Definition of 'Tenbagger'

Definition of 'Tenbagger'

A stock whose value increases 10 times its purchase price. This expression was coined by Peter Lynch, one of the greatest investors of all time, in his book "One Up On Wall Street" (1989).

Investopedia explains 'Tenbagger'

These types of returns are considered once-in-a-lifetime investments. Some of the most famous examples of tenbaggers include now blue-chip stocks like Wal-Mart, Hewlett-Packard and General Electric. Many investors are constantly in search of the elusive tenbagger, but there isn't an exact science to discover tenbagger stocks. Generally, these explosive companies are smaller companies (market cap under $1 billion) with large potential markets. Over time, these companies grow into their potential markets, providing patient investors with handsome returns.

Read more: http://www.investopedia.com/terms/t/tenbagger.asp#ixzz29TLSeRzN



Where did the term "tenbagger" originate?

On February 15, 1989, Peter Lynch's investing book, "One Up On Wall Street", made its debut. At the core of the book was a call to arms for individual investors. Lynch believed that individual investors could outperform highly educated Wall Street stock pickers by keeping their eyes open during their daily life and learning basic research skills. Lynch pointed out that, as consumers, workers, mothers and fathers, individual investors are much closer to the market than the people in Wall Street's ivory towers. When new products are introduced or new businesses opened up, consumers get first-hand information that Wall Street firms wait months for analysts to come up with.

Lynch explained that once a stock becomes noticeable enough to make the institutional approved list, most of the gains have already happened. He coined the term tenbagger to describe a stock that returns ten times the money that you put into it and gave numerous examples of ten, twenty, and even fortybaggers that individual investors could've spotted before Wall Street jumped in. These include everything from Dunkin' Donuts, Wal-Mart, The Limited and Stop & Shop. Lynch showed that Wall Street funds came in late on the majority of multi-baggers, seeing only a small percentage of the overall gains.

Boiled down to two precepts, "One Up On Wall Street" tells investors to invest where they have an edge in knowledge and keep up with the "story" of their stocks. Lynch didn't want investors to blindly buy companies that they encountered in their daily lives, but he suggested that those companies were the best place to start looking for great stocks rather than searching in an industry that they knew nothing about. He also emphasized the need to create a storyline for a company and keep up with any changes in that story so that investors can eliminate the market noise before deciding to buy or sell. The mixture of real world examples and practical advice made Lynch's book a classic and it continues to be a source of inspiration and instruction for individual investors today.

For more, read Pick Stocks Like Peter Lynch.

This question was answered by Andrew Beattie.

Read more: http://www.investopedia.com/ask/answers/09/tenbagger-peter-lynch.asp#ixzz29TOJzaAi

3 Simple Investing Lessons From Peter Lynch

By John Reeves

September 17, 2012

In the lead-up to Sept. 25's Worldwide Invest Better Day, The Motley Fool is reacquainting investors with the basic building blocks of investing. In light of that, who better to consider than one of the most Foolish investors of all?

Peter Lynch put together one of the greatest investing track records of all time, while serving as the portfolio manager of Fidelity's Magellan Fund. An ordinary investor who put $1,000 in the fund on the day Lynch took over would have had roughly $28,000 by the time Lynch stepped down 13 years later.

Despite those truly remarkable returns, Lynch was a passionate believer in the notion that the normal investor can pick stocks better than the average Wall Street professional. In fact, he argued that the retail investor had numerous advantages that might allow him or her to outperform both the experts and the market in general.

You need to do certain things
Lynch did not say, however, that it would be easy for retail investors to outperform. He believed they could do the job very well, but that they had to do certain things. Below are three simple lessons from Lynch that will assist ordinary investors in their quest to beat the market:

1. Do the work. Peter Lynch is very well known, of course, for recommending that investors "buy what they know." According to this principle, investors may want to invest in that busy restaurant on the corner that always seems crowded on Friday night.

Perhaps less well-known about Lynch is that he expected investors to understand their businesses before putting their money in them. In his classic book One Up On Wall Street, he recommended that you should "never invest in any company before you've done the homework on the company's earnings prospects, financial condition, competitive position, plans for expansion, and so forth."

Amazon.com (Nasdaq: AMZN  ) provides a great example here, I think. Many of us are dedicated users of the online retailer, so why wouldn't we want to invest our money in the company as well? Before doing so, however, investors might want to know why the company's profit margins are so low, and how the company intends to increase those margins over time. Finally, investors should feel comfortable with Amazon's valuation too before buying shares in it.

