Peter Lynch Golden Rules of investing

Investing is fun, exciting, and dangerous if you don't do any work.

Your investor's edge is not something you get from Wall Street experts. It's something you already have. You can outperform the experts if you use your edge by investing in companies or industries you already understand.

Over the past three decades, the stock market has come to be dominated by a herd of professional investors. Contrary to popular belief, this makes it easier for the amateur investor. You can beat the market by ignoring the herd.

Behind every stock is a company, find out what it's doing.

Often, there is no correlation between the success of a company's operations and the success of its stock over a few months or even a few years. In the long term, there is a 100 percent correlation between the success of the company and the success of its stock. This disparity is the key to making money; it pays to be patient, and to own successful companies.

You have to know what you own, and why you own it. "This baby is a cinch to go up!" doesn't count.

Long shots almost always miss the mark.

Owning stocks is like having children - don't get involved with more than you can handle. The part-time stock picker probably has time to follow 8-12 companies, and to buy and sell shares as conditions warrant. There don't have to be more than 5 companies in the portfolio at any time.

If you can't find any companies that you think are attractive, put your money into the bank until you discover some.

Never invest in a company without understanding its finances. The biggest losses in stocks come from companies with poor balance sheets. Always look at the balance sheet to see if a company is solvent before you risk your money on it.

Avoid hot stocks in hot industries. Great companies in cold, no growth industries are consistent big winners.

With small companies, your better off to wait until they turn a profit before you invest.

If you're thinking about investing in a troubled industry, buy the companies with staying power. Also, wait for the industry to show signs of revival. Buggy whips and radio tubes were troubled industries that never came back.

If you invest $1,000 in a stock, all you can lose is $1,000, but you stand to gain $10,000 or even $50,000 over time if you're patient. The average person can concentrate on a few good companies, while the fund manager is forced to diversify. By owning too many stocks, you lose this advantage of concentration. It only takes a handful of big winners to make a lifetime of investing worthwhile.

In every industry and every region of the country, the observant amateur can find great growth companies long before the professionals have discovered them.

A stock-market decline is as routine as a January blizzard in Colorado. If you're prepared, it can't hurt you. A decline is a great opportunity to pick up the bargains left behind by investors who are fleeing the storm in panic.

Everyone has the brainpower to make money in stocks. Not everyone has the stomach. If you are susceptible to selling everything in a panic, you ought to avoid stocks and stock mutual funds altogether.

There is always something to worry about. Avoid weekend thinking and ignore the latest dire predictions of the newscasters. Sell a stock because the company's fundamentals deteriorate, not because the sky is falling.

Nobody can predict interest rates, the future direction of the economy, or the stock market. Dismiss all such forecasts and concentrate on what's actually happening to the companies in which you've invested.

If you study 10 companies, you'll find 1 for which the story is better than expected. If you study 50, you'll find 5. There are always pleasant surprises to be found in the stock market - companies whose achievements are being overlooked on Wall Street.

If you don't study any companies, you'll have the same success buying stocks as you do in a poker game if you bet without looking at your cards.

Time is on your side when you own shares of superior companies. You can afford to be patient - even if you missed Wal-Mart in the first five years, it was a great stock to own in the next five years. Time is against you when you own options.

If you have the stomach for stocks, but neither the time nor the inclination to do the homework, invest in equity mutual funds. Here, it's a good idea to diversify. You should own a few different kinds of funds, with managers who pursue different styles of investing: growth, value, small companies, large companies, etc. Investing in six of the same kind of fund is not diversification.

The capital gains tax penalizes investors who do too much switching from one mutual fund to another. If you've invested in one fund or several funds that have done well, don't abandon them capriciously. Stick with them.

Among the major markets of the world, the U.S. market ranks eighth in total return over the past decade. You can take advantage of the faster-growing economies by investing some of your assets in an overseas fund with a good record.

In the long run, a portfolio of well-chosen stocks and/or equity mutual funds will always outperform a portfolio of bonds or a money-market account. In the long run, a portfolio of poorly chosen stocks won't outperform the money left under the mattress. 

