One up on wall street book is written by legendary American investor “Peter Lynch”. As the manager of Magellan fund at Fidelity investments between 1977 and 1990, Lynch averaged an annual return of 29.2% consistently beating the S&P 500 market index and making it the best performing mutual fund in the world.
During his tenure , assets under management grew from $18 million to $14 billion.
Mr. Lynch has written many books and papers on investment strategies, I personally consider one up on wall street as the best peter lynch book.
In this article, we will discuss about one up on wall street review.
The style of writing and simplicity of concepts makes it a great read for beginners.
The power of common knowledge:
He made picking stocks easy by ” How to use what you already know to make money in the market”. Peter Lynch believes an individual with an edge can beat those wall street professionals and money managers.
These edge could be industry you are working in , products which you consume, etc. This edge could help in identifying the industry trends way before wall street professionals notices it.
Eg: If you are working in a apparel industry, you would have noticed how people are flocking towards GAP stores . By using this edge if you would have bought 10 share of GAP stock at its IPO price $18. This would have turned into $4672.5 by 1987.
Not only the retailer has this edge, A plumber will knew the best piping supplier, A doctor knew the medicines which he prescribes and companies behind those medicines, A new mom knows which is best pamper available in stores for her baby.
This advantage as a consumer and professionals in an industry has is way out of reach to wall street professionals who have little exposure towards the real economy. Peter Lynch believes this edge will help an individual to perform better than most wall street money managers.
Street Lag:
Most of the fund managers don’t outperform the market because too many obstacles between them and the tenbaggers.
One up on wall street book talks about how wall street and mutual fund operates in a typical day.
In wall street, a stock is not truly attractive until a number of large institutions have recognized its suitability and an equal number of analysts have put it on their recommended list.
So many people are waiting for others to make the first move.
This behavior is led by their “Group thinking” and personal career risk which makes them slow to react on great growth opportunities.
An unwritten rule on wall street: “You will never lose your job losing your client’s money in IBM.”
Whenever fund managers do decide to buy something exciting (against all the social and political obstacles), they may be held back by various written rules and regulations.
Eg: Won’t invest in nongrowth industries or specific industry group, Its not in their approved list of shares, etc.
But Peter Lynch try to buy the very stocks that traditional fund managers try to overlook. In other words, Peter lynch continues to think like an amateur as frequently as possible.
Related read: Who is the richest man in Babylon?
Passing the checklist:
Lynch acknowledges that stocks are more profitable and risker than holing bonds.
The only way to mitigate the risk is knowing the company and products behind the stock. This is why investing in what you already know makes a lot of sense.
Checklist:
- Do I own a house?
Houses are most likely to be profitable when they are held for a long period of time. Unlike stocks, houses are likely to be owned by the same person for a number of years.
The value of house increases 5 percent a year. On top of it, you get a tax deduction from the government.
House is a perfect hedge against inflation and a great place to hide out during a recession.
House gives you security not only to you, for your whole family a roof over your head.
2. Do I need the money?
If you need the money in two or three years, don’t put that money into stocks.
Even buying blue chip stocks would be risky for short term money needs. Blue chips can fall down and stay down over a three year period or even a five year period.
When to invest?
“Only invest what you could afford to lose without that loss having any effect on your daily life in the foreseeable future”.
3.Do I have the personal qualities to succeed with stocks?
Stocks make good or bad investments depends more on your responses than anything you will read in The Wall Street Journal.
One up on wall street book covers the qualities required for successful investor.
Regarding personal qualities , peter lynch thinks a good investor should have:
- Patience
- Self-reliance
- Common sense
- A tolerance for pain
- Open-mindedness
- Detachment
- Persistence
- Humility
- Flexibility
- A willingness to do independent research
- Willingness to admit to mistakes
- Ability to ignore general panic
He also believes the important skill to have success in stocks is not listening (to wall street or brokerage firms), its snoring.
Trick is not to learn to trust your gut feelings, but rather to discipline yourself to ignore them.
Standing by your stocks as long as the fundamental story of the company hasn’t changed irrespective of the market conditions.
Core message of one up on wall street book is “Anybody can have great success in stock market with right method and temperament“.
Investing success has nothing to do with one’s education and IQ.
Related read: The Shockingly simple math behind early retirement
The Six categories:
Peter Lynch categorize the stocks into six different buckets.
- Slow growers:
These are large and old companies grow little faster than the gross national product. But these slow growers were fast growers of past. Once the industry matures, the companies within the industry becomes slow too. Eg: Electric Utility stocks.
2. Stalwarts:
Stalwarts are companies of todays FMCG industry which grow faster than slow growers. They grow at 10 to 12 percent annually.
Keeping Stalwarts in your portfolio offer pretty good protection against recessions and hard times.
3.Fast growers:
These are the enterprises which grow at 20 to 25 percent a year. Its a land of the ten bagger , twenty baggers and even hundred baggers. These stock category is a favorite of Mr. Peter Lynch.
4.Turn arounds:
These are depressed companies which are about to rebound or comeback.
5.Cyclicals
In Cyclicals . companies sales and profits rise and fall in regular. Auto industry , Airlines, Tire companies, Steel companies and chemicals companies are all cyclicals.
6. Asset plays
They own great assets or something valuable which wall street has missed.
Each type has its own qualities, and you will need to assess once you classify the company.
These are the six categories of stock mentioned in one up on wall street book.
The perfect stock characteristics:
One up on wall street book goes to the extent of explaining the characteristics of perfect stock. They are listed to help to you start off your own stock picking.
