1-Sentence-Summary: One Up on Wall Street talks about the challenges of being a stock market investor, while also exploring how anyone can pick good, well-performing stocks without having much knowledge in the field, by following a few key practices.
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Being a stock market investor has always been considered one of the best jobs one can have, and that’s why this field is highly competitive and considered hard to understand or get into.
In One Up on Wall Street, Peter Lynch breaks the stereotypes related to what being a good investor consists of, and how anyone can beat renowed investors by using logic and common sense as their main analysis metrics. It all comes down to putting your money into the companies that you understand.
Instead of researching analyst ratings and recommendations about businesses that literally imply rocket science to be understood, just keep it simple. For instance, maybe you’ve wandered your neighbourhood and seen a good donut shop that’s constantly frequented by people. Then perhaps you saw the same shop being successful in your trip to another city. You’ll think, maybe it’s time to consider investing in it. After all, that’s how ordinary people discovered the Dunkin Donuts stock.
When it comes to investing, overcomplicating it can ruin your chances of having a successful portfolio. Simple, everyday stocks can prove to be among the best-performing ones. However, there are more aspects to consider when picking your investments, such as how to assess the value of a stock and analyse it correctly.
Here are my three favorite lessons from the book:
- There’s six categories of stocks that you should know of.
- If you’re looking for a tenbagger, there are 13 traits to consider.
- There are five essential traits to avoid when investing in stocks.
Are you willing to explore these lessons in detail? If yes, stick around, as we’ll take them one by one!
Lesson 1: Be aware of the six categories of stocks, to know which one is best for you
There are certain traits that define what type of investor you are. It could be according to your risk tolerance, budget, and so on. However, according to Peter Lynch, there are also a few categories of stocks that you should know of before deciding where to put your money. Let’s start with the first one – slow growers. These companies are usually large, part of a mature industry, and therefore grow slower.
Stalwarts – they are a little bit riskier than the first one, as they’re growing at a rate of 10-15% per year. Sell them if you make a 30-50% percent gain! Then, there’s fast growers – they break the patterns and grow significantly, making them risky investments, as they can also lose their current price very fast. These companies can prove to have a high return on investment.
When it comes to fast growers, always ask yourself: Can it keep up with this growth pace? Is this sustainable? If you find that the risk is too high compared to the company’s valuation, and that the market is just going crazy over it without a reliable reason, don’t go for it.
Then, there’s cyclicals – these are companies that have their profits or losses move in concordance with the business cycle.
One disadvantage of this type of stock is that they produce goods that consumers will postpone buying in times of financial uncertainty. Lastly, there’s turnarounds, which are companies that have problematic balance sheets. Their stocks can prove to be a very rewarding investment if the business manages to bounce back and improve their financial status and management effectiveness. However, if the opposite happens, the risk of losing the value of your investment increases significantly.
Lesson 2: A tenbagger stock has a series of traits that make it easier to be recognized
So what’s a tenbagger? Lynch uses this term to describe a stock that has gone up ten times its value since the time of purchase. Fortunately, there are some characteristics that make it easier for investors to spot these stocks. The first one would be the name. Yes, you’ve heard that right, a funny or dull name can be a sign of a good early investment. If the company has a funny name, will Wall Street brokers be eager to brag about buying it? Not so much!
The second and third characteristics are related to what the company’s doing. Did it do something dull? Or perhaps it did something its shareholders disagreed with. This indicates that investors aren’t going to buy it any time soon. This leads us to the fourth characteristic of a good stock – institutions don’t own it, analysts don’t follow it. Meaning that they’re yet to be discovered.
Moreover, a company can prove to be a good investment if there’s something depressing about it, such as a burial service business. People aren’t exactly crowding to buy such companies until their figures overcome their reputation. Another good metric to consider is if its industry isn’t growing. This could be a good moment to enter it before it goes up. More importantly, look for companies who’ve got a niche, Warren Buffett does the same thing.
If the business has recurring revenues, it is a great sign of a valuable investment. Because consumers come back to buy their products and are loyal to the brand. This could also lead you to the ninth key characteristic, meaning that insiders are buying shares in it. They must know something we don’t, right?
Lastly, you’ll want to see if the company is buying back shares. After all, they know better if they’re a good investment, or not.
Lesson 3: Learn to spot non valuable investments by looking at five key indicators
Just as you can spot good investment opportunities, you can learn to avoid the bad ones. The first thing you should look for is the industry. If it’s in a hot industry, avoid it, as the stock can prove to be overpriced. Next, if it’s too advertised, and you find the stock in headlines such as “The next Google/ Amazon/Facebook”, it’s probably best to avoid it.
Next, look for the company’s ways of diversification. Maybe the company is buying shares in non-related businesses from diverse industries. That could be a potential sign of a bad investment. Next, be aware of their customer base. If the company is dependent on few customers, or on one single type, things can go really bad if they leave. So you wouldn’t want to be there when that happens, right?
Lastly, watch out for whisper stocks. These companies advertise themselves as businesses that are about to discover something miraculous or did something out of the ordinary that will blow their stock price. More often than not, these are only cheap marketing practices that aim to coerce people into buying a non valuable share to pump up their price briefly.
The One Up on Wall Street Review
One Up on Wall Street is an extremely valuable piece of writing on financial education and the stock market that should be on everyone’s reading list, as it has the potential to radically improve one’s finances, if the knowledge turns into practice. This time-proven book serves as a benchmark for any individual or institution looking to spot valuable investment opportunities. Peter Lynch is not only one of the best investors of the twentieth century, but also an excellent writer that inspired and helped thousands to improve their financial status.
Who would I recommend the One Up on Wall Street summary to?
The 25-year-old investor who wants to invest and earn passive income, the 30-year-old looking to start a retirement fund early on and create a portfolio that incorporates valuable assets, or the 22-year-old finance student who is looking to learn more about their stock investing passion outside their school curriculum.