Summary of Peter Lynch’s “One up on Wall Street”

Peter Lynch ran the Fidelity Magellan between 1977 and 1990. During this time he created the most enviable US mutual fund track record by averaging returns of 29% per year. To give you an idea of the compounding effect, he would have turned $10,000 into just over $270,000 in 13 years.

General Market observations
• The advance versus decline number paint better picture then the performance
of the market than index movements.
• Do not make comparisons between current market trends and other points in
history.
• For five years after July 1st 1994, $100,000 would have turned into $341,722.
If you missed the best 30 days, would have been worth $153,792.
• "The bearish argument always sounds more intelligent"
• Superior companies succeed and mediocre companies will fail. Investors in
each will be rewarded accordingly.
• Investing in stocks is an art not a science.
• If seven out of ten stocks perform, then I am delighted, if six out of ten stocks
perform, I am thankful. Six out of ten stocks is all it takes to create an enviable
record on Wall Street.
• Stand by your stocks as long as the fundamental story of the company has not
changed.
• There was a 16 month recession between July 81 and Nov 82. This time was
the scariest in memory. Sensible professionals wondered if they should take
up hunting and fishing, because soon we'd all be living in the woods, gathering
acorns. Unemployment was 14% and inflation was 15 %. A lot people said
they were expecting this but nobody mentioned it before the fact. Then
moment of greatest pessimism, when 8 out of 10 swore we where heading
into the 1930s the stock market rebounded with a vengeance and suddenly all
was right with the world.
• No matter how we arrive at the latest financial conclusions, we always prepare
ourselves for the last thing that happened.
• The day after the market crashed on Oct 19th 1987 people started worrying
that the market was going to crash.
• The great joke is that the next time is never like the last time.
• Not long ago people were worried that oil would drop to $5 and we would have
a depression. Two years later the same people were worried that oil would
rise to $100 and we would have a depression.
• When ten people would rather talk to a dentist about plaque then to a fund
manager about stocks, then it is likely the market is about to go up.
• “The stock market doesn't exist, it is there as a reference to see of anybody is
offering to do anything foolish” - Warren Buffett
• If you rely on the market to drag your stock along, then u might as well go to
Atlantic City and bet on red or black.
• Investing without research is like playing stud poker without looking at the
cards.

Categorising stocks
When you buy into stocks you need to understand why you are buying. In doing
this, it helps to categorise the company in determining what sort of returns you
can expect. Catergorising also enforces some discipline into your investment
process and aids effective portfolio construction. Peter Lynch uses the six
categories below
• Sluggards (Slow growers) – Usually large companies in mature industries
with earnings growth below or around GDP growth. Such companies are
usually held for dividend rather than significant price appreciation.
• Stalwarts (Medium growth) - High quality companies such as Coca-Cola,
P&G and Colgate that can still churn out high single digit/low teens growth.
Earnings patterns are not cyclical meaning that these stocks will protect
you recession.
• Fast growers – Companies whose earnings are growing at 20%+ and have
plenty of runway to attack e.g. think Google, Apple in their early days. It
doesn’t have to be a company as “sexy” as those mentioned.
• Cyclicals – Companies whose fortunes are closely linked to the economic
cycle e.g. automobiles, financials, airlines.
• Turn-arounds – Companies coming out of a depressed phase as a result of
change in management, strategy or corporate restructuring. Successful
turnarounds can deliver stunning returns.
• Asset plays – Firm has hidden assets which are undervalued or not
recognized at all on the balance sheet or under appreciated by the market
e.g. cash, land, property, holdings in other company.
General observations about different types of stocks
• Wall Street does not look kindly on fast growers that run out of stamina and
turn into slow growers and when that happens the stock is beaten down
accordingly.

