"Gentlemen who prefer bonds don't know what they've missing."

Theoretically, it makes no sense to put any money into bonds, even if you do need income.

Take the case of a asset allocation of 50 percent of the money invested in stocks that grow at 8% and 50 percent in bonds that don't appreciate at all, the combined portfolio had a growth rate of 4 percent - barely enough to keep up with inflation.

What would happen if we adjusted the mix?

By owning more stocks and fewer bonds, you would sacrifice some current income in the first few years.  But this short-term sacrifice would be more than made up for by the long-term increase in the value of the stocks, as well as by the increases in dividends from those stocks.  

Since dividends continue to grow, eventually a portfolio of stocks will produce more income than a fixed yield from a portfolio of bonds. 


Peter Lynch



Additional notes:

1.  Once and for all, we have put to rest the last remaining justification for preferring bonds to stocks - that you can't afford the loss in income.
2.  But here again, the fear factor comes into play.
3.  Stock prices do not go up in orderly fashion, 8 percent a year.  Many years, they even go down.
4.  The person who uses stocks as substitute for bonds not only must ride out the periodic corrections, but also must be prepared to sell shares, sometimes at depressed prices, when he or she dips into capital to supplement the dividend.
5.  This is especially difficult in the early stages, when a setback for stocks could cause the value of the portfolio to drop below the price you paid for it.
6.  People continue to worry that the minute they commit to stocks, another BIG ONE will wipe out their capital, which they can't afford to lose.
7.  This is the worry that will keep you in bonds, even after you've studied and are convinced of the long-range wisdom of committing 100% of your money to stocks.


Let's assume, that the day after you've bought all your stocks, the market has a major correction and your portfolio loses 25% of its value overnight.
1.  You berate yourself for gambling away the family nest egg, but as long as you don't sell, you're still better off than if you had bought a bond.
2.  Computer run simulation shows that 20 years later, your portfolio will be worth $185,350 or nearly double the value of your erstwhile $100,000 bond.

Or, let's imagine an even worse case:  a severe recession that lasts 20 years, when instead of dividends and stock prices increasing at the normal 8 percent rate, they do only half that well.
1.  This would be the most prolonged disaster in modern finance.
2.  But, if you stuck with the all-stock portfolio, taking out your $7,000 a year, in the end you'd have $100,000.  This still equals owning a $100,000 bond.

Ref:  Pg 55 Beating the Street, by Peter Lynch.


FOR YOUR IMMEDIATE ACTION!!!

1.  TALK YOURSELF OUT OF OWNING ANY BONDS.
2.  AT LEAST, YOU SHOULD DECIDE TO INCREASE THE PERCENTAGE OF ASSETS INVESTED IN STOCKS, WHICH IS A STEP IN THE RIGHT DIRECTION.

Buy Stocks!

Millions of people are devoted to collecting interest, which may or may not keep them slightly ahead of inflation, when they could be enjoying a 5 - 6 percent boost in their real net worth, above and beyond inflation, for years to come through investing in stocks for the long-term.

Of course, that assumes that you go about your stock-picking or fund-picking in an intelligent manner, and that you don't get scared out of your stocks during corrections.

Don't give up on the rewarding pastime of stock-picking.  An amateur who devotes a small amount of study to companies in an industry he or she knows something about can outperform 95 percent of the paid experts who manage the mutual funds, plus have fun in doing it.

Peter Lynch

A luxury that few people can afford.

If you are lucky to have been rewarded in life , there comes a point at which you have to decide:

- whether to become a slave to your net worth by devoting the rest of your life to increasing it

- or to let what you have accumulated begin to serve you.

The End Of The American Dream - USA

The Middle class is defined as a set of people with these aspirations:

I want to own my own house
I want to live in a safe neighbourhood with good schools
I want to be able to put a bit of money away for taking a modest vacation every year.
I want a health insurance.
I want to be able to save a little for retirement.
I want to be able to send my kids to college.

These make up the "Middle class basket."


Big Question:  Are you doing the things that are most important in your life?

Who owns the Federal Reserve

Someone once asked Warren Buffett how to become a better investor.

Someone once asked Warren Buffett how to become a better investor. 

He pointed to a stack of annual reports and industry trade journals. 

"Read 500 pages like this every day," he said. "That's how knowledge works. It builds up, like compound interest. All of you can do it, but I guarantee not many of you will do it." 

That last sentence is the most important.

World Collapse Explained in 3 Minutes

Money As Debt - Full Length Documentary

How Do Banks Create Money from Nothing? The Basics of the Economic Crisis



Uploaded on 3 Oct 2009
The economic crisis is the result of flawed banking rules. In 5 minutes, learn the basics of how banks operate and why the rules must change.

The rules of banking allow banks to lend out 90% or more of the money of depositors under a system known as "fractional reserve banking". This leads to the majority of all deposits in checking and savings accounts to be backed only by the promises of borrowers to pay back the loans on schedule and with interest. If the borrows are unwilling or unable to keep up their payments, the banks enter a state of crisis, and the deposits of all the savers are at risk.

In 5 minutes, review the basics of how banks "create" money from "nothing" by lending out money based on promises of future repayment. If the borrowers fail to repay, and if the collatoral backing the promises is insufficient, then crisis results. This is a key component of the current economic crisis, which led to bailouts, financial crisis, tightened lending standards, job losses, and a recession that some believe will continue indefinitely.

(Note: This is a 5-minute revision of a 10-minute video covering the same concepts. The 10-minute video goes through each step in more detail, bringing in more basics, and created with a school-aged audience in mind.)

Chin Peng

An intriguing enigma to the end

BY CHEAH BOON KHENG

Chin Peng, flanked by C.D. Abdullah and Tan Sri Rahim Noor, during the signing of the Peace Accord in Haadyai in 1989.

Chin Peng’s legacy after his death in a Bangkok hospital remains a hot dispute in Malaysia today.

GOVERNMENT ministers, including Home Minister Datuk Seri Dr Ahmad Zahid Hamid, were quick to denounce Chin Peng as a criminal, while DAP leader Lim Kit Siang and website bloggers have come out to acknowledge the role and struggle of the clandestine Communist Party of Malaya (CPM), which Chin Peng led against British rule, saying it hastened the achievement of Malaya’s national independence in 1957.

