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

Indonesia to Surpass Germany by 2030: Report

By CNBC | CNBC

Southeast Asia's most populous nation is on track to become the world's 7th largest economy by 2030, putting it ahead of the developed nations of Germany and the U.K., a new report by McKinsey Global Institute showed Tuesday.

The report cites the country's young population, new consumer class and the rapid urbanization of cities as reasons that will elevate Indonesia's $850 billion economy up nine spots from its current place of 16th largest economy globally.

The findings do not reveal the projected rankings of other economies, and are based on a "proprietary modeling" method which McKinsey declined to elaborate on.

According to the report, Indonesia's economy will be powered by an estimated 90 million additional consumers with considerable spending power by 2030, making its "consuming class stronger than in any economy of the world apart from China and India."

Its relatively younger population will also keep the economy's productivity edge. McKinsey estimates that 70 percent of the country's population will remain of working age of between 15 and 64 in the next 18 years.

"Indonesia has a much younger, productive, and growing population. That is a different demographic outlook to the situation in many Western European economies, where the labor force will be either static or decline in size in the future," said Raoul Oberman, Chairman of McKinsey & Company, Indonesia.

The country's rapid pace of urbanization-especially in its smaller cities-as it moves up the value chain will contribute significantly to the country's growth. McKinsey estimates that 86 percent of GDP in the country will come from urban areas by 2030.

"The greater areas around Jakarta and Surabaya are the economic powerhouses of Indonesia today, but we expect strong growth in cities like Pekanbaru, Pontianak, Karawang, Makassar, and Balikpapan which are all outside of Java," Oberman said.

The report highlights the key challenges facing the economy, which involves low productivity, rising inequality and soaring consumer demand, and says the country is at a "critical juncture."

"It (Indonesia) needs to build on its recent impressive performance to boost labor productivity to 4.6 percent - that's 60 percent higher than in the past decade," said Oberman. "It also needs to tackle concerns about rising inequality and manage soaring demand from its expanding consumer class to meet the government's longer term GDP growth targets."

More From CNBC 

• Indonesian Firms Most Bullish Among Asian Corporates: Survey
• Will Indonesia Replace India in the BRICs?
• Singapore Recession Risk Looms After August Exports Shrink

http://finance.yahoo.com/news/indonesia-economy-surpass-germany-2030-093100423.html

McDonald's Corporation

McDonald's Corp. (MCD)

-NYSE

Prev Close:	92.14
Open:	N/A
Bid:	91.80 x 700
Ask:	92.75 x 400
1y Target Est:	99.13
Beta:	0.3
Next Earnings Date:	19-Oct-12

Day's Range:	N/A - N/A
52wk Range:	83.74 - 102.22
Volume:	0
Avg Vol (3m):	5,523,360
Market Cap:	92.92B
P/E (ttm):	17.31
EPS (ttm):	5.32
Div & Yield:	2.80 (3.10%)

Currency in USD.

Billionaires get richer, while many millionaires lose ground

September 17, 2012

Research company Wealth-X said on Monday in a report that many millionaires got poorer in the last year, but billionaires did just fine, using their heavyweight money management teams to ride out market and economic turmoil. – Reuters pic

SINGAPORE, Sept 17 – Many millionaires got poorer in the last year, but billionaires did just fine, using their heavyweight money management teams to ride out market and economic turmoil that hit the lesser rich, research company Wealth-X said today.

The ranks of people with at least US$30 million edged up to 187,380 but their total wealth fell 1.8 per cent to US$25.8 trillion – still a sum bigger than the combined size of the US and Chinese economies, Wealth-X said in a report.

Hardest hit globally were those in the US$200 million to US$499 million range, whose numbers dropped 9.9 per cent and whose fortunes shrank 11.4 per cent, the World Ultra Wealth Report said, using data for the year through July 31.

But the really, really rich got even richer as the number of billionaires rose 9.4 per cent to 2,160 people and their wealth grew 14 per cent to US$6.2 trillion.