Three phases of growth:
• Start-up phase: during which it works out kinks in the business model.
• Rapid expansion phase: moves into new locations and markets.
• Mature phase: begins to prepare for the fact there's no easy to continue to
expand.
• Each of these phases may last several years. The first phase of the riskiest
for the investor, because the success of enterprise isn't yet established.
The second phase in safest, and also where the most money is made,
because the company is going to think about duplicating it's successful
formula. The third phase is when challenges arise, because of company
runs into its limitations. Other ways must be found to increase earnings.
• You can lose more than 50 percent of your investment quickly if you buy
cyclicals in the wrong part of the cycle.
• You just have to be patient, keep up with the news and read it with dispassion.
• After it came out of bankruptcy, Penn Central had a huge tax loss to carry
forward which meant when it had to start earning money it wouldn't have to
pay taxes. It was reborn with a 50% tax advantage.
• It's impossible to say anything about the value of personal experience in
analysing companies and trends.
• Companies don't stay in the same category forever. Things change. Things
are always changing.
• It's simply impossible to find a generic formula that sensibly applies to all the
different kinds of stocks.
• Understand what you are expecting from the stock given its categorisation. Is
it the sort of stock you let run, or do you sell for a 30-50% gain.
• Ask if any idiot can run this joint, because at some point an idiot will run it.
• If you discover an opportunity early enough, you will probably get a few dollars
off its price for its dull name.
• A company that does boring things with a boring name is even better.
• High growth and hot industries attract a very smart crowd that want to get into
the business. That inevitably creates competition which means an exciting
story could quickly change.
• Try summarise the stock story in 2 minutes.
• Ask if the company is able to clone the idea.
• For companies that are meant to be depressed you will find surprises in one
out of ten of these could be a turnaround situation. So it always pays to look
beyond the headlines of depressing companies to find out if there is any thing
potentially good about the stock.

Financial analysis
• When cash is increasing relative to debt that is an improving balance sheet.
The other way around is a deteriorating balance sheet.
• When cash exceeds debt it's very favourable.
• Peter Lynch ignores short-term debt in his calculations. He assumes the
company that other assets can cover short term debt.
• With turnarounds and troubled companies, I pay special attention to debt.
Debt determines which companies survive and which will go bankrupt in a
crisis. Young companies with heavy debts are always a risk.
• Bank debt is the worst kind is due on demand.
• Commercial paper is loaned from one company to another for short periods of
time. It's due very soon and sometimes due on call. Creditors strip the
company and there is nothing left for shareholders.
• Funded debt is the best kind from a shareholders point of view. It can never be
called no matter how bleak the situation is.
• Pay attention to the debt structure as well as amount of debt when looking at
turnarounds. Work if the company has room for maneuver.
• Inventory - The closer you get to a finished product the less predictable the
resale value.
• Overvalued assets on the left of the balance sheet are especially treacherous
when there is a lot of debt on the right. Assets can easily fall in value whilst
debt is fixed.
• Keep a careful eye on inventories and think about what the value of
inventories should be. Finished goods are more likely to be subject to
markdowns then raw materials. In the car industry new cars are not prone to
severe markdowns compared to say the clothes industry.
• Looks for situations where there is high cash flow and low earnings. This may
happen because the company is depreciating a piece of old equipment which
doesn't need to be replaced in the immediate future.

The final checklist
• P/E ratio. Is it high for this particular company other similar companies in the
same industry?
• The percentage of institutional ownership. The lower the better.
• The record of earnings to date and whether the earnings are sporadic or
consistent. The only category where earnings may not be important is in the
asset play.
• Whether the company has a strong balance sheet or a weak balance sheet
and how it's rated for financial strength

When to Sell
Slow Grower
• I try sell when there's been a 30 to 50% appreciation or when the
fundamentals have deteriorated, even if the stock has declined in price.
• The company has lost market share for two consecutive years and is hiring
another advertising agency.
• No new products are being developed, spending research and development is
curtailed, and the company appears to be resting on its laurels.
Stalwart
• These are the stocks that I frequently replace for others in the category. There
is no point expecting a quick tenbagger in stalwarts and if the stock price get
above the earnings line, or if the P/E strays to far beyond on the normal range,
you might think about selling it and waiting to buy back later at a lower price or
buying something else as I do.
Cyclicals
• Extended run in upturn means a downturn could be nearing.
• One of the sell signal is inventories are building up in the company and can't
get rid of them, which means low prices and low profits down the road.
Fast grower
• If the company falls apart and the earnings shrink, and so will the P/E multiple
that investors have bid up on the stock. This is a very expensive double
whammy for the loyal shareholders.
• The main thing to watch for is the end of the second phase of rapid growth.
Turnaround
• The best time to sell a turnaround is after its turned - around. All troubles are
over and everybody knows it. The company has become the old self that was
before it fell apart: growth companies or cyclical or whatever. you have to do
reclassified stock.
Asset Play
• When the stock price has risen to the estimated value of the assets.