Lynch was an indefatigable worker himself, who felt that -- borrowing from Edison – "investing is ninety-nine percent perspiration." In general, he believed that you need to "know what you own" and just thinking it will go up "doesn't count." As a result of this belief, Lynch figured that a part-time stock picker probably only has time to follow eight to 12 companies. And he warned that "if you don't study any companies, you have the same success buying stocks as you do in a poker game if you bet without looking at your cards."

2. Use your edge. Lynch strongly believed that everyone has an edge that can allow them to outperform the experts. The key is to utilize your edge by investing in companies or industries that you understand well.

He recommended that individuals identify three to five companies that they could know very well. You could study them; lecture on them; and understand their stories intimately. Ultimately, Lynch felt that ordinary folks need to discover their personal edge, whether it's a profession or hobby or even something else, like being a parent.

When I started out as an investor, Procter & Gamble (NYSE: PG  ) was a stock I felt I had a considerable edge with. My grandfather had worked for the company for over 30 years, and my grandmother held quite a few shares of the company. As a kid, I always talked with her about new products and challenges facing the business. When I first began buying stocks, I always felt extremely comfortable having P&G in my portfolio. Each of us probably knows a company or two like that, and we must use that edge to our advantage.

3. Be patient. Being patient and investing for the long term should be the simplest investing lesson of all. Sadly, it's one of those things that is easier said than done. In 1960, the average holding period for a stock was eight years; nowadays, it's just four months.

Lynch often said that he had no idea what the market would do in one or two years. But he was confident about what stocks would do 10, 20, or 30 years from now. He truly believed that time was on the side of the retail investor, and that's why he was an enthusiastic proponent of long-term investing.

And yes, he was aware of some long time frames where the market didn't do well. In an interview with Frontline, he referred to the period from 1966 to 1982 when the market was flat for the most part. But Lynch noted that you'd have still received dividends from your stocks. He also felt that corporate profits tend to trend upward, and that investors would eventually be rewarded for that.

McDonald's (NYSE: MCD  ) is perhaps a good illustration of a stock that will outperform today's market. Over the past decade, the S&P 500 has been more or less flat. Going forward, however, McDonald's -- with its growing dividend and overseas expansion -- is likely to perform very well for long-term investors. Similarly, I'd be very surprised if ExxonMobil(NYSE: XOM  ) -- with its growing dividend and rock-solid balance sheet -- didn't do well over the next decade regardless of the performance of the overall market.

Lynch believed that it "pays to be patient, and to own successful companies." He understood that there are times when there doesn't appear to be a correlation between a company's operations and its stock price. Lynch also knew, however, that "in the long term, there is a 100 percent correlation between the success of the company and the success of its stock. This … is the key to making money."

Simple is as simple doesPeter Lynch once said, "The simpler it is, the better I like it." In a world of faster trading and ever-increasing flows of information, keeping it simple might be the ultimate edge for the ordinary investor. Always remember, though, that simple doesn't necessarily mean easy. I know I have to work a lot harder on all three of those "simple" lessons mentioned above.

http://www.fool.com/investing/beginning/2012/09/17/3-simple-investing-lessons-from-peter-lynch.aspx

Use This Simple Rule to Pick Winning Shares

LONDON -- When it comes to investing, it's all too easy to get bogged down in technical details and miss the really obvious clues -- the evidence of our own eyes. I've developed a simple rule that has helped me identify goodbusinesses and steer clear of bad ones.

The original 10-baggerBetween 1977 and 1990, the U.S.-based Fidelity Magellan Fund was the best-performing fund in the world. The fund's manager during this period was Peter Lynch, the man who coined the term "10-bagger."

Lynch's record as a growth investor is second to none, and in his book One Up on Wall Street, he explains how some of his most successful investments were the result of anecdotal evidence and personal experience, rather than stockanalysts' reports.

My Lynch ruleI've developed my own version of this approach, which I've found works well for a surprising number of business: If I wouldn't want be a customer of the business, then I don't want to be a part owner of it either.

This rule made selecting some of the FTSE 100 (UKX) shares that lie at the heart of my portfolio much easier. I've written before about how virtually all of us are customers ofGlaxoSmithKline (LSE: GSK.L  ) -- a company whose products are an integral part of the fabric of modern life.

On a more mundane but no less important note, I have been a regular Tesco (LSE: TSCO.L  ) customer for years. Not only is there a Tesco Express within a short walk of my house, but there's a larger store nearby, too -- and both offer the best combination of pricing and availability in my local area. Needless to say, both stores are always busy.