Even before his death, while the Government had banned films on the CPM and his return to Malaysia from exile, his role had been grudgingly accepted by even those who once fiercely opposed him.

Since 1989, public controversy has swirled over the party’s role and its real contribution to the achievement of Malaya’s independence in 1957. Some people have argued that while the party’s struggle for independence was valid up to 1957, its continuation thereafter against the popularly elected governments of Malaya and Singapore has been difficult to justify.

Nevertheless, first Prime Minister Tunku Abdul Rahman in his memoirs, Lest We Forget (1983), acknowledged the communists’ role in the struggle for independence: “Just as Indonesia was fighting a bloody battle, so were the communists of Malaya, who, too, fought for independence.”

Chin Peng’s application to return to Malaysia to launch his memoirs in September 2003 was rejected by the Home Ministry. He finally lost his appeal against this ban in the Federal Court in 2009.

PAS leaders, including Mat Sabu, and its party organ Harakah have recognised the role played by the CPM’s Malay leaders, Rashid Maidin and C.D. Abdullah, in the CPM’s armed struggle in achieving Malaya’s independence. Even former Inspector-General of Police Tan Sri Rahim Noor has echoed this recognition.

Former Prime Minister Tun Dr Mahathir Mohamad, who played a crucial role in initiating the negotiations to end the CPM’s armed struggle, half-heartedly recognised the role of Rashid Maidin and other Malay communists in Malaya’s independence up to 1957, in a foreword he wrote in a book on the CPM.

Ong Boon Hua, alias Chin Peng, was the CPM’s secretary-general for 42 years. Until his memoirs, Alias Chin Peng: My Side of History, was published in 2003, much of his life and leadership of the party remained shrouded in secrecy and he is best known for his wartime (1942–45) exploits as a guerilla leader.

At the end of World War II, Chin Peng’s heroic role as an anti-Japanese resistance leader was highlighted in Spencer Chapman’s account, The Jungle Is Neutral(1952), in which he is portrayed as the key link between the resistance movement in Malaya and the British armed forces based in Kandy, Sri Lanka.

Post-war Malayan newspapers called him “Britain’s most trusted man”. For his wartime services he was awarded two military medals and an Order of the British Empire (OBE), which was revoked when the CPM took up arms against British rule in June 1948.

Born in Kampong Koh, in Sitiawan, Perak, on Oct 21, 1924, Chin Peng became a communist at 15. He adopted the alias “Chin Peng” because all secret cell members were required to conceal their true identities from the police.

In the interwar period it took great intellectual and moral courage to join the banned CPM as once its members’ identities became known, the British police hunted them down.

Chin Peng found the communist ideology attractive as it stood for social justice, the elimination of poverty, a new classless world order and the end of imperialism.

His father from Fujian province, emigrated to Singapore where he met and married Chin Peng’s mother. They moved to Sitiawan where they ran a bicycle business.

The second of 11 children, Chin Peng studied at the Hua Chiao (Overseas Chinese) Primary School in Sitiawan, and later briefly attended a secondary school, the Anglo-Chinese Continuation School.

While there, the police discovered his communist activities and he disappeared underground to evade arrest.

Within the movement, he worked ρrst in 1940 as a probationary member, in charge of members in the Sitiawan district, then transferred to Ipoh to do propaganda work, and was subsequently appointed the party’s state secretary in 1942, the year he married a party comrade, Lee Khoon Wah, who was from Penang. They had three children.

In 1941, during the Japanese occupation, the British administration, accepted the CPM’s offer of volunteers to ρght the Japanese behind enemy lines.

Wanted man: The bounty on Chin Peng's head is equivalent to millions of ringgit today.

In Perak, Chin Peng was responsible for establishing communication and supplies lines between the urban areas and the guerrilla forces in the jungle camps. He was the liaison ofρcer between the British special operations group, Force 136, and top party ofρcials in the Blantan highlands in 1943 and 1945, to discuss the airdrop of money and arms to the guerilla groups.

At the end of the war, in recognition of his wartime services, Chin Peng was awarded a military medal in Singapore and later in London he received a second medal.

In 1947, the party’s central committee purged its secretary-general, Lai Tek, after Chin Peng and another committee member, Yeung Kuo, exposed him as a British agent.

Chin Peng was elected to replace him and the party began to adopt a “militant” line against the British administration.

After British intelligence uncovered information that the party was planning an insurrection, the colonial government decided to seize the psychological advantage by declaring an emergency in Malaya in June 1948.

This was in the wake of widespread labour unrest, including the murder of white planters on rubber estates, which it blamed on the CPM.

The British put up a reward of 250,000 Straits dollars on Chin Peng’s head. This offer was given wide publicity in the local and foreign press.

The Malayan Emergency lasted from 1948 to 1960, in the midst of which, Malaya secured independence on Aug 31, 1957.

In December 1955, Chin Peng and two CPM leaders, Rashid Maidin and Chen Tien, attended “peace talks” in Baling, Kedah, with Tunku Abdul Rahman, who was then Malaya’s chief minister, David Marshall, Singapore’s chief minister, and Tun Tan Cheng Lock, the MCA leader.

At the Baling talks, Chin Peng rejected the offer of amnesty when he failed to secure legal recognition for the CPM, and refused to accept the condition that the police screen his guerillas when they laid down their arms.

However, he made the surprising offer that the party would cease hostilities and lay down its arms if the Tunku secured the powers of internal security and defence in his talks on Malaya’s independence with the British Government in London.

It strengthened the Tunku’s bargaining position in the talks, which allowed him to win Malaya’s independence.

“Tunku capitalised on my pledge and gained considerably by this,” claims Chin Peng in his memoirs. In 1960, the Tunku’s Alliance government ended the Malayan Emergency. An ailing Chin Peng left for Beijing to recuperate and reorganise the party’s struggle.

He remained in Beijing for 29 years and did not return until 1989 to bring the CPM’s armed struggle to a close after negotiating a peace agreement with the Malaysian and the Thai Governments in Haadyai.

Chin Peng, in his book, described himself as a nationalist and freedom ρghter.

He took responsibility for the thousands of lives lost and sacriρced in the cause of the communist struggle. “This was inevitable,” he said, in an interview with me in Canberra in 1998. “It was a war for national independence.

