Introduction: ‘One Up on Wall Street’ is fantastic book written by Peter Lynch, the portfolio manager of Fidelity Magellan Equity Mutual Fund, and John Rothchild on investing in stocks. It is based on ‘New York Stock Exchange’ and on ‘S&P 500’. It is mainly divided in three parts namely ‘Preparing to Invest’, ‘Picking Winners’, and ‘The Long-term View’. In this blog summary of first part is described. This book explains how to invest wisely in the stock market to gain reasonable profit annually, which stocks to choose and which to avoid, when to buy and when to sell, importance of earnings, P/E ratio, profit margin, book value, dividends etc. in evaluating the important benchmarks.
Preparing to Invest
The Making of a Stockpicker
In this chapter the author highlights that picking stocks that are outperforming in one’s surrounding and routine life is the best act to get a tenbagger (stock whose price goes up tenfolds). One’s business or job is the best place to get the best stocks. As a person is well aware of the companies that outperform and supply the best products at a reasonable rate. The author also shares his experience of investing in Maine Sugar. Maine Sugar convinced Maine potato farmers to grow sugar beets in off-season. As sugar beets is the perfect companion crop to potatoes, farmers could earn extra money and revitalize the soil at the same time.
There was a hitch, Maine farmers are very cautious, so the first implied the strategy on a quarter of acres; and then when it went successful they implied in on half of their land, and eventually to full farmland. But by that time the refinery was shut due to lack of business and went bankrupt. By then, the author decided never to trust the Maine farmers.
The Wall Street Oxymoron
Here, the writer describes about how the number of analysts following the company affects its stock price. The famous companies like Limited and Service Corporation International has grown enormously, though only a small number of analysts followed it. They were the 10 baggers. ‘Stocks you trade, it’s wives you are stuck with’, quoted Mister Johnson who changed America’s mind about investing. When the company Limited went public in 1969, it was unknown to the large institutions; a lone analyst followed it before a second, Maggie Gilliam in 1974. Employees and executives in the company were heavy owners which is a good sign. By 1983, when stock hit its intermittent high of $9(went up eighteenfold), only six analysts followed it. Same happened with Service Corporation International.
The author mentions that going it alone for investing is better than running mutual funds and choosing stocks for the fellow professionals. As professionals spent quarter of their working hours explaining what they are doing to their boss and the large holding customers. Amateur investors can get that time saved and can choose stocks in new companies which are good without any hitch.
Is This Gambling,
or What?
In this chapter the author talks about the difference between investing in stocks and investing in bonds. The author says that the things that separate investing from gambling is the skill, experience, patience etc. of an investor. Nowadays, the interest rate fluctuates in bonds as in stocks the prices. Intelligent and careful investing in stocks can provide you with a return far more than investing in bonds. No doubt, stocks are riskier than bonds. But normally an intelligent investor gets over 9.8 percent return in investing in common stocks while only 5 percent in corporate bonds, 4.4 percent in government bonds and 3.4 percent in treasury bills.
For instance if in 1927, someone had put $1000 in each of the four investments wisely, and the money has compounded tax free, then 60 years later he’d have had those amounts:
Treasury bills $7,400
Government bonds $13,200
Corporate bonds $17,600
Common stocks 2,27,000
Passing the Mirror Test
Three personal issues are addressed in this chapter. Those are (1) Do I own a house? (2) Do I need the money? and (3) Do I have the personal qualities that will bring me success in stocks?
(1) DO I OWN A HOUSE?: In this, the author calls house as good investment in 99 out of 100 cases and also as risk free. Houses can also be brought at nearly 20% down. If the rate of house increases at 5% a year, then indirectly one will make 25% return on the down payment. Thus it is advisable to invest in a house before investing in stocks.
(2) Do I NEED THE MONEY?: The money which is invested in stocks and will be in need during next few years is not to be invested. Because the stocks you select may be good but the company may suffer loss by the operations which were aimed to be worth profiting, so forceful selling at a loss is worse than not investing.
(3) Do I HAVE THE PERSONAL QUALITIES THAT WILL BRING ME SUCCESS IN STOCKS?: It is the most important one. As discussed above investing in rush is harmful economically. Investing needs a lot of qualities like patience, self-reliance, common sense, ability to ignore general panic etc. It is impossible to predict the market so predicting market is not be considered as the quality to make profit from investing.
Is This a Good Market?
Please Don’t Ask
The author calls predicting market as futile by giving certain facts and figures. He quotes that whenever Lynch advances market declines. He describes facts that how number of times the economists predicted the bull, but market went bear and vice versa. We always seems to be preparing defensive methods for the next recessions that are assumed to be ditto like past. Instead we shall focus on present and be ready to face the future one which will definitely not be as same as the previous one.
Mayans are used to explain the above stated idea. In Mayans mythology the universe was destroyed four times, and every time Mayans learned sad lessons. First there was a flood, and the survivors moved to higher ground into the woods. But next time the world was destroyed by fire. The survivors came down and built new houses out of stones. But this time the world was destroyed by an earthquake. Last thing the author forgot, but certainly they were going to miss it as they were always busy preparing for the past things to occur in future and not being ready to face the future once that ever happened.