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?

http://www.bookrags.com/studyguide-beating-the-street/

Peter Lynch's Investment Principles

Peter Lynch ran the Fidelity Magellan Fund for 13 years, during which time Magellan was the number one ranked general equity fund in America. His books One Up on Wall Street and Beating the Street are filled with his accumulated wisdom and in Beating the Street he gives a fairly detailed account of how he did his analysis.

The first thing that will strike new investors as strange is that Lynch's methods are actually so simple that mostly an amateur could use them entirely unchanged and with the same results. Lynch does not use any gimmicky computer programs, either to pick stocks or optimize the portfolio for volatility. Each and every company invested in by Magellan was considered on its own individual merits, and the managers of Magellan generally did their very best to completely avoid investing in anything that consensus opinion from the average Wall Street analyst declared was a good thing.

Lynch sums up his points in Beating the Street with a number of humorous "Peter's Principles", which appear here. Do take the time to read Beating the Street in its entirety though, as he makes a number of very interesting points throughout.

Peter's Principle #1
When the operas outnumber the football games three to zero, you know there is something wrong with your life.

This first point comes from the preface, where he is talking about how busy he was, regretting being unable to spend time with his family since he was too busy trying to keep current on a few thousand stocks. Although not really a hugely important point as far as this FAQ goes, I guess if I didn't put it here you'd wonder what it was if it was the only thing missing from the list!

Peter's Principle #2
Gentlemen who prefer bonds don't know what they are missing.

This one gets a going over in this FAQ in the separate "Bonds vs. Stocks" article, Lynch just pointed out that bonds are an inferior investment to shares.

Peter's Principle #3
Never invest in any idea you can't illustrate with a crayon.

A class of seventh graders at an American primary school did a social studies project on stocks, the kids had to do their own research and dig up stocks for a paper portfolio. They sent their picks to Lynch, who later invited them to a pizza dinner at the Fidelity executive dining room, illustrating their portfolio with little drawings representing each stock. Lynch just loved this because it illustrates the principle that you should only invest in what you understand, the kids portfolio consisted of toy manufacturers, makers of baseball swap cards, clothing manufacturers and outlets, Playboy Enterprises (a couple of boys chose that one), Coke, and other stocks of that ilk. With a portfolio notably lacking in glamorous technology ventures and entrepreneurial risk taking they went for solid stocks with excellent profits, their portfolio returned 69.6% against a background of a 26.08% gain in the S&P500 in 1990/91.

Peter's Principle #4
You can't see the future through a rearview mirror.

Chapter 2 of the book talks about "weekend worriers", those pundits that always have a thousand reasons why the economy is bad and it is not a good time to invest in stocks. He points out that even he is guilty of this, appearing on the prestigious Barren's panel on the state of the economy to prognosticate and outdo the other panelists on why the market is about to crash. He also notes that none of the people on the Barren's portfolio are anything less than the top experts on investment, managers of the biggest and best funds and all highly respected, obviously even with all the doom-saying they still find some time to invest. Lynch advocates looking at stocks for their own value, not to go in for top-down analysis in some futile attempt to predict the state of the economy and their effects on stock prices. The market crashes when stocks are way over valued, and doesn't usually crash again until stocks have become over valued again. His point comes down to the old saying, "buy in gloom, sell in boom". When the experts are bearish is the time to buy.

Peter's Principle #5
There's no point paying Yo-Yo Ma to play a radio.

Bonds vs. Bond funds, Lynch ponders why people invest in bond funds, with all their administrational fees, when any fool can go to a broker or the American Federal Reserve bank to buy a 3-year treasury note, or T-bill from $5000, and other notes for $1000. The returns on the direct investments are better than the managed funds because a T-bill is always a T-bill, there is nothing to manage or research. Bond funds are very popular in America, but Lynch really can't figure out why!

Peter's Principle #6
As long as you're picking a fund, you might as well pick a good one.

At the time Lynch wrote his book, there were more American mutual funds than there were listed companies! The majority of fund managers would rather be part of the Wall Street herd than do any serious research of their own. Despite the argument for a fund being that you are entrusting your money to a professional who will spend more time doing research than you ever could, the level of analysis in all but a minority of funds is very shallow, and tends to be the corporate equivalent of keeping up with the Joneses. Funds with big entry fees are not necessarily any better than funds without, the fund that comes out of nowhere and gets the top ranking one year is probably just highly leveraged in something that happened to do well that year, and will fail the next. In their quest to invest conservatively most managers buy stocks that have already been bought up to expensive levels, shunning investing in out-of-favor industries. Lynch gives a number of tips as to what to look for in a good fund, but his main point is that the majority of funds are duds. Often it takes as much research to find a good fund as it takes to find a good stock, perhaps more research since there are more funds than stocks.

