Main lesson of the book: How to invest to beat the market.
This is a really nice book that has a lot of interesting points that will carry through the ages. A great point the book loves to make is that the small investor has a leg up on the “Big Boys” on Wall Street. The reason why this is, is because the small investor can literally invest in what they know. What the small investor knows is what they experience and see happening around them in their everyday life. If you see a business open up a lot of stores around you, or all of a sudden someone in your circle buys something new and they love it. Those are signals that there is something happening in the market you might want to look into. Because the base rules still apply, regardless of whatever might happen. Quality and good business sense will be seen by the market and it will price it correctly. Knowing that the market will price what you have found correctly, it will give you the confidence to keep the stock till the value you assigned it matches with the value assigned by the market. But remember that no matter how much confidence you have or how much research you have put it, the market isn’t something anyone can accurately read all the time. So you will make mistakes. The goal is to be right more than you are wrong. Or be lucky enough to be wrong a lot but be right one big time.
The book divides the market into 6 segments of companies one can invest in. You have the Fast Grower. These companies have grown their earnings by about 25% per year on average. These companies will of course be well known by the market thus their potential growth will be well priced and thus sell at a premium. With these companies you have to make sure you get out once the growth slows down. The opposite of Fast Growers is of course Slow Growers. These are the companies that usually pay dividends to their stock owners. These are good options for those who like stability. The next one are what the book calls Stalwarts. These are the companies that don’t really drop nor grow as much because they tend to sell essentials that aren’t really volatile. These companies are usually recession proof. There are also Cyclical companies that have their profits go up and down in cycles. These companies are usually the ones that get referred to when people say buy low and sell high. Turnarounds are the companies that just went through something or are experiencing difficulties. When investing in these companies you will need to make sure that you are sure they can actually turn it around and won’t go bankrupt. And the last one is Asset Plays. These are companies that are currently underappreciated by the market. Some companies tend to not have an accurate balance sheet showing the true value of their assets. Which these companies you can make a lot of money because the market might not be aware of the mistake.
Peter Lynch also suggested that as a serious investor, you will need to at least put in one hour of research every week to make sure you are at least aware of what’s happening in the market. And no matter what you do, never invest in HOT stocks. Because these stocks are almost always overvalued and the market will correct itself. A smart move you can make is by investing in the category instead of an individual stock so you can see what is going on in the market. And if you are to invest in a company, keep in mind that a company with no debt can not go bankrupt. Which also means that he company might not be expanding as much as it could.
One of the best pieces of advice the book gave was the following. Invest in boring, simple, dull or mundane stocks. Or find stocks that are currently out of favor with the market, and if you can find companies that haven’t been found by Wall Street yet. If the company does something that everyone needs or wants but would rather not talk about, you might have found yourself a great company. The reason why is because people tend to want to only invest in things they don’t understand or things that seem sexy to be a part of. But a company that sells toilet seats might be an amazing investment. Or a funeral home that keeps growing its consumer base. The fact that you own stocks in a funeral home might not be seen as “sexy” but it could be a very valid investment. Another fun point the book made is that you should look for a company with a weird, funny or straight up ridiculous name. The reason for this is that Wall Street will most likely never purchase it sheer for the fact that the big companies won’t want to tell their clients they just bought “Dingy Jingy Jeanie Beanie” for 5 million. But if this company has a solid business model that can be replicated and a strong management team, its intrinsic value will most likely be higher than its value in the current market. So owning it until the market catches up is the smart move. And another great point is that you should look for companies that don’t have or have little institutional ownership. If a company checks all the boxes then you have yourself a good bet, according to Peter Lynch.
When becoming a part of a company you should try to find the story behind the company. This will help you follow it a lot better. And keep in mind that a company that buys back its stocks is a positive. This shows that management understand the value of its company and is looking to the future and not the present. These are all things you should take into consideration. As stated in several books, Peter Lynch always wants to make sure that the reader understands that we are buying a part of a company and not just a piece of paper. Which means that we will have to do a bit or research before we buy. Do as much research as you would when buying a new fridge. And always be patient. Watching your stocks will only drive you crazy.
The book also tries to answer some common mistakes a lot of people make when investing. You will never know what the bottom of a stock is, so don’t make the assumption that just because the stock is down it won’t go down further. The same goes for a stock going up. There is no ceiling on a stock. Don’t ever think that just because you only invested a small amount of money it doesn’t matter. A loss is a loss no matter how much you invested. You can lose it all regardless. And I know that hope is a beautiful thing to most, but some companies will NOT come back. So waiting for something to come back to the price you bought it at, might not be the smartest thing to do. And never compare yourself to others. The mind state of “I could have made so much money if I bought it back then”. Will just lead you to make mistakes in the future.
This was a nice book. It had a lot of nice insights and good points I will take into my own investment strategies.