earnings per share together and aligned the value of $1 in earnings per share to $15 in stock price. He wrote in pages 164-165 of the book:
“A quick way to tell if a stock is overpriced is to compare the price line to the earnings line. If you bought familiar growth companies – such as Shoney’s, The Limited, or Marriott – when the stock price fell well below the earnings line, and sold them when the stock price rose dramatically above it, the chances are you’d do pretty well.”
To see how this Peter Lynch Chart works, we applied it to the top holdings of Warren Buffett, the most successful investor ever: Wells Fargo (WFC), Coca-Cola (KO), IBM (IBM), American Express (AXP) and Wal-Mart (WMT). The Peter Lynch Chart of Wells Fargo is below, where the green line is the Price Line, and the blue line is the Peter Lynch Earnings Line. When the Price Line is well below the Peter Lynch Earnings Line, the stock is a buy.
Certainly buying stocks that are traded well below their Earnings Line is not the only criterion Peter Lynch used to achieve his 29%-a-year results. We also added his other requirements such as strong balance sheet and solid growth into the screener. When I limit my Peter Lynch screen to only the stocks that are owned by Warren Buffett, I found eight other companies that Warren Buffett owns and Peter Lynch would be buying. All of these eight companies have strong balance sheet, solid growth and reasonable valuations. One of them is of course Wells Fargo. Warren Buffett loves it so much that he made it his largest holding.
Now both Warren Buffett and Peter Lynch are working for me! I have added these stocks to my watch list.