Silliest things people say about stocks
• If it's gone down this much already it can't go much lower
• You can always tell when a stocks hit bottom
• If it's gone this high already, how can it possibly go higher?
• It's only three dollars a share: what can I lose?
• Eventually they always come back

Things I have seen and general advice
• Most of the money I make is in the third of fourth-year that I've held the stock.
• In most cases it is better to buy the original good company at the high-priced
than it is to jump on the next “Apple or Microsoft” at a bargain price.
• Trying to predict the direction of the market over one year, or even two years,
is impossible.
• You can make serious money by compounding a series of 20 to 30% gains in
stalwarts.
• Just because the price goes up doesn't mean you are right.
• Just because the price goes down doesn't mean you're wrong.
• Stalwarts with heavy institutional ownership and lots of Wall Street covered
that outperform the market are due for arrest or a decline.
• Buying a company with mediocre prospects just because the stock is cheap is
a losing technique.
• Selling an outstanding fast-growing because the stock seems slightly
overpriced is a losing technique.
• Don't become so attached to a winner that complacency sets in and you stop
monitoring the story.
• By careful pruning and rotation based on fundamentals, you can improve your
results. If stocks are out of line with reality and better alternatives exist, sell
and switch into something else
• There is always something to worry about.
• Stick around to see what happens – as long as the original story continues
make sense, or gets better – and you'll be amazed at the result in several
years.
• One of the biggest troubles with stock-market advice is that good or bad it
sticks in your brain. You can't get it out of there, and someday, sometime, you
may find yourself reacting to it.
• I almost didn't buy La Quinta because in important insider had been selling
shares. Not buying because an insider have started selling can be as big a
mistake as selling because an outsider had stopped buying. In La Quinta's
case I ignored the nonsense, and I'm glad I did.
• You don't have to "kiss all the girls". I've missed my share of 10 baggers and
hasn't kept me from beating the market.


http://twitdoc.com/upload/funalysis/summary-of-one-up-on-wall-street-peter-lynch.pdf

The Twelve Silliest (and Most Dangerous) Things People Say About Stock Prices

1.  If it's gone down this much already, it can't go much lower.

2.  You can always tell when a stock's hit bottom.

3.  If it's gone this high already, how can it possibly go higher?

4.  It's only $3 a share:  What can I lose?

5.  Eventually they always come back.

6.  It's always darkest before the dawn.

7.  When it rebounds to $10, I'll sell.

8.  What me worry?  Conservative stocks don't fluctuate much.

9.  It's taking too long for anything to ever happen.

10.  Look at all the money I've lost:  I didn't buy it.

11.  I missed that one, I'll catch the next one.

12.  The stock's gone up, so I must be right, or ... The stock's gone down so I must be wrong.


Reference:
One Up on Wall Street by Peter Lynch

Buffett Quotes on Emotion and Discipline

"Investing is not a game where the guy with the 160 IQ beats the guy with the 130 IQ. ....  Once you have ordinary intelligence, what you need is the temperament to control the urges that get the other people into trouble in investing."

"To invest successfully does not require a stratospheric IQ, unusual business insights, or inside information.  What's needed is a SOUND INTELLECTUAL FRAMEWORK for making decisions and the ability to KEEP EMOTIONS FROM CORRODING THE FRAMEWORK."

Fabulous Life of Filthy Rich - Billionaires

Updated: Wednesday September 18, 2013 MYT 10:03:24 AM

Versace's Former Miami Mansion Sells For $41.5 Million At Auction

This April 22, 2005 file photo shows the former house of the famous late fashion designer Gianni Versace.

MIAMI: One of America's landmark homes, the Miami Beach mansion that once belonged to Italian fashion designer Gianni Versace, was sold at an auction on Tuesday for $41.5 million to a business group that includes the owners of the Jordache jeans brand.

The 1930s-era Mediterranean-style estate, which has 10 bedrooms, 11 bathrooms and a pool inlaid with 24-karat gold, was auctioned off as part of a bankruptcy proceeding by its current owner, telecom magnate Peter Loftin.

