One Up On Wall Street Book Summary - 5 Big Ideas
Peter Lynch is a Wall Street legend who believes that you don’t need to be an expert with a Harvard MBA to make great investments. He practices what he preaches. Peter Lynch, who liked the coffee at Dunkin-Donuts, did a little research and bought their stock – which made a ten-fold return on his investment. In this book, Lynch tells the reader that the experts are blinded by their own expertise. They miss great opportunities because they are cocooned within their spreadsheets. The layperson, however, can use their perspective as daily-consumer to spot “ten-baggers”
Experts? Pfft - Listen to your surroundings instead
Peter Lynch insists that you do not need to be an expert to make great investments. In fact, the layperson has a serious advantage over an expert is cooped up in the office all day. You can make extremely profitable investments by simply observing your immediate surroundings – from your workplace to your visits to the mall. These are companies that haven’t reached the ears of the expert yet – and that’s precisely why they are undervalued. These are opportunities to receive a ten-fold return on your investment.
Develop A Story - Understand the fundamentals of the company
Liking a product or the vision for a company that you stumble across in your day-to-day activities is a great start – but you shouldn’t jump the gun on the investment. Research the company – understand the fundamentals. Try to pen down a story as to why you believe the company will grow. Finally, look deeper into the company's numbers for opportunities and redflags:
- P/E ratio - you want this to be low
- True asset value (hidden in the balance sheet)
- Insider activity (are the founders buying shares back? - this is a good sign)
- Cash position (Cash is king)
Hot Stocks = Nope-stocks
Lynch suggest that a tip from the top news channels are probably the worst to follow. If there’s a stock you’re thinking of buying and CNBC says it’s hot -– forget about it. If you own that stock -– it may be time to sell it quickly!
"If I could avoid a single stock, it would be the hottest stock in the hottest industry –the one that every investor hears about in the carpool or on the commuter train”
Hot-picks like these often get overvalued and either cost you money or don’t make enough gains once they’ve reached the public eye.
A Slice Of The Pie
A company may come out with a brilliant product that you believe in strongly. But an important question to ask is: Is this product a large slice of the company’s pie or a small slice? If the product is only one of the hundred products that the company has, then this is a small slice. Even if the product does extremely well, it unlikely have a noteworthy impact on the stocks. However, if the product is a large slice, then the stock has potential to be a ten-bagger (ten-fold return)
For example, if P&G come out with a new hot product — no matter how well the product does, it's not going to cause a huge spike in their shares. Why? Because P&G has countless of products that all contribute to the profits of the company.
Diversifications are Die-Worse-Ifications
Lynch advises the reader to be wary of companies that diversify. Diversifications have great potential for growth, but they are often done wrong. Profitable companies that look to diversify tend to waste their money on overpriced acquisitions that they do not fully understand. As a result, the acquisition is mismanaged and results in heavy losses. Companies looking to diversify should be a warning sign. If you hold the stock, it may be time to sell. If you’re considering buying – you may want to stay away.
Final Thoughts
Overall, Peter Lynch provides us with a great primer to investing. The book seems highly anecdotal. But I believe that’s precisely the author's underlying message — investing doesn’t need to be a complicated process. He relates his experiences — several of them, mind you — in an attempt to get his idea across. While some may bash the books for this approach, I appreciate it for it’s own charm. I pictured myself sitting across Lynch over a cup-of-a-joe while he dispensed his priceless wisdom upon me. Now — how much would YOU pay for a meeting like that?
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