> Cheah Boon Kheng was Professor of History at Universiti Sains Malaysia until his retirement in 1994. He was a visiting fellow in Singapore, Canberra and at USM. He is the author of several books, including The Masked Comrades (1979) and Red Star Over Malaya (1983).

http://www.thestar.com.my/News/Nation/2013/09/17/An-intriguing-enigma-to-the-end.aspx

Peter Lynch's strategy for all seasons

More than 80% of investment managers don't beat the market. Peter Lynch did it consistently over 13 years with Magellan. His secret: PEG ratios, and staying power.

20 September 07, John Reese

It stands to reason that professional mutual fund managers should be considerably more successful at picking stocks than the average investor. After all, people who have degrees in finance and years of practical experience in the market -- and who are willing to take your money in exchange for their expertise -- should be very good at what they do, right?

Unfortunately, many times that is not the case. In fact, my own research has shown that 80 to 90 percent of active fund managers fail to beat the market in the long term.

But there are, of course, fund managers who have proved you can beat the market over the long haul, and if you're looking for inspiration there's probably no better example than Peter Lynch. During his 13-year tenure as the head of Fidelity Investments' Magellan Fund, Lynch guided the fund to a 29.2 percent average yearly return -- nearly twice the 15.8 percent return that the S&P 500 posted during the same period. According to Barron's, over the last five years of Lynch's tenure, Magellan beat 99.5 percent of all other funds. Looked at another way, if you had invested $10,000 in Magellan the day Lynch took the helm, you would have had $280,000 on the day he retired 13 years later.

How did Lynch achieve such success where so many other professional investors failed? Interestingly, a big part of his approach involved something that is not at all exclusive to being a renowned professional fund manager: He invested in what he knew. Lynch believed that if you personally know something positive about a stock if you buy the company's products, like its marketing, etc. -- you can get a beat on successful businesses before professional investors get around to them. In fact, one of the things that led him to one of his most successful investments -- undergarment manufacturer Hanes -- was his wife's affinity for the company's new pantyhose years ago.

Investing in what you know is really just a starting point for Lynch, however. His strategy also has many quantitative aspects, and I was so impressed by it that it became the basis for one of my "Guru Strategies", computer models each of which mimics the approach of a different investing great. Here's a look at how my Lynch-based strategy works, and some examples of companies that fit the bill.

Different criteria on one PEG

An important aspect of Lynch's strategy is that he didn't apply the same rules to all stocks. He classified companies by their size and growth rate (and sometimes by the nature of their business), and used different sets of criteria to analyze these different groups.

His favorite type of investment was "fast-growers" -- companies whose earnings have been increasing at a rate of 20 to 50 percent per year. Other groups he focuses on in his book are large "stalwarts", which grow at a more moderate pace, and "slow-growers", which have single-digit growth rates but are attractive for their high dividend payouts.

Before I examine what Lynch looks for in each of these categories of stocks, however, I should note that there is one variable that Lynch considers crucial no matter what the stock's classification: the P/E/Growth ratio.

While the price/earnings ratio (which compares a company's per-share price to its per-share earnings) may be the best-known stock market variable, Lynch found that looking at the P/E ratio by itself was less useful than looking at it in comparison to a company's growth. The rationale was that higher P/E ratios are okay, provided that the firm is growing at an appropriate pace. If a company's P/E ratio was about even with or less than its growth rate (i.e. P/E divided by growth rate equals 1.0 or less), Lynch saw that as acceptable

Lynch found that this P/E/Growth ratio -- or "PEG" -- was a great way to identify growth stocks that were still selling at good prices. In fact, the P/E/G ratio became the most important variable he considered when looking at a stock, and his reliance on it is one of the things he is most known for in the investing world.

To show how the P/E/G can be more useful than the P/E ratio, Lynch cited Wal-Mart, America's largest retailer. In his book "One Up On Wall Street", he notes that Wal-Mart's P/E was rarely below 20 during its three-decade rise. Its growth rate, however, was consistently in the 25 to 30 percent range, generating huge profits for shareholders despite the P/E ratio not being particularly low. That also proved another one of Lynch's tenets: that you have plenty of time to identify and invest in exceptional growth companies, even after they have exhibited years, or even a decade, of rapid growth and have become quite large.

An example of a company with a very strong P/E/G ratio is energy giant Exxon Mobil (NYSE:XOM), which has a P/E of 12.15. When we divide that by its growth rate of 31.69 percent (based on the average of its three-, four-, and five-year earnings per share growth figures), we get a P/E/G ratio of 0.38. This not only betters my Lynch-based model's 1.0 maximum; it also falls into the strategy's best-case category (0.5 or below).

Fast-growers

Now let's take a look at those three categories I mentioned earlier, beginning with fast-growers. Exxon Mobil is an example of one such stock, because of its 31.69 percent growth rate.

For fast-growers, Lynch looks not only at the P/E/G, but also at the P/E ratio by itself. For large companies -- which my model views as those with annual sales greater than $1 billion -- he likes to see P/E ratios below 40, because he found that larger companies have trouble maintaining high enough growth to support P/Es over that threshold. (Smaller firms can have very high P/E ratios during their growth years, however).

Another quality Lynch looks for in fast-growers is manageable debt. He likes companies that are conservatively financed, and my Lynch-based model calls for debt to be no greater than 80 percent of equity. Exxon again makes the grade, with a debt/equity ratio of 7.56 percent.

An even better example of a fast-grower that meets this criterion is computer software power Microsoft (NASD:MSFT). Microsoft has no long-term debt, which my model considers exceptional. (Its 0.89 P/E/G ratio is another reason it passes my Lynch-based method.)

Lynch also made an astute observation about inventory, which can be applied not only to fast-growers but to other firms as well. He viewed it as a red flag when inventory increased more quickly than sales. (Inventory piling up indicates the products aren't as in-demand as the company had hoped.) My Lynch-based model thus likes the inventory/sales ratio to stay the same or decrease from year to year, but will allow for an increase of up to 5 percent if all other financials are in order. Exxon's inventory/sales ratio increased by just 0.32 percent this year while Microsoft's dropped by 1.13 percent, so each passes the test.