Similarly, my electricity and gas come from Southern Electric -- part of dividend king SSE, while much of my diesel comes from Royal Dutch Shell (LSE: RDSB.L  ) , whose sustainable 4.8% yield and massive reserves give me confidence that the company will remain an attractive investment for decades to come.

In fact, there is only one FTSE 100 company in my portfolio that breaks my rule. I am pretty sure I will never be a direct customer of defense giant BAE Systems -- but I am fairly sure the government will continue to pay BAE a portion of my tax bill every year, which should be reflected in the company's excellent dividend record.

A sporting chanceNothing illustrates the importance of keeping your eyes open when investing more clearly than Sports Direct International (LSE: SPD.L  ) and JJB Sports.

As their updates last week showed, these two companies may be in the same business, but they are operating in completely different worlds. Both chains have large stores in the town where I live and a visit to these shops is just as educational as a look at the companies' financials.

Sports Direct is always full of stock and bustling with customers -- you always have to queue at the till. JJB, on the other hand, is a similar size shop but carries about a quarter of the stock and has very few customers. You don't need to be an accountant to work out which company is in better health.

Expert adviceOne man who knows how to identify a long-term profitable business is Neil Woodford, one of the U.K.'s most successful fund managers. Between 1996 and 2011, his stock choices rose in value by 347% -- outperforming the 42% gain of the wider market by a country mile.

Neil Woodford now manages more money for private investors than any other City manager, with a whopping 20 billion pounds of our money in his hands. In the last five years alone, his High Income fund has gained 15%, more than double the 7% return of the wider market.

The good news is that you can find all the details of eight of Neil Woodford's biggest holdings in this special free report from the Motley Fool, "8 Shares Held By Britain's Super Investor."

By Roland Head

July 23, 2012

http://www.fool.com/investing/general/2012/07/23/use-this-simple-rule-to-pick-winning-shares.aspx#.UBM2g2GO2So

Peter Lynch's Investment Principles

Wondering when you should exit the market? Use Lynch's rule of thumb.

Wondering when you should exit the market? Use Lynch's rule of thumb.

Should we all exit the market to avoid the correction?  Some people did that when the Dow hit 3000, 4000, 5000, and 6000. 

• A confirmed stock picker sticks with stocks until he or she can't find a single issue worth buying. 
• The only time I took a big position in bonds was in 1982, when inflation was running at double digits and long-term U.S. Treasurys were yielding 13 to 14 percent. I didn't buy bonds for defensive purposes. 
• I bought them because 13 to 14 percent was a better return than the 10 to 11 percent stocks have returned historically. 

I have since followed this rule: 
When yields on long-term government bonds exceed the dividend yield on the S&P 500 by 6 percent or more, sell stocks and buy bonds. 


As I write this, the yield on the S&P is about 2 percent and long-term government bonds pay 6.8 percent, so we're only 1.2 percent away from the danger zone. Stay tuned.

So, what advice would I give to someone with $1 million to invest? The same I'd give to any investor: Find your edge and put it to work by adhering to the following rules:

With every stock you own, keep track of its story in a logbook. Note any new developments and pay close attention to earnings. Is this a growth play, a cyclical play, or a value play?Stocks do well for a reason and do poorly for a reason. Make sure you know the reasons.
Stocks do well for a reason, and poorly for a reason.

1. *Pay attention to facts, not forecasts.
2. *Ask yourself: What will I make if I'm right, and what could I lose if I'm wrong? Look for a risk-reward ratio of three to one or better.
3. *Before you invest, check the balance sheet to see if the company is financially sound.
4. *Don't buy options, and don't invest on margin. With options, time works against you, and if you're on margin, a drop in the market can wipe you out.
5. *When several insiders are buying the company's stock at the same time, it's a positive.
6. *Average investors should be able to monitor five to ten companies at a time, but nobody is forcing you to own any of them. If you like seven, buy seven. If you like three, buy three. If you like zero, buy zero.
7. *Be patient. The stocks that have been most rewarding to me have made their greatest gains in the third or fourth year I owned them. A few took ten years.
8. *Enter early -- but not too early. I often think of investing in growth companies in terms of baseball. Try to join the game in the third inning, because a company has proved itself by then. If you buy before the lineup is announced, you're taking an unnecessary risk. There's plenty of time (10 to 15 years in some cases) between the third and the seventh innings, which is where the 10- to 50-baggers are made. If you buy in the late innings, you may be too late.
9. *Don't buy "cheap" stocks just because they're cheap. Buy them because the fundamentals are improving.
10. *Buy small companies after they've had a chance to prove they can make a profit.
11. *Long shots usually backfire or become "no shots."
12. *If you buy a stock for the dividend, make sure the company can comfortably afford to pay the dividend out of its earnings, even in an economic slump.
13. *Investigate ten companies and you're likely to find one with bright prospects that aren't reflected in the price. Investigate 50 and you're likely to find 5.