Peter's Principle #7
The extravagance of any corporate office is directly proportional to management's reluctance to reward shareholders.

Excellent companies are thrifty. They seek to maximize returns by running their operation efficiently and seeking to be the best at what they do. Companies that buy themselves glamorous skyscraper office towers with indoor waterfalls and gold plated toilet seats, award executives with fat salaries not linked to performance, corporate jets, massive advertising campaigns aimed purely at sprucing up the corporate image, changing a sensible old name to something flashy and techy and other such excesses are not companies you want to invest in. To Lynch, such behavior indicates the management may well be far too concerned with self-aggrandizement rather than trying to maximize returns for shareholders. Some of the very best investments Lynch has made are cyclical companies in difficult industries that turn out to be the last man standing when all their rivals have gone broke, leaving the market all to them, and the credit goes to thrifty policies which ensure that these companies become the lowest cost competitors in the market.

Peter's Principle #8
When yields on long-term government bonds exceed the dividend yield of the S&P 500 by 6 percent or more, sell your stocks and buy bonds.

Lynch recommends this as a kind of value-contrarian-safety type of strategy, making the claim that when this situation occurs you should enjoy the "risk-free" investment of bonds, they are either yielding exceptionally well or the stock market is over-valued. Either way they make more sense than stocks at that time, this is the only exception to Lynch's assertion that stocks are always better than bonds.

Peter's Principle #9
Not all common stocks are equally common.

A direct attack on the efficient-market dart board method of stock picking. Lynch spends this chapter talking about asset allocations in Magellan, pointing out that while this fund, with more than one billion dollars invested was into over 1400 stocks at the time he was referring to, many of these were small investments, nice companies but too small for an organization like Magellan to own much. Really good stocks are not that common, Lynch's favorite stocks made up substantially larger proportions of the portfolio than others, but the other stocks held were held because they were also great companies, just too small for $100 million purchase orders. Many of these smaller companies are totally ignored by most funds, who prefer to buy well known stocks rather than research something not well known. This leads to great opportunities for small investors, because it means that it is perfectly possible to find small stocks trading at very low valuations, often below book value. You won't find Newscorp trading at below book any time soon, but such purchases are quite easy in very small companies. Lynch doesn't so much think that funds ignore small stocks because of the inability to make large purchases, he puts this down to copy-cat fund managers not wanting to stick their necks out. Although a dreadful stock in many ways, no fund manager has ever been fired for buying IBM: it is said that IBM has "disappointed the market", not that the fund manager screwed up. I have read a few books recently that very sternly advocate the efficient market hypothesis, dart boards and all, if you want to cure yourself of such nonsense just look at the results of Magellan!

Peter's Principle #10
Never look back when you're driving on the autobahn.

He's referring to the time he was doing a research trip in Europe and while traveling at 120mph (just shy of 200kmh) he noticed in his rear view mirror that some guy in a Mercedes was tailgating him about 3" from his rear bumper. I'm sure this incident has deep significance for investors, but I guess I'm too much of a philistine to see it.

Peter's Principle #11
The best stock to buy may be the one you already own.

Many stocks which later became major holdings started out as minor purchases by Magellan. Often it is unnecessary to run around looking for the perfect stock, you may already have it in your portfolio, so buy more! It goes back to principle number 9, the number of really brilliant companies is finite, so when you do have one it might be better to buy more than to go out to find something else.

Peter's Principle #12
A sure cure for taking a stock for granted is a big drop in the price.

Like many people who trade shares with great initial success, Lynch had attained something of a God complex thinking he was immune to the lumps and bumps of the market. He is referring to the shocks of 1978 and 1987, where big falls provided the necessary kick in the pants to remind him of who the real boss is. This point should be made to everyone who just got a Sanford account in the middle of the last bull market, sometimes good luck can mask bad skill.

Peter's Principle #13
Never bet on comeback while they're playing "Taps".

For those that don't get it, "Taps" is the name of that bugle tune they play at military funerals. This point deals with the idea of buying something just because the share price has fallen. Carefully investigate each purchase as if it were a new stock, ignore the history if the situation has obviously changed. As Lynch says, there is no shame in losing money on a stock. Everybody does it. What is shameful is to hold on to a stock, or worse, to buy more of it, when the fundamentals are deteriorating.