One caveat about "fast-growers": to Lynch, there is such a thing as too much growth. When a firm's historic growth rate is greater than 50 percent, he avoids it. Growth that high is unlikely to be maintained over the long run, and an investor shouldn’t pay for a stock on the basis of the assumption that a growth rate this high or higher will be maintained for long.

Stalwarts

Because of their large size (sales in the multi-billion-dollar range) and moderate earnings growth rate (10 to 19 percent per year), Lynch always keeps a few stalwarts in his portfolio, as they offer protection during recessions or hard times. An example of a stalwart that my Lynch-based model likes is credit card giant American Express (NYSE:AXP), which has a growth rate of 18.1 percent (again based on the average of the three-, four-, and five-year EPS growth rate figures) and annual sales of $29.8 billion.

One of the main differences between stalwarts and fast-growers is that dividends are often important for stalwarts, so Lynch adjusted the earnings portion of their P/E/G calculations for dividend yield. (He makes this adjustment by adding the yield, 1.01%, to the growth rate in the P/E/G formulathe yield supplements the EPS growth.) American Express's yield-adjusted P/E/G is 0.93, which comes in under my model's 1.0 upper limit.

Lynch also looked at debt for stalwarts, and my model again calls for debt to be no greater than 80 percent of equity.

When it comes to financial companies like American Express, however, debt is often a required part of business. Recognizing this, Lynch didn't apply the debt/equity ratio to financials. Instead, he looks at how a company's equity compares with its assets for a sign of financial health, and at how much of a return it is generating on those assets for a sign of its profitability.

The model I base on Lynch's writings calls for financial firms to have an equity/assets ratio of at least 5 percent, and a return on assets of at least 1 percent. At 8 percent and 3.18 percent, respectively, American Express passes both tests. (Note that while American Express is a stalwart, the equity/assets and return on assets figures are used for fast-growing and slow-growing financials as well.)

Slow-growers

Lynch was less keen on slow-growers and their single-digit growth than he was on fast-growers or stalwarts. But they can have high dividend yields, so they may be a good option if you're investing for income.

Lynch liked slow-growers to be large companies, so the model I base on his writings requires their sales to be greater than $1 billion. Just as with stalwarts, the P/E/G ratio for slow-growers is adjusted for dividend yield, and the debt-equity ratio should be below 80 percent (unless the firm is a financial).

One key difference when it comes to slow-growers: Because by definition they don't post big earnings increases, their dividend yields must be greater than 3 percent or greater than the yield of the S&P 500, whichever is larger.

Few slow-growers currently pass my Lynch-based model, but one that does is the US financial firm Comerica (NYSE: CMA), a Texas-based company that offers banking and financial management services in the US, Canada, and Mexico. Comerica's growth rate (7.34 percent, based on the average of the three-, four-, and five-year EPS figures) and high sales ($3.6 billion) make it a slow-grower, and its yield of 4.78 percent (which more than doubles the S&P's current 2.09 percent yield) is one reason my Lynch strategy considers it a good slow-grower. In addition, Comerica's yield-adjusted P/E/G is an acceptable 0.91, its equity/assets ratio is a healthy 9 percent, and its ROA is a strong 1.32 percent.

Be ready for all weathers

There is another critical aspect of Lynch's approach not specifically included in my quantitative model. It's simple in theory, but in practice it is one of the hardest things for an investor: Stay in the market.

Lynch recognized that the stock market was unpredictable in the short term, even to the smartest investors. In fact, he once said in an interview with American television station PBS that putting money into stocks and counting on having nice profits in a year or two is like "just like betting on red or black at the casino. ... What the market's going to do in one or two years, you don't know."

Over the long-term, however, good stocks rise like no other investment vehicle, something Lynch recognized. His philosophy: Use a proven strategy and stay in the market for the long term and you'll realize those gains; jump in and out and there's a good chance that you'll miss out on a chunk of them.

That, of course, means resisting the temptation to bail when the market takes some short-term hits, no easy task. But as Lynch once said, "The real key to making money in stocks is not to get scared out of them." If you have the fortitude to follow that advice -- and the discipline to follow Lynch's quantitative blueprints -- your portfolio should be much the better for it.

http://www.globes.co.il/serveen/globes/docview.asp?did=1000256306&fid=3011

Published by Globes [online], Israel business news - www.globes.co.il - on September 20, 2007

One up on Wall Street by Peter Lynch (Summary)

Here is a summary of One up on Wall Street by Peter Lynch – this is one of the best books you could ever lay your hands on.

Peter Lynch argues how jokers like you and me could find hidden gems in the stock market much before the bigger jokers of Wall Street can if we keep our eyes open. He suggests that everyday information can be used to find spectacular growth stocks.

Peter used his skills at Fidelity to rake in huge profits from stocks that the market discovered much later than he did. Following are some of the gists taken from the book. Note the type of stocks he thinks we should be looking out for.

Summary of One up on Wall Street by Peter Lynch – types of companies

SLOW GROWERS

• Since you buy these for dividends (why else would you own them?), you want to check to see if dividends have always been paid and whether they are routinely raised.

• When possible, find out what percentage of the earnings are being paid out as dividends. If it’s a low percentage, then the company has a cushion in hard times. It can earn less money and still retain the dividend. If it’s a high %, then the dividend is riskier.

 

STALWARTS

 • These are big companies that aren’t likely to go out of business. The key issue is price and the P/E ratio will tell you whether you are paying too much.

• Check for possible di-worseifications that may reduce future earnings.

• Check the companies long-term growth rate and whether it has kept the same momentum in recent years.

• If you plan to hold the stock forever, see how the company has fazed during previous recessions and market drops.

 

FAST GROWERS

 • Investigate whether the product that’s supposed to enrich the company is a major part of the company’s business.

• What the growth rate in earnings has been in recent years (20-25% is great)

• That the company has duplicated its successes in more than one city/town, to prove that expansion will work.

• That the company has room to grow.

• Whether the stock is selling at a P/E ratio at or near the growth rate.

• Whether the expansion is speeding up (3 new motels last year and 5 this) or slowing down.

• That few institutions own the stock and only a handful of analysts ever heard of it. With fast growers on the rise, this is a big plus.