http://myinvestingnotes.blogspot.com/2012/01/whats-best-way-to-invest-1million-peter.html

Value Investing - Peter Lynch's Formula

 Peter Lynch's Formula  Peter Lynch 's astounding record makes him the greatest mutual fund manager in history. In his book One Up on Wall Street, Lynch gives a simple, straight-forward explanation as to how he does a quick and dirty valuation of a firm's growth versus its stock price. Here's just a short quote explaining how he does it.

The P/E ratio of any company that's fairly priced will equal its growth rate ... If the P/E of Coca-Cola is 15, you'd expect the company to be growing at about 15 percent a year, etc. But if the P/E ratio is less than the growth rate, you may have found yourself a bargain. A company, say, with a growth rate of 12 percent a year ... and a P/E ratio of 6 is a very attractive prospect. On the other hand, a company with a growth rate of 6 percent a year and a P/E ratio of 12 is an unattractive prospect and headed for a comedown.

In general, a P/E ratio that's half the growth rate is very positive, and one that's twice the growth rate is very negative.

Lynch's formula is as follows:

Intrinsic Value = EPS * G

EPS = Earnings per Share , G = Long Term EPS Growth Rate 

http://www.trade4rich.com/Lynch.html

Audiobook: One Up On Wall Street by Peter Lynch

One up on Wall Street by Peter Lynch pdf

The New York Times best seller "one up on wall street by Peter Lynch" has more than one million copies sold through out the world. Peter Lynch, the world's greatest and the most successful fund manager, was undoubtedly the best stock picker of his time. Anise C. Wallace of The New York Times says "Mr. Lynch investment record puts him in a league by himself ".

Any investor should pay heed to what Mr. Lynch has to say and this book is full of advises by Mr. Lynch himself. He has shared loads of his own personal experiences of stock picking during his tenure at Fidelity Magellan Fund, which is truly a priceless treasure for any equity investor.

Use the following link to download this fabulous book in pdf format: One up on Wall Street by Peter Lynch

What's the best way to invest $1million? Peter Lynch

By Peter Lynch   


What's the best way to invest $1million?

Tip one: Don't buy stocks on tips alone. 

If your only reason for picking a stock is that an expert likes it, then what you really need is paid professional help. Mutual funds are a great idea (I ran one once) for folks who want this sort of assistance at a reasonable price. Still, I'm not convinced that having 4,000 equity funds in this country is an entirely positive development. True, most of the cash flooding into these funds comes from retirement and pension contributions, where people can't pick their own stocks. But some of it also has to be pouring in from former stock pickers who failed to invest wisely on their own account and have given up trying. 

One of the oldest sayings on Wall Street is "Let your winners run, and cut your losers." 

When people find a profitable activity -- collecting stamps or rugs, buying old houses and fixing them up -- they tend to keep doing it. Had more individuals succeeded at individual investing, my guess is they'd still be doing it. We wouldn't see so many converts to managed investment care, especially not in the greatest bull market in U.S. history. Halley's comet may return times before we get another market like this. If I'm right, then large numbers of investors must have lost money outright or badly trailed a market that's up eightfold since 1982. How did so many do so poorly? Maybe they traded a new stock every week. Maybe they bought stocks in companies they knew little about, companies with shaky prospects and bad balance sheets. Maybe they didn't follow these companies closely enough to get out when the news got worse. Maybe they    stuck with their losers through thin and thinner, without checking the story. Maybe they bought stock options. Whatever the case, they failed at navigating their own course.

Amateurs can beat the Streat because, well, they're amateurs.

At the risk of repeating myself, I'm convinced that this type of failure is unnecessary -- that amateurs can not only succeed on their own but beat the Street by (a) taking advantage of the fact that they are amateurs and (b) taking advantage of their personal edge. Almost everyone has an edge. It's just a matter of identifying it.

While a fund manager is more or less forced into owning a long list of stocks, an individual has the luxury of owning just a few. That means you can afford to be choosy and invest only in outfits that you understand and that have a superior product or franchise with clear opportunities for expansion. You can wait until the company repeats its successful formula in several places or markets (same-store sales on the rise, earnings on the rise) before you buy the first share.