“Even at a billion or two billion, they have a much larger entourage, they have much more in the way of investment advice. They certainly get the attention of every major bank,” Mykolas Rambus, Wealth-X’s chief executive officer, said.

As Europe struggles and the US economy recovers fitfully, the affluent are shifting away from speculative investments into private companies, commodities and property, said Wealth-X, a Singapore-based firm that provides intelligence on the ultra-rich to banks, fundraisers and luxury retailers.

Asia suffered the worst regional loss of wealth, with a fall of 6.8 per cent to US$6.25 trillion due to weaker equity markets and lower export demand from the West, it said.

While wealth also shrank in Europe, Latin America and the Middle East, the rich saw their fortunes grow in North America (up 2.8 per cent to US$8.88 trillion) and Oceania (up 4.4 per cent to US$475 billion) – much of that in Australia.

But Asia’s rich cannot be discounted, Wealth-X said, as the fall in wealth in Japan, China and India – home to 75 per cent of ultra high net worth (UHNW) Asians – will reverse, based on the strength of the region’s financial systems and economies.

“Total Asian UHNW wealth is forecast to surpass the US combined wealth by 2020,” it said. – Reuters

Top 10 Stocks Held by Investment Clubs in August 2012 in U.S.

1 AAPL Apple 1297 1 2 GE General Electric Co. 1037 2 3 JNJ Johnson & Johnson 843 3 4 F Ford Motor Co. 759 4 5 MSFT Microsoft Corporation 681 5 6 INTC Intel Corporation 656 6 7 SYK Stryker Corporation 641 7 8 PEP PepsiCo 630 8 9 PG Procter & Gamble 620 9 10 MCD McDonald's Corporation 613 10

Data by myICLUB.com, the World's Most Popular Solution for Investment Club Accounting and Operations

Defining Middle Class (US)

September 14, 2012, 4:26 PM21 Comments

Defining Middle Class

By CATHERINE RAMPELL

CATHERINE RAMPELL

Dollars to doughnuts.

In a discussion on “Good Morning America” about his tax plan, Mitt Romney suggested the cutoff for middle income was for households earning “$200,000 to $250,000 and less.” President Obama has used a similar threshold in talking about extending tax cuts for the middle class.

To be clear, both politicians appear to be talking about the ceiling for the middle class, not its midpoint. It’s a pretty high ceiling, though; here’s a chart showing household income distributions for 2011, based on calculations from the Tax Policy Center:

Source: Tax Policy Center

As you can see in the chart, households earning $250,000 fall somewhere just above the 96th percentile. For context, the Tax Policy Center placed the median household at about $42,000 in cash income in 2011. (Using a slightly different metric, the Census Bureau reported on Wednesday that the median household income was about $50,000.)

As broad as these politicians’ definition might be for middle class, historicallyAmericans of all income levels have predominantly self-identified with that category. In a survey conducted in July by Pew Research Center, about half of American adults surveyed said they were middle class, including almost half of those earning more than $100,000.

Those self-identifications are changing, though.

Pew also found that the share of people who self-identify as lower class or lower middle class has risen substantially, from 25 percent in 2008 to 32 percent in 2012. The greatest growth is among younger Americans.

Since people seem to define middle class by culture and values as much by income, it will be interesting to see if this growing self-identification with lower class sticks in the years ahead as this younger cohort ages, and if it does, what kind of pressure (if any) that might put on politicians to redefine their stated socioeconomic class categories. As I mentioned in an earlier post, even as the median American family has gotten poorer, Americans overall have lowered their expectations for what the rich should pay in taxes.

• http://economix.blogs.nytimes.com/2012/09/14/defining-middle-class/

September 14, 2012, 6:00 AM91 Comments

The Debt of Medical Students

By UWE E. REINHARDT

Correction Appended

Uwe E. Reinhardt is an economics professor at Princeton. He has some financial interests in the health care field.

In debates on health work force policy, it is frequently argued that medical education is a public good, because it benefits society as a whole.

TODAY’S ECONOMIST

Perspectives from expert contributors.