Peter's Principle #14
If you like the store, chances are you'll love the stock.

One of Lynch's favorite stock picking techniques is to take his wife and kids shopping at a large shopping centre. There you can see for yourself what chains are doing well, before the annual report. Many shops that are starting out as franchises have not yet been noticed by the stock market, even if they are listed. To do this kind of research he'd give his daughters some pocket money and see where they spend it, which usually led him to a discount clothing store like the Gap (an American jeans store turned popular general clothing store), which was always packed with kids making big purchases. What better operation could there be than an extremely profitable store just going franchise that is about to expand all over the country? Lynch loves these stocks, retail operations that go absolutely wild after a few years listing producing what Lynch aptly names "Ten-Baggers" - stocks with a 1000% price increase or better! His kids also help him by telling him what drinks are popular these days, leading him often to some small operation making a niche range of products that gains similarly. Of course once he gets back to the office he always checks up on the PE ratio and debt levels, which is what stopped him investing in "The Body Shop", on a 40+ PE which was too rich for his tastes even with such rapid expansion. Clearly investing in this sort of thing beats buying some riverboat casino or speculative technology issue recommended by a generic Uncle Harry.

Peter's Principle #15
When insiders are buying, it's a good sign - unless they happen to be New England bankers.

When management people make large purchases of their own stock with private funds, you know that the insiders feel the company is undervalued, or that something big is about to happen. The bankers comment refers to the silliness of the management of a number of Texas and New England banks who violated principle #13, buying substantial holdings almost right up to the day the banks closed their doors for good.

Peter's Principle #16
In business, competition is never as healthy as total domination.

The name of this chapter is "Blossoms in the Desert", it is about Lynch's love affair with really good companies in really bad industries. The trouble with investing in really good industries is that it attracts the attention of many others who want a piece of the action, hordes of players show up to take a piece of the pie, and even with the big profits of the industry the competition ends up so fierce that even people in the best industry can end up losing money to the lower cost competitors. As Yogi Berra once said about a famous Miami Beach restaurant, "It's so popular, nobody goes there any more.", exactly the point that Lynch is making. Instead Lynch really likes terrible industries, airlines, steel, tire retreads, can making, textile companies etc. He doesn't buy every stock of course, he looks for the one with the lowest operating costs. When times get hard most of their competitors will fold, leaving them with a huge market share in an industry no one wants any more, and since their costs are so low they often make a profit, even in the bad years. What then happens one day is the industry improves, leaving this very low cost producer with virtually no competition in a market that suddenly has the potential for explosive growth. Companies of this sort bear in mind principle #7, they are more likely to take investors across the road for a deli sandwich than entertain them on a wine and dine junket, with a corporate reception consisting of a black phone saying "pick me up" at the entrance to their factory, executives and staff who's pay is linked to corporate profits, non-membership of trade unions for the workers - and the workers like it that way since their pay is better with this company, employee award plaques on the walls instead of expensive art and a board room in the floating loft above the factory floor.

As an example of how great industries can mean very poor profits, look at airlines. Because of the poor profits made it has now dawned on many people that the airline industry is not a good one to invest in. This wasn't always the way people thought of it though, just when technology was picking up and the first true "Jumbo Jets" were appearing, it looked like a great time to invest in airlines. Sure enough, passenger numbers have grown substantially, and will no doubt continue to do so. Airlines should have been the greatest of growth stocks, and yet they have stagnated. With the huge growth in ticket sales there have been many new airlines to take a piece of that, along with the increasing cost of fuel this competition has been ruinous. As a result, air travel is considered to be a rotten industry, the reputation comes not from the business itself but from the competition.

Peter's Principle #17
All else being equal, invest in the company with the fewest color photographs in the annual report.

Still on austere companies that come to dominate lousy industries, Lynch has nothing but praise for companies that don't waste money. This extends to the annual report as well. Contrast the highly promoted tax dodge schemes with their glossy brochures and extensive advertising with the companies Lynch really likes, dull organizations that grow their profits steadily, unnoticed by Wall Street brokers until the share price has already increased 10 times over. Some of Lynch's favorite companies don't even have any photos at all in their report, going for a simple black and white text document that just sticks to the facts about expenditure and strategy. Lynch feels as if these companies actually feel themselves employed by the shareholders, not for themselves. Such companies would rather buy back their own stock and inflate the EPS than spend money on frivolities.

Peter's Principle #18
When even the analysts are bored, it's time to start buying.