If you put together a portfolio of five to ten of these high achievers, there's a decent chance one of them will turn out to be a 10-, a 20-, or even a 50-bagger, where you can make 10, 20, or 50 times your investment. With your stake divided among a handful of issues, all it takes is a couple of gains of this magnitude in a lifetime to produce superior returns.

One of the oldest sayings on Wall Street is "Let your winners run, and cut your losers." It's easy to make a mistake and do the opposite, pulling out the flowers and watering the weeds. Warren Buffett quoted me on this point in one of his famous annual reports (as thrilling to me as getting invited to the White House). If you're lucky enough to have one golden egg in your portfolio, it may not matter if you have a couple of rotten ones in there with it. Let's say you have a portfolio of six stocks. Two of them are average, two of them are below average, and one is a real loser. But you also have one stellar performer. Your [Image]Coca-Cola, your [Image]Gillette. A stock that reminds you why you invested in the first place. In other words, you don't have to be right all the time to do well in stocks. If you find one great growth company and own it long enough to let the profits run, the gains should more than offset mediocre results from other stocks in your portfolio.

Look around you for good stocks. Down the road, you won't regret it.

A lot of people mistakenly think they must search far and wide to find a company with this sort of potential. In fact, many such companies are hard to ignore. They show up down the block or inside the house. They stare us in the face.

This is where it helps to have identified your personal investor's edge. What is it that you know a lot about? Maybe your edge comes from your profession or a hobby. Maybe it comes just from being a parent. An entire generation of Americans grew up on [Image]Gerber's baby food, and Gerber's stock was a 100-bagger. If you put your money where your baby's mouth was, you turned $10,000 into $1 million. Fifty-baggers like [Image]Home Depot, [Image]Wal-Mart, and Dunkin' Donuts were obvious success stories to large crowds of do-it-yourselfers, shoppers, and policemen. Mention any of these at a party, though, and you're likely to get the predictable reaction: "Chances like that don't come along anymore."

Ah, but they do. Take Microsoft -- I wish I had.

You didn't need a Ph.D. to figure out that Microsoft was going to be powerful.
I avoided buying technology stocks if I didn't understand the technology, but I've begun to rethink that rule. You didn't need a Ph.D. in programming to recognize the way computers were becoming a bigger and bigger part of our lives, or to figure out that Microsoft owned the rights to MS-DOS, the operating system used in a vast majority of the world's PCs.

It's hard to believe the almighty Microsoft has been a public company for only 11 years. If you bought it during the initial public offering, at 78 cents a share (adjusted for splits), you've made 100 times your money. But Apple was the dominant company at the time, so maybe you waited until 1988, when Microsoft had had a chance to prove itself.

By then, you would have realized that [Image]IBM and all its clones were using Microsoft's operating system, MS-DOS. IBM and the clones could fight it out for market share, but Microsoft would prosper regardless of who won. This is the old combat theory of investing: When there's a war going on, don't buy the companies that are doing the fighting; buy the companies that sell the bullets. In this case, Microsoft was selling the bullets. The stock has risen 25-fold since 1988.

The next time Microsoft might have got your attention was 1992, when Windows 3.1 made its debut. Three million copies were sold in six weeks. If you bought the stock on the strength of that product, you've quadrupled your money to date. Then, at the end of 1995, Windows 95 was released, with more than 7 million copies sold in three months and 40 million copies as of this writing. If you bought the stock on the Windows 95 debut, you've doubled your money.

If you missed the boat on Microsoft, there are still other technology stocks you can buy into.

Many parents with children in college or high school (I'm one of them) have had to step around the wiring crews as they installed the newfangled campuswide computer networks. Much of this work is being done by Cisco Systems, a company that recently wired two campuses my daughters have attended. Cisco is another opportunity a lot of people had a chance to notice. Its earnings have been growing at a rapid rate, and the stock is a 100-bagger already. No matter who ends up winning the battle of the Internet, Cisco is selling its bullets to various combatants.

Computer buyers who can't tell a microchip from a potato chip still could have spotted the intel inside label on every machine being carried out of the computer stores. Not surprisingly, [Image]Intel has been a 25-bagger to date: The company makes the dominant product in the industry.

Early on, it was obvious Intel had a huge lead on its competitors. The Pentium scare of 1994 gave you a chance to pick up a bargain. If you bought at the low in 1994, you've more than quintupled your investment, and if you bought at the high, you've more than quadrupled it.