Bidding opened at $25.5 million and the winning offer was made by the current mortgage holders of the property, VM South Beach, a company affiliated with New York's Nakash family, which controls Jordache Enterprises.

The group beat out two other bidders, including billionaire Donald Trump and a Florida developer who owns the Palm Beach Polo and Country Club.

Potential buyers participated in a poolside auction at the three-story mansion on Miami's Ocean Drive. The property is now known as Casa Casuarina.

The Nakash family jointly owns a hotel next door to the mansion with the Gindi family, who founded theCentury 21 department store chain. They plan to consolidate the properties to create a hotel that will possibly carry Versace's name.

Joe Nakash told reporters he planned to ask Versace's family for permission to name the new property the Versace Hotel Villa.

"Everything will stay as is," he said. "It's history, every day you see how many people take a picture of this place."

Bidders were required to sign a confidentiality agreement and meet financial requirements that included a $3 million deposit and proof of funds to pay at least $40 million. The sale was a cash transaction.

The 23,000-square-foot (2,137-square-metre) mansion, replete with hand-painted frescoes, Italian marble and a gold-and-marble toilet, has been the subject of a long legal battle.

In 1997, Versace was gunned down at the mansion's entrance gate by serial killer Andrew Cunanan. Three years later, Versace's family sold the property to Loftin, who is now facing bankruptcy and who had been trying to sell the house for more than a year.

The property was initially listed on the market with an asking price of $125 million. The price was later lowered to $75 million before it wound up in bankruptcy proceedings.

In recent years, the mansion had been used as a private club and a boutique hotel.

Versace bought the property in 1992 for $2.9 million. He then purchased a hotel next door and spent $33 million on renovations to add another wing.

Inside, he decorated with an over-the-top style that included paintings of Grecian, nymph-like characters playing lyres under palm trees. The snake-haired Medusa head, Versace's logo, can be seen throughout the house.

When Versace owned the property, he helped usher in a renaissance of Miami's South Beach. His presence attracted models, jet-setters and celebrities including Sylvester Stallone and Madonna, who also bought homes in Miami.

The former Versace mansion was originally built by Standard Oil heir Alden Freeman. It was modeled after the Alcazar de Colon palace built in the Dominican Republic in 1510 by the son of Christopher Columbus- Reuters

Your Guide to Wealth - The Importance of Financial Education (Rich Dad, Poor Dad)

Many look for job security.
However, it is better to aim for Financial security.

Robert Kiyosaki - 3 Types of Income

How to Win Friends and Influence People by Dale Carnegie

Discrepancies between price and value

One cannot be taught how to weigh the future.

The analyst is warned not to trust his projections of the future too far, and especially not to lose sight of the price of the security he is analyzing.

No matter how rosy the prospects, the price may still be too high.

Conversely, the shares of companies with unpromising outlooks may sell so low that they offer excellent opportunities to the shrewd buyer.

Also, the wheel of time brings many changes and reversals.

"Many shall be restored that now are fallen, and many shall fall that now are in honor."

I wish I knew this 20 years ago ....

The Millionaire Next Door (audiobook)

The Wealth of Nations by Adam Smith (audiobook)

Singapore Property Sector (REITS)

The Scientific Approach to Achieving Double Digit Returns Using Value Investing

"Walter Shloss" method.

[My friend, the stockraider's method.]

Behavioural Decision Theory

How the way you frame your thinking affects your decision making.

Understanding Real Estate Investment Trusts

The John Templeton Way - Ben Graham Centre - Value Investing Conference

When to search for undervalued stocks?
1.  Neglected stocks
2.  Maximum pessimism - during crisis events

How worried are you when the stock market goes down 50%? Ask Charlie Munger who reveals the secrets to getting rich.

Published on 13 Jul 2012

http://www.charliemunger.net -- Charlie Munger, the long-time business partner of famed investor Warren Buffett, talks with the BBC. If you know anything about Charlie Munger, he's famous for his quick wit, plain spokeness and absolute genius. He has helped shareholders of Berkshire Hathaway amass untold forunes.

The Winning Investment Habits of Warren Buffett

WARREN BUFFETT'S MANAGEMENT SECRETS

Warren Buffett Documentary