The first in a series of articles where we’ll take a look at an important book on the subject of business, investing or personal finance.
It only seemed appropriate that for our first Five Minute Read, we focus on the book that’s at the core of the whole Rubicoin philosophy – ‘One Up On Wall Street’ by Peter Lynch.
Published in 1989, ‘One Up On Wall Street’ quickly became a number one bestseller and still remains relevant almost 30 years later.
About the Author
Peter Lynch is nothing short of legendary in the world of investing. Having landed the role as an intern with Fidelity Investments (largely because he caddied for the president of the company), Lynch worked his way up through the business and proved to be extremely talented at identifying great stocks.
Returning from two years in the army, he became Fidelity’s head of research, and at the age of 33, was given the control of the Magellan Fund—a relatively small mutual fund with assets of $18 million.
Over 23 years, Lynch grew the fund to $14 billion, making it the best performing mutual fund in the world with an average annual return of almost 30%.
Lynch has written three books on investing, outlining a simple philosophy that made him one of the world’s most famous investors.
‘One Up On Wall Street’—An Overview
The overall message of this book is that anyone can invest successfully with the right temperament and a small amount of research.” username. In fact, Lynch argues that the individual investor can actually greatly outperform professional fund managers for the following reasons:
- They are not beholden to the same restrictions as fund managers on what stocks they can buy.
Fund managers can typically only pick stocks of a certain size with a solid credit rating. This leaves a huge amount of untapped opportunity for individuals who are willing to put the work in and invest in smaller companies.
- Individuals can see the trends in their local community before that information makes it to Wall Street.
You might spot that a restaurant chain is becoming increasingly popular or that a new product is being touted by your friends and family. Alternatively, you might work within an industry in which your skill set would help you identify the next big thing.
The example Lynch gives for the second point is when his wife brought home a new product called L’eggs, which were women’s tights sold in an egg-shaped container.
The product was only being tested at the time, but his wife raved about how great they were. Lynch researched the product and found that they were made by a public company called Hanes. He bought the stock and eventually made it one of his funds biggest holdings. By the time Hanes was bought out, the stock had increased 30 fold.
“As I look back on it now, it’s obvious that studying history and philosophy was much better preparation for the stock market than, say, studying statistics. Investing in stocks is an art, not a science, and people who’ve been trained to rigidly quantify everything have a big disadvantage…All the math you need in the stock market you get in the fourth grade.”
Lynch was the first to coin the term “tenbaggers”—stocks that increase ten times in value.
He believed that just buying one of these stocks could greatly increase your wealth over a lifetime. Lynch took an aggressive approach to investing, noting that a few “tenbaggers” could make up for many failures.
“All you need for a lifetime of successful investing is a few big winners, and the pluses from those will overwhelm the minuses from the stocks that don’t work out.”
The Six Categories
Lynch sets out six categories that all stocks fall into. Understanding which category a stock belongs to is important for assessing what you should look for, and what return you should expect.
Slow Growers: These are mature companies with not much growth ahead of them, bought primarily for dividends.
Stalwarts: These are similar to Slow Growers in that they are mature companies, but they have many years of steady growth ahead of them.
Fast Growers: These are high-growth companies that have the potential to multiply many times and eventually become “tenbaggers”.
Cyclical: Companies whose profits rise and fall at predictable or regular intervals.
Turnarounds: Companies that are seriously down in the dumps, but may have a chance to rebound.
Asset-Plays: Companies that are sitting on some asset that has been overlooked or undervalued by Wall Street.
Lynch argued that before you buy a stock, you should know what category it falls into and set your expectations accordingly. This will give you a better insight into when to sell. It will also alert you to when your investment thesis has not worked out, allowing you to reconsider your opinion on a stock.
You should know and understand every company that you invest in. In other words, “Buy What You Know”. Click To Tweet
“Buy What You Know”
“There seems to be an unwritten rule on Wall Street: If you don’t understand it, then put your life savings into it. Shun the enterprise around the corner, which can at least be observed, and seek out the one that manufactures an incomprehensible product.”
Finally, Lynch argues that you have to invest for the long term in order to realize outsized returns.
Following the daily movements of a stock price is time-wasting and nothing but a distraction. What you should be focused on is the company’s earnings as, over the long term, a stock’s price will tend to follow its earnings.
If you’re not prepared to accept losses and hold onto stocks in hard times, you’ll never succeed as an investor.
“People who succeed in the stock market also accept periodic losses, setbacks, and unexpected occurrences. Calamitous drops do not scare them out of the game. The typical big winner in the Lynch portfolio (I continue to pick my share of losers, too!) generally takes three to ten years or more to play out.”
Should I buy this book?
This is required reading for anyone who wants to get serious about investing and it’s one that you will go back to many times over your lifetime. Trying to summarize the vast amount of superb advice in this book is almost a fool’s errand. Not only is this one of the greatest investment manuals ever written, it is an immensely enjoyable and accessible read.