- It has a dull or boring name , even better a ridiculous one
- It business is boring (producing bottle caps, processing coupons), so it won’t get noticed by wall street.
- It does something disgusting (clean greasy auto parts, makes plastic straw)
- Its a spinoff.( A parent firm letting one of its division as an independent one)
- The institutions don’t own it , and analysts don’t follow it
- Rumors Around: Involved with toxic waste or Mafia.
- Does something depressing(funeral services, alcohol)
- No growth industry. No one tries to compete there, so the best company consolidate the market.
- It got a niche (MOAT or less competition)
- People have to keep buying its products(soft drinks, razor, cigarettes)
- User of technology (to cut costs)
- Insiders are buying
- Company is buying back its shares.
Peter lynch avoided the stocks which are most trended or stocks that have been bought by hype. He likes sectors which are ignored.
There is a point you could contradict with him, but overall buying stocks from ignored companies is reasonable.
Related read:why buffett favors Index fund: 3 terrific reasons
What Stocks to Avoid
Peter lynch has mentioned some characteristics as red flag to avoid buying them.
- The next big thing. The next IBM (Amazon or Tesla today?) is probably not going to succeed as much as IBM. Such enthusiasm can even mark the beginning of trouble for the original one to which it is compared to.
- “Diworseification”: mixing diversification and worsening, the word illustrates when companies enter new markets for no good reasons. Eg: Can you imagine Starbucks entering into logistics business. A solid niche is better than multiple failing products.
- Dependents. Companies that rely on one client or a small number of clients for a large part of their business are vulnerable.
Again, these are not the only things you’ll want to avoid in an investment, but if you see than you may want to take a closer look.
The Story
Before investing, you should be able to summarize your reasons or investment thesis in a two minute story about the stock.
It includes what the company does, how can it grow, why its mispriced, and other key things.
The story has to be regularly revisited to see the latest developments.
Check the story as your company enters into a more mature stage, making any major acquisitions, introducing any new product or undergoes another major change.
The 12 Silliest (and Most Dangerous) Things People Say About Stock Prices
- If it’s gone down this much already, it can’t go much lower.
- You can always tell when a stock’s hit bottom.
- If it’s gone this high already, how can it possibly Go higher?
- It’s only $3 a Share: What can I lose?
- Eventually they always come back
- It’s always Darkest before the Dawn.
- When it Rebounds to $10, I’ll sell.
- What me Worry? Conservative stocks don’t fluctuate much
- It’s taking too long for anything to ever happen
- Look at all the money I’ve lost: I didn’t buy it!
- I missed that one, I’ll catch the next one
- The stock’s gone up, So I must be right, or… The stock’s gone down so I must be wrong.
These 12 things are discussed in a separate chapter in one up on wall street book.
Key Takeaways of one up on wall street book
Sometime in the next month, year or three years, the market will decline sharply.
Market declines are great opportunities to buy stocks in companies you like. Corrections – Wall street’s definition of going down a lot – push outstanding companies to bargain prices.
Trying to predict the direction of the market over one year, or even two years, is impossible.
To come out ahead you don’t have to be right all the time, or even a majority of the time.
The biggest winners are surprises and takeovers are even more surprising. It takes years, not months, to produce big results.
Different categories of stocks have different risk and rewards.
You can make serious money by compounding a series of 20 – 30 percent gains in stalwarts.
Stock prices often move in opposite directions from the fundamentals but long term, the direction and sustainability of profits will pervail.
Just because a company is doing poorly doesn’t mean it can’t do worse.
Just because the price goes up doesn’t mean you’re right.
Just because the price goes down doesn’t mean you’re wrong.
Stalwarts with heavy institutional ownership and lots of wall street coverage that have outperformed the market and are overpriced are due for a rest or a decline.
Buying a company with mediocre prospects just because the stock is cheap is a losing technique.
Selling an outstanding fast grower because its stock seems slightly overpriced is a losing technique.
Companies don’t grow for no reason, nor do fast growers stay that way forever.
You don’t lose anything by not owning a successful stock, even if it’s a tenbagger.
A stock does not know that you own it.
Don’t become so attached to a winner that complacency sets in and you stop monitoring the story.
If a stock goes to zero, you lose just as much money whether you bought it at $50, $25, $5, or $2 – everything you invested.
By careful pruning and rotation based on fundamentals, you can improve your results. When stocks are out of line with reality and better alternatives exist, sell them and switch into something else.
When favorable cards turn up, add to your bet, and vice versa.
You won’t improve results by pulling out the flowers and watering the weeds.
If you don’t think you can beat the market, then buy a mutual fund and save yourself a lot of extra work and money.
There is always something to worry about.
Keep an open mind to new ideas.
You don’t have to “kiss all the girls.” I’ve missed my share of tenbaggers and it hasn’t kept me from beating the market.
Conclusion
I believe one up on wall street book is a brilliant one and must read if your actively participating in stock market investing or begin to invest in it. This book is simple, easy to understand & motivating.
Its is the best peter lynch book out of the three.
It gives the investor the right mindset and attitude before he/ she explores the market.
Every concept and idea is carefully explained with real world examples taken from Lynch’s vast investing experience.
Its a brutally honest about why investors fail, how to develop a story about company, avoid leverage etc.
Its a perfect book for someone who does not have a background in investing/ business but with lot of motivation to learn and succeed.
One up on wall street book takes an educational approach and sets a solid foundation for successful investing strategy if you are willing to put the work.
“The person who turns over the most rocks wins the game. And that’s always been my philosophy “
– Peter Lynch.
Thank you for reading. Happy investing!