Physicians, nurses, candy stripers, patients with heart problems -- a huge potential audience could have noticed the brisk business done by medical-device manufacturers Medtronics, a 20-bagger, and Saint Jude Medical, a 30-bagger.

There are ways you can keep yourself from gaining on the good growth companies.
There are two ways investors can fake themselves out of the big returns that come from great growth companies.

The first is waiting to buy the stock when it looks cheap. Throughout its 27-year rise from a split-adjusted 1.6 cents to $23, Wal-Mart never looked cheap compared with the overall market. Its price-to-earnings ratio rarely dropped below 20, but Wal-Mart's earnings were growing at 25 to 30 percent a year. A key point to remember is that a p/e of 20 is not too much to pay for a company that's growing at 25 percent. Any business that can manage to keep up a 20 to 25 percent growth rate for 20 years will reward shareholders with a massive return even if the stock market overall is lower after 20 years.

The second mistake is underestimating how long a great growth company can keep up the pace. In the 1970s I got interested in [Image]McDonald's. A chorus of colleagues said golden arches were everywhere and McDonald's had seen its best days. I checked for myself and found that even in California, where McDonald's originated, there were fewer McDonald's outlets than there were branches of the Bank of America. McDonald's has been a 50-bagger since.

These "nowhere to grow" stories come up quite often and should be viewed skeptically. Don't believe them until you check for yourself. Look carefully at where the company does business and at how much growing room is left. I can't predict the future of Cisco Systems, but it doesn't suffer from a lack of potential customers: Only 10 to 20 percent of the schools have been wired into networks, and don't forget about office buildings, hospitals, and government agencies nationwide. [Image]Petsmart is hardly at the end of its rope -- its 320 stores are in only 34 states.

Whether or not a company has growing room may have nothing to do with its age. A good example is [Image]Consolidated Products, the parent of the Steak & Shake chain that's been flipping burgers since 1934. Steak & Shake has 210 outlets in only 12 states; 78 of the outlets are in St. Louis and Indianapolis. Obviously, the company has a lot of expansion ahead of it. With 160 continuous quarters of increased earnings over 40 years, Consolidated has been a steady grower and a terrific investment, even in a lousy market for fast food in general.

Sometimes depressed industries can produce high returns.

The best companies often thrive even as their competitors struggle to survive. Until recently, the airline sector has been a terrible place to put money, but if you had invested $1,000 in [Image]Southwest Airlines in 1973, you would have had $460,000 after 20 years. Big Steel has disappointed investors for years, but [Image]Nucor has generated terrific returns. [Image]Circuit City has done well as other electronics retailers have suffered. While the Baby Bells have toddled, a new competitor, [Image]WorldCom, has been a 20-bagger in seven years.

Depressed industries, such as broadcasting and cable television, telecommunications, retail, and restaurants, are likely places to start a research list of potential bargains. If business improves from lousy to mediocre, investors are often rewarded, and they're rewarded again when mediocre turns to good and good turns to excellent. Oil drillers are in the middle of such a recovery, with some stocks delivering tenfold returns in the past 18 months. Yet it took a decade of lousy before they even got to mediocre. Readers of my column in Worth learned of the potential in this long-suffering sector in February 1995.

Retail and restaurants haven't been performing well -- but they're two of Lynch's favorite areas.
Retail and restaurants are two of the worst-performing industries in recent memory, and both are among my favorite research areas. I've taken a beating in a number of retail stocks (some of which I still like and have continued to buy), but the general decline hasn't stopped Staples, [Image]Borders, Petsmart, [Image]Finish Line, and [Image]Pier 1 Imports from rewarding shareholders. Two of my daughters and my wife, Carolyn, have continued to shop at Pier 1, reminding me of its popularity. The stock has doubled in the past 18 months.

A glut in casual-dining outlets didn't hurt [Image]Outback Steakhouse, and a surplus of pizza parlors didn't bother [Image]Papa John's, whose stock was a double last year. [Image]CKE Restaurants -- whose operations include the Carl's Jr. restaurants -- has been a profitable turnaround play in California.

You can even find bargain stocks in this market that have been overlooked.

So far, we've been talking about growth companies on the move, but even in this so-called extravagant market, there are plenty of bargains among the laggards. Of the nearly 4,000 IPOs in the past five years, several hundred have missed the rally on Wall Street. From the class of 1995, 37 percent, or 202 companies, are selling below their IPO price. From the class of 1996, 33 percent, or 285, now trade below their offering price. So much for the average investor's never having a chance to profit from an offering. In more than half the cases, you can wait a few months and buy these stocks cheaper than the institutions that were cut in on the original deals.