The implication is that tuition charges at medical schools should be zero or close to zero. Many nations in the industrialized world follow that policy, although they have also kept tuition low for most college students.

Most economists disagree with characterizing higher education as a public good. Only the individual receiving a professional education – including the M.D. degree — owns the human capital that the graduation documents certify to exist.

Medical graduates can use their human capital any way they wish. They can treat patients, do medical research or use their knowledge as business consultants to health-related companies or as financial analysts in the financial markets, as some of them do.

There may be some positive spillover for society as a whole from having this privately owned human capital produced, and these effects (calledexternalities by economists) might warrant some public subsidies toward the production of that human capital. That argument could be extended to many other forms of human capital, as well — e.g., engineers, scientists, nurses.

According to a fact sheet published by the American Association of Medical Colleges, annual tuition and fees at public medical schools in 2011-12 amounted to $30,753, and the total cost of attendance was $51,300. The comparable averages for private medical schools were $48,258 and $69,738. To most Americans, these will seem staggering amounts.

Which brings me to the sizable debt with which, almost uniquely in the world, American medical students now graduate. The association routinely collects data on these debts. A good summary of the most recent data, for 2010, can be found on the previously identified fact sheet, and I created this table from that source.

American Association of Medical Colleges

As the table shows, some of the students’ accumulated debt by time of graduation from medical school was incurred to finance a liberal arts undergraduate education. The $18,000 shown in the table is actually on the low side. According to the Project on Student Debt, college seniors who graduated in 2010 had an average debt of $25,250, with a range among campuses of $950 to $55,250 a student. Individual students at private colleges may have even larger debts. And debt collectors are doing a thriving business collecting these debts.

Amortization of the large debt accumulated by medical students will clearly take a bite of the income they will earn in medical practice. But at least there will be a sizable future income stream to absorb the hit. Many other college graduates have much smaller incomes or are in even direr straits.

The table below conveys a rough indication of what the amortization of medical-school debt might mean for individual students.

In this table I have assumed that the student modeled here had average debt of $161,300 upon graduation from medical school. From that debt I deducted $24,400, the amount to which $18,000 of debt upon graduation from a liberal arts college would grow in four years at a compound interest rate of 7.9 percent (that’s at the high end of the interest rate medical students are charged on debt). The remainder is debt related strictly to the medical education of the student.

I assume that after residency, the practicing physician has a starting net income (after practice costs) of $150,000 or $300,000, and that these incomes will grow at an annual compound growth rate of 3.5 percent over time. Physician incomes vary considerably across specialties and even within specialties.

To get a feel for the data, readers may want to look at several surveys ofdoctors’ pay.

According to the association’s fact sheet, students pay an interest rate of 6.8 percent on Stafford loans; for lower-income students, the rate is a subsidized 3.4 percent. For Direct Plus loans, students or their parents pay a rate of 7.9 percent, the rate I used in the table.

Finally, I assume two distinct amortization models. Under one, students pay back their debt with flat annual (or monthly) payments over 20 years. That payment is $13,840 a year. Under the alternative approach, the annual amortization payment rises in step with the assumed annual increase in physician income. The first annual payment in that approach is $10,659.

The data in the table represent these annual debt-amortization payments as a percentage of physician net income in years one, 10 and 20 of medical practice.

Clearly, these payments are a noticeable burden, even over 20 years. For amortization over 10 years, they would naturally be higher. On the other hand, the numbers would decline sharply with reductions in the interest rate charged. The table below illustrates the sensitivity of the first-year payment to interest rates and amortization horizon for the payment stream that increases in step with assumed increases in practice income.

The annual amortization payments would be particularly burdensome for primary care physicians, with their relatively lower incomes. That fact is a potential policy lever Congress might employ if it took seriously people’s lament that America is suffering from an acute shortage of primary care physicians.

I shall muse about that and other options in a future post.