 

CYCLICAL

 • Keep a close watch on inventories, and the supply demand relationship. Watch for new entrants into the market, which is usually a dangerous development.

• Anticipate a shrinking P/E multiple over time as business recovers and investors look ahead to the end of the cycle, when peak earnings are achieved.

• If you know your cyclical, you have an advantage in figuring out the cycles. Its easier to predict an upturn in a cyclical industry than it is to predict a downturn.

 

TURNAROUNDS

 • Most important, can the company survive a raid by its creditors ? How much cash and debt does it have ? What is the debt structure, and how long can it operate in the red while working out its problems without going bankrupt ?

• If it’s bankrupt already, what’s left for the shareholders ?

• How is the company supposed to be turning around ? Has it rid itself of unprofitable divisions ? This can make a big difference in earnings.

• Is business coming back ?

• Are costs being cut ? If so, what will the effect be.

 

ASSET-PLAYS

 • What’s the value of the assets ? Are there any hidden assets ?

• How much debt is there to detract from these assets (Creditors are first in line)

• Is the company taking on new debt, making the assets less valuable ?

• Is there a raider in the wings to help shareholders reap the beneficiaries of the assets ?

Summary of One up on Wall Street by Peter Lynch – learnings

• Understand the nature of the company you hold and the specific reason for holding the stock.

• By putting your stock in categories, you’ll have a better idea of what to expect from them.

• Big companies have small moves, small companies have big moves.

• Consider the size of the company, if you expect it to profit from a specific product.

• Look for small companies that are already profitable and have proven that their concept can be replicated.

• Be suspicious of companies with growth rate of 50 to 100% a year.

• Avoid hot stocks in hot industries.

• Distrust diversification, which usually turn out to be diworseifications.

• Long shots almost never pay off.

• It’s better to miss the first move in a stock and wait to see if a company’s plan are working out.

• People get incredibly valuable fundamental information from their jobs that may not reach the professionals for months or even years.

• Separate all stock tips from the tipper, even if the tipper is very smart, very rich and his or her last tip went up.

• Some stock tips, esp from an expert in the field, may turn out to be valuable

• Invest in simple companies that appear dull, mundane, out of favour and haven’t caught the fancies of Wall Street.

• Moderately fast growers (20-25%) in non growth industries are ideal investments.

• Look for companies with niches.

• When purchasing depressed stocks in troubled companies, seek out the ones with the superior financial positions and avoid the ones with loads of bank debt.

• Companies that have no debt can’t go bankrupt.

• Managerial ability may be important, but it’s quite difficult to assess. Base your purchases on the company’s prospects, not on the CEO’s resume or speaking ability.

• A lot of money can be made when a troubled company is turning around.

• Carefully consider the P/E ratio. If the stock is grossly overpriced, even if everything else goes right, you won’t make any money.

• Find a story line to follow as a way of monitoring a company’s progress.

• Look for companies that consistently buy back their own shares.

• Study the dividend record of a company over the years and also how its earnings have fared in past recessions.

• Look for companies with little or no institutional ownership.

• All else being equal, favour companies in which management has a significant personal investment over companies run by people who benefit only from their salaries.

• Insider buying is a positive sign, esp when several individuals are buying at once.

• Devote at least an hour a week on investment research. Adding up your dividends and figuring out your gains and losses doesn’t count.

• Be patient. Watched stock never boils.

• Buying stocks on stated book value alone is dangerous and illusory. It’s real value that counts

• When in doubt, tune in later.

• Invest at least as much time and effort in choosing a new stock as you would in choosing a new refrigerator.

• Is the P/E ratio high or low in general as compared to the other companies in the same industry.

• Lower the % of Institutional Ownership, the better.

• If insiders are buying and if company is buying back its own shares, both are positive.

• The earnings growth to date should be consistent, not sporadic (exception for asset play where earning growth is not important).

• Company should have a strong balance sheet (debt to equity ratio) – how is it rated for financial strength.

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Peter Lynch: Beating the Street (Summary)

Beating the Street Plot Summary

Preview of Beating the Street Summary:

Peter Lynch, manager of Fidelity Investment's incredibly successful Magellan Fund from 1977 to 1990, writes this book to provide investors with insight into his investment methodologies and tactics. He begins with a tale about a group of 7th graders who make mock investments as part of their class. The children are instructed to invest in companies they own and to research their choices to explain to their classmates why they made them. The 7th graders do extremely well, beating the S & P 500 index significantly. Their story demonstrates that even a child can invest successfully if they choose companies they are familiar with and do their research. Knowing one's investments is the main theme of the book.

Next, for those who might be timid about investing in stocks, Lynch explains why stocks are a better investment than bonds or certificates of deposit. While a conservative investor may prefer a...

Chapter 1 Summary and Analysis

Peter Lynch, manager of Fidelity Investment's incredibly successful Magellan Fund from 1977 to 1990, writes this book to provide investors with insight into his investment strategies. Lynch believes amateur stock pickers can outperform mutual funds.

He begins with a tale about a group of 7th graders who make mock investments as part of their class. The children are instructed to invest in companies they own and to research their choices to explain to their classmates why they made them. The 7th graders do extremely well, beating the S & P 500 index significantly. Their story demonstrates that even a child can invest successfully if they choose companies they are familiar with and do their research. The kids compiled a list of potential stocks, and then researched each one thoroughly, checking earnings and relative strength. Before any kid could put a stock in their portfolio, they had to understand the company's...

Chapter 2 Summary and Analysis

The successful investor cannot be afraid of the minor fluctuations and corrections of the stock market. Investors must resist the natural human urge to cut and run at the first sign of trouble.
The Barron's Roundtable, an annual meeting of the best and brightest investors, is used to demonstrate that even the experts get too caught up in letting the news of the day influence their stock purchasing and selling thoughts. Each year, during the late 1980s, after the crash of 1987, the group found pessimistic news to dissuade them from buying stocks. 1990 and 1991 were predicted to be especially gloomy years. In fact, the doom and gloom and slightly depressed market created a perfect opportunity to buy.

The best way to avoid being scared out of stocks is to buy them on a regular basis, month in and month out. Looking to the "Even Bigger Picture" as opposed...