As the Dow has hit new records week after week, many small companies have been ignored. In 1995 and 1996, the Standard & Poor's 500 Stock Index was up 69 percent, but the Russell 2000 index of smaller issues was up only 44 percent. And while the Nasdaq market rose 25 percent in 1996, a lot of this gain can be attributed to just three stocks: Intel, Microsoft, and Oracle. Half the stocks on the Nasdaq were up less than 6.9 percent during 1996.

That's not to say owning these laggards will protect you if the bottom drops out of the market. If that happens, the stocks that didn't go up will go down just as hard and fast as the stocks that did. I learned that lesson in the 1971Ð73 bear market. Before the selling was over, companies that looked cheap by any measure got much cheaper. McDonald's dropped from $15 a share to $4. I thought Kaiser Industries was a steal at $13, but it also fell to $4. At that point, this asset-rich conglomerate, with holdings in aluminum, steel, real estate, cement, fiberglass, and broadcasting, was trading at a market value equal to the price of four airplanes.

Wondering when you should exit the market? Use Lynch's rule of thumb.

Should we all exit the market to avoid the correction? Some people did that when the Dow hit 3000, 4000, 5000, and 6000. A confirmed stock picker sticks with stocks until he or she can't find a single issue worth buying. The only time I took a big position in bonds was in 1982, when inflation was running at double digits and long-term U.S. Treasurys were yielding 13 to 14 percent. I didn't buy bonds for defensive purposes. I bought them because 13 to 14 percent was a better return than the 10 to 11 percent stocks have returned historically. I have since followed this rule: When yields on long-term government bonds exceed the dividend yield on the S&P 500 by 6 percent or more, sell stocks and buy bonds. As I write this, the yield on the S&P is about 2 percent and long-term government bonds pay 6.8 percent, so we're only 1.2 percent away from the danger zone. Stay tuned.

So, what advice would I give to someone with $1 million to invest? The same I'd give to any investor: Find your edge and put it to work by adhering to the following rules:
With every stock you own, keep track of its story in a logbook. Note any new developments and pay close attention to earnings. Is this a growth play, a cyclical play, or a value play? Stocks do well for a reason and do poorly for a reason. Make sure you know the reasons.

Stocks do well for a reason, and poorly for a reason.

1. *Pay attention to facts, not forecasts.
2. *Ask yourself: What will I make if I'm right, and what could I lose if I'm wrong? Look for a risk-reward ratio of three to one or better.
3. *Before you invest, check the balance sheet to see if the company is financially sound.
4. *Don't buy options, and don't invest on margin. With options, time works against you, and if you're on margin, a drop in the market can wipe you out.
5. *When several insiders are buying the company's stock at the same time, it's a positive.
6. *Average investors should be able to monitor five to ten companies at a time, but nobody is forcing you to own any of them. If you like seven, buy seven. If you like three, buy three. If you like zero, buy zero.
7. *Be patient. The stocks that have been most rewarding to me have made their greatest gains in the third or fourth year I owned them. A few took ten years.
8. *Enter early -- but not too early. I often think of investing in growth companies in terms of baseball. Try to join the game in the third inning, because a company has proved itself by then. If you buy before the lineup is announced, you're taking an unnecessary risk. There's plenty of time (10 to 15 years in some cases) between the third and the seventh innings, which is where the 10- to 50-baggers are made. If you buy in the late innings, you may be too late.
9. *Don't buy "cheap" stocks just because they're cheap. Buy them because the fundamentals are improving.
10. *Buy small companies after they've had a chance to prove they can make a profit.
11. *Long shots usually backfire or become "no shots."
12. *If you buy a stock for the dividend, make sure the company can comfortably afford to pay the dividend out of its earnings, even in an economic slump.
13. *Investigate ten companies and you're likely to find one with bright prospects that aren't reflected in the price. Investigate 50 and you're likely to find 5.