---

Correction: September 15, 2012

Because of an editing error, an earlier summary with this post misstated the author's view of subsidies for medical education. He writes that medical education is no more worthy of public subsidies than other professional preparation, not that it might warrant subsidies.


http://economix.blogs.nytimes.com/2012/09/14/the-debt-of-medical-students/

Protect yourself from 10 costly financial calamities

http://www.consumerreports.org/cro/2012/08/financial-what-ifs/index.htm

http://www.consumerreports.org/cro/money/index.htm?EXTKEY=AYFCF01

The IRS audits you

Before it happens. Keep tax returns and supporting documents for at least seven years, in some cases even longer. For guidance, go to irs.gov and search for IRS Publication 552, “Record-Keeping for Individuals.” Keeping a calendar of tax-deductible expenses, such as mileage for business or charitable trips, can help later. For charitable contributions, keep dated receipts for cash gifts of $250 or more and for noncash items you donate, such as furniture and clothes. Donations worth more than $5,000 require a written appraisal.

When filling out your return, make notes of anything you’ll need to remember later. It’s a good idea to prepare digital copies of everything for storing on a computer and backing up outside your home.

If it happens. Don’t panic. Read the audit notice carefully. If it’s something simple, such as a request for additional information, try working directly with the IRS. If it’s more complex and you have a tax preparer, ask him or her for guidance. If the IRS requests a meeting, your situation might be more serious. If you have a tax preparer, let him or her arrange the time and place of the meeting.

Your car breaks down

Before it happens. Don’t wait until you’re sitting on the side of a road on a rainy night to figure out what to do. If your car is under warranty and the manufacturer provides roadside assistance, make sure the number is in your glove box and cell phone. The same goes for insurance companies’ roadside assistance. Another alternative is to subscribe to roadside assistance from AAA or another organization.

It’s a good idea to know how to change a flat tire if you’re physically able to do it. Roadside assistance might be unavailable where your car broke down or you may have to wait hours.

Assemble and keep a roadside emergency kit that includes a jumper cable or battery booster, flashlight, and cell phone if you don’t routinely carry one. For a complete list, search our website for “Emergency roadside kit: What to carry with you.”

If it happens. Try to get the car off the road and away from traffic, especially if you’ll be trying to change a tire or otherwise work on the vehicle. Then simply follow your preparations.

Types of investment

Before you decide how to invest, learn about the potential risks and rewards of the 4 main kinds of assets – shares, bonds, property and cash. There are several different classes of asset, each with its own strengths and risks. By spreading your money across a range of assets, you can create a portfolio that balances risk, growth and income according to your priorities. Spreading your money out across assets in this way is called diversification. It can help you lower overall risk, since different kinds of assets perform well at different times. The main types of asset To help you find your ideal allocation, you should familiarise yourself with the main asset classes: Shares are high-risk investments, but they offer the best long-term returns. Find out more about shares Bonds are investments that can provide a steady income. More about bond investing Property, particularly buy-to-let property, takes time to manage. But the potential rewards include income from rent and capital gains if housing prices rise.  Cash is a safe and familiar asset, but one with very low returns. More on cash. Diversification If you diversify your portfolio by holding a variety of investments, you can prepare yourself for the ups and downs of the market. Different shares and assets perform well at different times. If you diversify your portfolio – that is, buy a variety of investments – you can take advantage of these differences in performance and achieve a more balanced return. The advantages of diversification are easy to see when you consider what might happen to a non-diversified portfolio. If you hold the shares of just one company and it collapses, you could well lose your entire investment. If you were chasing returns in a particular sector that takes a hit – much like the banking sector in 2008 – you would again find yourself with heavy losses. With a diversified portfolio, only a small fraction of your money is tied up in any given area. So a single bankruptcy or industry slump cannot have too large an impact on your total return. Remember that the value of well diversified portfolio can fall as well as rise. How to diversify You can diversify your investments at a number of different levels: across companies across industries geographically across asset classes. If you want to diversify while still keeping your portfolio manageable, you should consider pooled investments. These can include ETFs, funds, or unit trusts/OEICs, all of which invest in a basket of shares, bonds or other assets.