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 an investor is often made to look like a job reserved for geniuses. In One Up on Wall Street, Peter Lynch explains how anyone can beat renowned investors by using logic and common sense. It all comes down to putting your money into the companies that you understand.
Instead of researching analyst ratings of businesses that take rocket science to understand, keep it simple. Look into your favorite donut shop. Is it a chain already? Should it be? That’s how ordinary people first 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 be among the best-performing ones. But more goes into analyzing a stock, of course.
Here are 3 lessons from investing legend Peter Lynch to help you do that job as if you were being paid to do it:
- There are 6 categories of stocks that you should know of.
- If you’re looking for a tenbagger, there are 13 traits to consider.
- There are 5 essential traits to avoid when investing in stocks.
Let’s take these lessons one by one to become better investors!
Lesson 1: Be aware of the 6 categories of stocks, to know which one is best for you.
According to Peter Lynch, there are a few categories of stocks you should know before deciding where to put your money:
- Slow growers.
- Fast growers.
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 13 traits that make it easy to recognize.
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 5 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.
One Up on Wall Street Review
One Up on Wall Street has the potential to radically improve your finances, if you turn the knowledge into practice. This time-proven book can help any individual or institution spot valuable investment opportunities. Peter Lynch is not only one of the best investors of the twentieth century but also an excellent writer. You could do worse than get an education from him in just a few hours.
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 anyone who’s curious about stocks and wants to indulge their passion.
Last Updated on May 19, 2023