Investing: You Don't Have to Learn the Hard Way

Little minds are interested in the extraordinary; great minds in the commonplace.  -  Elbert Hubbard    All of us have heard the expression that experience is the best teacher.  Like many old expressions, you must be careful how you interpret its meaning.  In reality, the best way to learn is by observing the past successes and failures of others.  Our own lifetime is limited.  By utilizing the knowledge gained by others, we can determine the financial strategies most likely to succeed without wasting the time and effort required by our own trial and error experiences.  A logical place to start our observations is to review the investment guidelines used by some of the most successful stock market investors of all time.  Their guiding principles, based on decades of experience, should be thoroughly tested against most of the conditions any stock market investor is likely to encounter.  The following brief biographical sketches summarize the wisdom provided by five super successful stock investors:  Benjamin Graham, 1894 - 1976.  Benjamin Graham, considered one of the fathers of modern stock market investing, achieved a 17 percent average annual return on his stock market investments from 1929 to 1956.  This is extraordinary, considering that the time period from 1929 to 1945 included the 1929 stock market crash and the Great Depression, and represented one of the most difficult time periods in economic history to make money in the stock market.  Graham argued that the distinction between investment and speculation was an important one that was often misused by financial professionals.  Graham felt that investors should concentrate on the task of locating the stock of companies with sound financial standing that was priced well below the value of the company, irregardless of the general outlook of the economy or the stock market.  By applying these principles to select a diversified group of stocks and by maintaining a long-term approach, the investor separated himself from the speculator and would eventually be rewarded.     Warren Buffett, 1930 to present.  Warren Buffett is probably the most successful stock investor of all time.  Solely due to his stock picking abilities, on any given day Buffett is either the richest man in America or one of the richest men in America.  From 1957 to the present (over 40 years!), Buffett has achieved an average annual return of more than 25 percent per year on his stock investments.  However, Buffett did not achieve this enviable record using some complicated investment strategy or by borrowing money to magnify his investment returns.  Instead, some simple, familiar themes begin to emerge when you study his investment philosophies.  Buffett buys stock in what he calls franchise companies - companies that produce products that society needs or wants.  He buys these stocks with the intent of never selling them.  He meticulously studies each business of interest, and only buys the stock of companies in sound financial condition that can be purchased well below his assessment of their intrinsic value.  Buffet only buys stocks of companies that he understands.  Some of his largest stock investment returns have been made in household names like Capital Cities/ABC, Coca-Cola, and The Washington Post.  Anne Scheiber, 1894 - 1995.  Anne Scheiber is probably unknown to most people.  However, her accomplishment of creating a $20 million estate by investing in the stock market over approximately 50 years makes her a very successful amateur investor.  There is some debate over her true investment return over the 50-year time span, but it appears that it probably ranged between 12 and 17 percent per year.  Scheiber learned by reviewing the tax returns of wealthy individuals during her career as a tax auditor with the Internal Revenue Service that stocks were a proven way to get rich in America.  Her investment strategies were simple: invest in companies that create products that you know and admire, continue to invest, never sell stocks you believe in, and keep informed of your current investments.  In fact, Scheiber's top ten stock investments before she died included such well known companies as Coca-Cola, Exxon, and Bristol-Myers Squibb.  National Association of Investment Clubs (NAIC), 1940 to present.  NAIC is probably the best, well kept secret for the individual stock market investor anywhere.  NAIC is a national organization that anyone can join that assists individual investors and investment clubs by providing investment education.  Over the years, NAIC has developed an investing philosophy that can be used by anyone to identify a diversified group of growth stocks that are selected to double in value in five years.  The national annual average return for the stocks owned by thousands of investment clubs associated with NAIC throughout America have frequently outperformed stock market averages for the past 30 years.  Peter Lynch, 1944 to the present.  Peter Lynch may be the most widely recognized stock market investor.  From 1977 to 1990, Lynch piloted the now famous Magellan Mutual Fund to an amazing 29 percent average annual return.  He is the author of several popular books, appears as a guest speaker on numerous television programs, and is a columnist for several magazines.  Lynch's investment philosophy and advice for others is simple: invest in what you know, ignore the advice of others (including professional investors), ignore market fluctuations, and look for companies undiscovered by professional investors.  These biographical sketches should convince you that anyone, regardless of background or training, can succeed in the stock market.  Individual investors can compete head to head with professional investors and, more importantly, investment principles between successful individual and professional investors are often very similar.  Considering the complexity of the stock market, it is surprising that so many common threads run through these widely diverse, but successful, stock market investors.  These common threads or guidelines for stock market success can be summarized as follows:       ·        Invest for the long term       ·        Diversify your investments       ·        Invest regularly       ·        Avoid market forecasting       ·        Know what you are investing in. What could be easier?  The financial community seems to always make things more complicated and confusing than they need to be.  Never confuse sophistication with success.  Simple, proven strategies followed religiously often produce superior results.   http://www.mind-like-water.com/Rogue_Investor/RI_Articles/Rogue_Investing/RI_HardWay.html