Chapter 3 Summary and Analysis

Mutual funds are intended to take the confusion out of investing. You invest your money in the fund and do not have to worry about picking stocks or following the market. Mutual funds are so popular today that there are more mutual funds available than there are stocks on the New York and American stock exchanges combined.

Many investors make their investment decisions based on the amount of income a given type of investment will generate. They ignore growth potential. They often invest in bond or money market mutual funds because of the steady interest income they provide. Investors often ignore the income potential of stock dividends and the investment growth factor stocks provide. In other words, if you buy a bond, you will receive steady interest over the term of the investment, but, in the end, you receive your original investment back. This amount, when reduced by inflation, has...

Chapter 4 Summary and Analysis

Lynch took over Magellan in 1977. His first year was spent selling his predecessor's favorites and buying his own. These included Congoleum, Transamerica, Union Oil, Aetna Life and Casualty, Hanes, and Taco Bell. The variety of different companies reflects that Lynch did not have an overall strategy to investing. He was always looking for undervalued companies, no matter the industry. Lynch liked growing fast food chains because if they could be successful in one region, they would be successful nationwide.

Lynch made a point of getting to know every industry he could. One of the most valuable lessons he learned was the importance of doing his own research. Lynch made it a habit to meet with at least one industry representative from every sector once a month for a general update. This provided an opportunity to spot potential trouble early. Another trick he learned was to end every conversation by...

Chapter 5 Summary and Analysis

Lynch believes that focusing on the companies is more important than focusing on the stocks. Lynch used the methods of an investigative reporter: reading public documents for clues, talking with analysts and investor relations people for more clues, and then going to the companies themselves. After each contact, he would make a note in a loose-leaf binder with the name of the company, the current stock price, and a one or two line summary of the story he had just heard.

As Magellan grew, Lynch used assistants to call companies and analysts to keep up on developments. Lynch found that when people are given more responsibility, they usually live up to it. This was a revolutionary concept in the industry. Traditionally, fund managers choose stocks based on their analysts' research. Unfortunately, this allows managers to blame the analyst for a poor performing stock. If an analyst knows his or her...

Chapter 6 Summary and Analysis

The amount of time needed to research your portfolio depends on how many you own. A few hours a year must be dedicated to reading annual and quarterly reports and calling companies for periodic updates. One person with five stocks can do this as a hobby. The fund manager of a medium sized fund can do it as a 9-5 job. In a larger fund, a 60-80 hour work week is required. By mid-1983, Magellan had 450 stocks. Before the end of the year, the fund doubled to 900. Magellan was criticized for being too big-by owning that many stocks, they couldn't beat the market, they were the market.

When Magellan had 900 stocks, 700 of them accounted for less than 10% of the fund's total assets. The smaller stocks accounted for a tiny portion of the fund for two reasons: 1) the companies were small, so even if Magellan...

Chapter 7 Summary and Analysis

Lynch feels strongly that stock picking is part art and part science. Relying too much on either aspect, however, can be dangerous. Lynch has used the same stock picking method for 20 years. His method involves elements of both art and science with a healthy dose of legwork. He does not rely on computer programs or services. He figures that for every ten companies he researches, he will find one worth buying.

Lynch prefers a recession to an overpriced market. In an overpriced market, good value stocks are extremely hard to find. In a recession market, bargains are everywhere. He is happier to see the market lose 300 points than gain 300 points.

The investor who buys sells stocks frequently is asking for trouble. That investor would do much better to know their stocks. The investor who knows an industry and knows how a particular stock will respond to a...

Chapter 8 Summary and Analysis

A large regional mall can be the best place to do stock research. Many of the biggest gainers of all time are retailers: Home Depot, the Limited, Gap, and Wal-Mart are just a few. When it comes to retailers, if you like the store, you will probably love the stock even more.

Lynch attributes the success of retailers to the fact that taste in both food and fashion is universal. Typically the foods that are popular in one town or region will do well in other towns or regions. Likewise, clothes and fashion that are popular in one region often become popular nationwide.

Employees at malls can recognize very quickly which stores are doing well. If you don't happen to have such an insider connection, perhaps you can get some good tips from a friend or family member who visits the mall regularly. If a teenage girl you know buys...

Chapter 9 Summary and Analysis

Investors are often rewarded by looking to industries other investors fear. In 1992, for example, there was no more feared an industry than residential real estate. Investors feared that the collapse in the commercial real estate market would spread to residential real estate.

Lynch noticed that despite analysts' concerns, the median house price steadily rose from 1989 through 1991. Since the statistic was tracked in 1968, the median home price had gone up every single year. Lynch calls this a "quiet fact." Other quiet facts for the housing market are the "affordability index" and the percentage of mortgage loans in default. Even though these facts pointed in a positive direction, companies even remotely related to the home building and home finance industries were way down.

Anticipating a boom in the housing market, Lynch looked for housing-related companies that might benefit. He thought about Pier 1, the home furnishings retailer. If...

Chapter 10 Summary and Analysis

Towards the end of 1991, Lynch received a Supercuts prospectus and decided to visit a store for a haircut. He noted the prices were about the same as his regular barber, though much less than the salons his wife and daughters frequented. The company had just gone public a month or two earlier. There were 650 franchise stores established and management was embarking on an extensive expansion campaign. The theory behind the business was that the hair care industry was a $15-40 billion industry dominated by independent barbers and salons. Barbers, however, were a dying breed. This seemed a perfect opportunity for a well-managed national franchise do to very well.

Lynch liked the fact that the only expenditures for the company, besides rent, were scissors and combs. As a franchise operation, the corporation didn't have to invest its own money in expansion. The biggest plus of all, though, were the...

Chapter 11 Summary and Analysis

Lynch is quite fond of solid companies in poor industries. It is much more difficult to find an undervalued stock in an industry that is popular and successful. In a lousy industry, weak companies fail and strong ones earn an even bigger share of the market. A growing company in a stagnant market is much better off than one that has to struggle to keep up in a fast-paced market.

Good companies in poor industries share certain characteristics. They operate at low cost. Their owners are often characterized as "cheap" or "penny-pinchers." They avoid debt. They reject the traditional corporate structure of overpaid fat-cat executives who ignore the concerns and opinions of labor. Workers are well paid and often own a piece of the business. They seek out markets that larger companies have overlooked. They tend to grow very quickly.