What efficient market? Lynch loves industries Wall Street is ignoring, for here is where the real bargains are. Giant conglomerates have a hundred analysts watching their every move, because they are so popular they are often bought up to silly price earnings ratios though, it is the whole phenomenon of the market buying what they are familiar with, rather than what is good. Savings and Loan companies went out of fashion for a while in America, because a few crooked entrepreneurial types bought a few out and got into a whole lot of trouble making vast loans to their mates for speculative commercial real estate. The result was a series of spectacular failures that ruined the image of the whole industry. Most brokerages stopped looking at S&Ls altogether, and nearly every one of them was sold down. For Lynch this was great, he realized that the actions of these 1980s Christopher Skase types had not damaged the industry as a whole, certainly it meant absolutely nothing to the earnings of many of these companies. As a result Lynch was able to make quite a few wonderful acquisitions of solid companies with excellent histories that paid great dividends, and he waited a while for the hubbub to calm down and for the industry to get noticed by Wall Street again. Warren Buffett also likes this technique, he bought American Express after a scandalous one-off fraud perpetrated against the company, which led to a massive sell-off in AMEX. If an event doesn't hurt the long-term earnings of a company, and it won't go broke as a result of this hit, then obviously a big sell off is a good time to pick up a bargain.

Peter's Principle #19
Unless you're a short seller or a poet looking for a wealthy spouse, it never pays to be pessimistic.

This chapter talks about Lynch's strategy with cyclical stocks. Cyclicals can be a great way to make a buck if you buy them at the bottom, so it helps to look for opportunity in depressed stocks, rather than think of all the reasons why a cyclical is going to take losses. When cyclical stocks are so crushed by the economy that it seems things could not possibly get any worse, cyclicals usually hit their bottom. Lynch goes on to talk about PE ratios of cyclicals, advising that the time to buy these is when their PE is at a historic high, because Wall Street has caught on to cyclicals and often begins to discount them before the market as a whole tops. When a cyclical is sitting on a very low PE, along side record profits that have grown for many years, the market is anticipating a downturn. When a cyclical reaches a high PE on very low earnings, the price may be ready for an upturn because earnings will be at or near their nadir.

Peter's Principle #20
Corporations, like people, change their names for one of two reasons: either they've gotten married, or they've been involved in some fiasco that they hope the public will forget.

This chapter deals with utilities, especially nuclear power providers who suffer a temporary setback (like General Public Utilities, once proud owners of Three Mile Island Unit Two), but also other power utilities such as Consolidated Edison, who made massive losses as the price of oil skyrocketed in the 70s energy crisis, and yet regulators refused to allow the company to pass on the price to energy consumers. Although regulators can be a real burden on utilities, they are also their guardian angels, trying to prevent them from going entirely out of business, as long as people still need electricity the government regulators will not allow the company to fold. As a result utilities can take massive hits in the share price, but in all but a very rare few there is a support level from which they bounce back, often very spectacularly several years after the event. Lynch quotes some specialist utility analysts who have identified four distinct stages in a utility crash and recovery.

Stage one: disaster. Either the cost of fuel has gone through the roof or a major accident has occurred, a huge sell off follow, where the utility may fall to 20 to 30 percent of book value in one or two years. Those who regard utilities as safe bottom draw blue chips usually get something of a shock if their once-a-decade examination of their portfolio happens to coincide with this period.

Stage two: crisis management. An austerity budget is adopted and the dividend is reduced or eliminated. Costs are cut to the point that the company can survive the disaster. At this point Wall Street isn't paying attention any more, and stock prices remain very low.

Stage three: financial stabilization. The company, now as lean and mean as it will ever get can now turn a profit on the cash it receives from its bill-paying customers. Share prices by now have doubled, they are selling at 60 to 70% of book value while still reflecting great value in the eyes of typical "value investors".

Stage four: recovery. The company can now once again make a profit and pay a dividend. Shares now sell at full book value. Where it goes from here depends a lot on how regulators allow it to pass on costs to customers and the reception from the capital markets, because the company needs capital to expand.

Peter's Principle #21
Whatever the Queen is selling, buy it.

When governments in democratic countries privatize public companies, they nearly always offer such attractive terms that shareholders are almost guaranteed to make great profits. All over the world, in Britain, Mexico, France, Greece, Chile, Hong Kong and even America (not as many in USA as you'd expect, all of their great companies are already private), IPO's of major public corporations almost always pay off. Often these stocks are offered at well below book value, and with attractive installment payment plans. As we all know all about Telstra 1, I suppose I don't need to elaborate do I?

http://www.rbcpa.com/lynch's25goldenrules.html

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