Sun TV, a small, discount retail television and electronics business...

Chapter 12 Summary and Analysis

In the early 1990s, Savings & Loans had a terrible reputation. After hundreds went bankrupt, the federal government was forced into a $500 billion bailout. In that environment, investors did not want to go near an S & L. Many S & Ls, however, were doing just fine and were excellent candidates for investment. Lynch provides a framework to analyze an S & L. He divides them into three categories: the "bad guys" that perpetuated fraud, the "greedy guys" that ruin a good thing, and the thrifty "Jimmy Stewart" types.

The "bad guys" tended to run them into the ground in the same ways. For example: several investors get together and collectively invest $1 million. This is their equity. They take in $19 million in deposits and then make $20 million in new loans. In order to raise the $19 million in deposits, they paid sky-high interest rates. Those deposits...

Chapter 13 Summary and Analysis

A casual stock picker could pick five conservative S & Ls, invest an equal amount in each, and wait for the profits to roll in. One would likely do better than expected. Three of them would make an average return. One would do worse than expected. The overall result should be better than a traditional investment in Coca-Cola or Merck.

Lynch would try to improve his odds through in-depth research. He spoke with the CEO of Glacier Bancorp. It was a 12-15% earner selling at 10 times earnings. Nonperforming loans were almost non-existent. The dividend rose for the 15th straight year. It had just acquired two other S & Ls. Strong S & Ls grow quickly by acquiring troubled and defunct S & Ls. Glacier held a relatively high percentage of commercial loans, but these loans for multifamily housing, not vacant office buildings or condos.

Lynch phoned the CEO of...

Chapter 14 Summary and Analysis

Another class of company ignored by Wall Street was the master limited partnership or "MLP." The term limited partnership, in 1991, brought back memories of terrible tax-shelter partnerships that went bust. Another reason they were ignored was that an MLP forced the shareholder to do extra tax paperwork. The biggest difference between an MLP and a normal corporation is that the MLP distributes all of its earnings to the shareholders in the form of a very high dividend. A substantial drawback was that most all MLPs were forced to close out in 1997-1998 because of tax laws.

EQK Green Acres owned a shopping mall on Long Island. Lynch recommended this company in 1991. Management owned many shares and the dividend rose every quarter since it went public. Future earnings would be good as well, because rent would increase substantially a year down the road. He was worried about heavy borrowing,...

Chapter 15 Summary and Analysis

In a poor economy, fund managers often turn to cyclicals. Cyclicals are companies which typically follow a pattern of boom to recession and then back again. Common cyclical industries are: aluminum, steel, paper, automobiles, chemicals and airlines. Wall Street seemed to be anticipating the return of cyclicals earlier and earlier, making it that much more difficult to successfully invest in them. While a low P/E ratio is regarded as good with most stocks, such is not the case with cyclicals. When they are very low, a cyclical is usually at the end of a favorable period. Inexperienced investors will stick with the company because business is good and earnings are high. This, however, will soon change. Smart investors will sell. The price of the stock falls quickly once the selling begins. Never buy a cyclical after several years of record earnings and when the P/E ratio is at a low...

Chapter 16 Summary and Analysis

Utility stocks have traditionally been consistent earners. They are often better than a CD because they pay a nice dividend and normally appreciate in value over the course of several years. Troubled utilities can be excellent investments. A troubled utility almost has to fix itself because they are regulated by the government and the population has to have electricity. A utility may declare bankruptcy or eliminate its dividend, but it is going to have to stay in operation.

With several distressed utilities to choose from at the end of 1991, Lynch looked to CMS Energy, the utility company of Michigan. The company had done very well until it built a nuclear plant that regulators would not allow them to operate. Its stock fell from $20 to $4.50 in 1984. The company was forced to take a $4 billion write off-the cost of building the plant. Despite the huge hit, CMS...

Chapter 17 Summary and Analysis

Privatization of government-run business can be very profitable, no matter which country is selling. Privatization takes something that is owned by the public, sells it to the public, and then it is private. In America and Britain, privatization is almost always a no-lose situation. Elected officials do not want to upset the voting public by losing their money in a privatization deal that goes wrong. Privatizations almost always favor the investor with very low prices.

Telephone companies around the world have privatized and done extremely well. Privatization of telephone companies in Mexico, Spain, and the Philippines all resulted in investors making a once-in-a-lifetime killing. The Mexican phone company, for example, went up almost 800% in only two years.

Privatization in the United States is somewhat rare since the types of companies that might be privatized in other countries likely started out private in the U.S.

Chapter 18 Summary and Analysis

During Lynch's last three years at Magellan, Fannie Mae was its biggest position in the fund. Fidelity's clients made over $1 billion in profits from Fannie Mae during the 1980s. Looking back, Lynch thinks Fannie Mae was a rather obvious pick. He realizes, however, that no one can make that much on a stock unless the stock is grossly underestimated by the market.

Fannie Mae created the concept of the "mortgage-backed security." They bought mortgages, bundled them together, and then sold the bundle to anyone, including the banks that originated the mortgages. Fannie Mae earned a fee for this package and passed the interest rate risk on to new buyers. This service became very popular among the banks. Before it was invented, banks and S & Ls were stuck administering thousands of little mortgages. They were hard to keep track of and hard to sell. Now the bank could sell...

Chapter 19 Summary and Analysis

Lynch bemoans the fact that he missed investing in the mutual fund industry. The Great Correction of 1987 allowed him to give them a try. There was a great fear at the time that the mutual fund industry would collapse. Lynch bought mutual funds at low prices. When mutual funds are popular, it is often better to invest in the companies that sell the funds than to invest in the funds themselves. When interest rates decline, bond and equity funds attract more cash and the companies that specialize in these funds do very well.

Chapter 20 Summary and Analysis

New restaurants and fast food establishments are created every year. Historically, restaurant stocks have been some of the biggest earners of all time. Shoney's rose 168 times. McDonald's price multiplied by 400. Kentucky Fried Chicken rose 27 ? times its initial offering price.

The investor who missed the restaurants of the 1960s didn't have to worry. In the 1970s he could have done very well investing in Dairy Queen, Wendy's, Luby's, Taco Bell, Pizza Hut, and Long John Silver. In the 1980s, Cracker Barrel, Chili's, Sbarro, and Chi-Chi's were excellent restaurant opportunities.

Restaurant chains, like retailers, typically have 15-20 years of fast growth as they expand. Restaurant companies take time to expand across the country. Slow and steady expansion is better than overexpansion. If a restaurant expands by more than 100 stores a year, it is asking for trouble. A pace of 30-35 new units per year is much more...

Chapter 21 Summary and Analysis

A prudent investor should review his portfolio every six months and ask the following questions: 1) is the stock price still a bargain compared to its earnings? And 2) is the company doing anything to increase earnings?

Asking these two questions can lead to one of three conclusions: 1) the company's financial situation has improved and I should buy more, 2) the company's situation has worsened and I should sell or 3) the company's situation is unchanged and I can either leave the money there or put it into another company with better prospects. With this strategy in mind, Lynch re-examined the 21 picks he made for Barron's at the six-month point.

As a group, the 21 stocks did very well in an average market. Lynch read the quarterlies of the 21 companies. Some of his research led him to companies he liked better than the original 21. He recommended...

20 Golden Rules Summary and Analysis

This section is a summary of Lynch's most important lessons learned through two decades of investing.

Get the investor's edge to outperform the experts by investing in companies or industries you know and understand. An amateur can often outperform the professionals by ignoring them. In every industry, an amateur who does a little homework can find great growth companies long before a professional. Never invest in a company without understanding its finances. Never own more stocks than you can handle. An amateur can do quite well owning only five companies.

The key to making money is being patient. Sometimes even a successful company may not see an increased value in its stock for many years. Eventually, though, a successful company will show a long-term gain in value. Long shot stocks, on the other hand, almost always fail. "Hot" stocks in "hot" industries are usually risky. Established companies in non-growth industries...

Beating the Street Important People

Investors

Investors are the target audience of this stock-picking advice book. In recent decades, investors have shied away from buying stocks and have preferred investing in bonds or mutual funds. Lynch wrote this book to convince investors to head back to the stock market. He urges the cautious investor to give stocks a try by demonstrating that a long-term investment in the stock market will almost certainly pay off. He shows how investing in an established, solid company can result in long-term gains that could double or even triple the returns of a bond. The ups and downs of the stock market are largely made irrelevant by long term investment.

Fund Managers

Peter Lynch managed the Magellan Fund. A mutual fund is basically a pool in which many investors have deposited their money. The fund managers then invest the money in various stocks and other investments depending on the type of fund. An...

Beating the Street Objects/Places

St. Agnes School

This is the school the amateur 7th grade investors attend. Lynch uses them to make a point that even a novice investor can be successful if they make wise investment choices and sticks to areas in which they are knowledgeable.

Magellan Fund

The Magellan Fund is a fund created by Fidelity Investments in the 1960s. Peter Lynch managed Magellan from 1977 to 1990. By managing Magellan, Lynch became the premier fund manager in the U.S. Magellan outperformed the S & P index each year.

Barron's Roundtable

This was an annual meeting in which the top fund managers and investment analysts met to make investment recommendations for an annual issue of Barron's Magazine. Lynch's 1991 and 1992 recommendations form the basis of this book. The book highlights how he made his selections and how he reviewed and tracked them to make further recommendations.

P/E Ratio

The P/E ratio provides a way to measure a stock's value. P...

Beating the Street Themes

Invest in what you know

Lynch's overriding theme throughout the book is investing in what one knows. He demonstrates this first in the 7th grader exercise. The 7th graders did very well in their mock investments by choosing companies they were familiar with, from fast food restaurants to Nike to Disney to the Gap. Lynch suggests that an amateur investor can be just as knowledgeable about a particular field as a Wall Street analyst and perhaps even more so. For example, those who visit malls frequently often have insight into new retail stores and trends of which a Wall Street analyst may not be aware. The shopping mall regular may be able to pick out a new, popular chain with great potential like the Body Shop. Likewise, regional fast food chains on the move might be spotted early, as they are on their way to national expansion and great success. Taco Bell, Sbarro, and Chili's...

Beating the Street Style

Perspective

Peter Lynch is perhaps the most successful mutual fund manager of all time. Lynch managed the Magellan Fund from 1977 through 1990. During that time, Magellan was the top-ranked general equity mutual fund. TimeMagazine called Lynch the "#1 money manager." Lynch's first book, One Up on Wall Street, instructed potential investors to invest in subjects and areas in which they are knowledgeable. After retiring from Magellan, Lynch devoted his time to assisting nonprofit corporations with their investments. He wrote Beating the Street to help the average investor make better investment choices.

Lynch's intended audience could be any investor, from a seasoned pro to an absolute beginner. The beginner will appreciate the step-by-step method Lynch takes in explaining the basics of investing and then explaining his own methodology for researching a company for potential investment. The seasoned investor will likely appreciate learning Lynch's methodology and exactly what goes through his...

Beating the Street Quotes

"Never invest in any idea you can't illustrate with a crayon." Chapter 1, p. 27.

"You can't see the future through a rearview mirror." Chapter 2, p. 41.

"The extravagance of any corporate office is directly proportional to management's reluctance to reward the shareholders." Chapter 4, p. 86.

"The best stock to buy may be the one you already own." Chapter 6, p. 129.

"A sure cure for taking a stock for granted is a big drop in the price." Chapter 6, p. 131.

"Never bet on a comeback while they're playing 'Taps.'" Chapter 6, p. 138.

"If you like the store, chances are you will love the stock." Chapter 8, p. 152.

"All else being equal, invest in the company with the fewest color photographs in the annual report." Chapter 11, p. 190.

"...try to find a reason that the next year will be better than the last. If...

Beating the Street Topics for Discussion

Why are stocks a better investment than bonds or certificates of deposit?

Discuss three specific ways that research helps an investor make better decision.

Discuss how an average consumer has an advantage over a Wall Street analyst in choosing a retail stock.

What is the pattern of a cyclical stock and when should an investor consider buying one?

Name the five basic types of funds and describe each one.

What are the effects when a company buys back its own stock?

Describe how a recession can be good for an investor.

Explain how to find a good company in a lousy industry.

What is the "January Effect" and how can a good investor take advantage of it?

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