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 stock. 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’. The summary of third part is described in this blog. 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.
The Long-Term View
Designing a Portfolio
In this section, the author shares his knowledge about designing a portfolio for investors. When you are figuring out how you’re doing in stocks, don’t forget to include all the costs of subscriptions, commissions, investment seminars, and long-distance calls to brokers. You ought to be getting 12-15 percent return, compounded over time. That’s after all costs and commissions have been subtracted, and all dividends and other bonuses have been added.
In author’s view it’s best to own as many stocks as there are situations in which: (a) you’ve got an edge; and (b) you’ve uncovered an exciting prospect that passes all the tests of research. Maybe that’s a single stock, or maybe it’s a dozen stocks. In small portfolios he’d be comfortable owing between 3-10 stocks.
Spreading your money among several categories of stocks is a way to minimize downside risk. Slow growers are low-risk, low-gain. Cyclicals may be low-risk, high-gain or high-risk, low-gain, depending on how adept you are at anticipating cycles. Tenbaggers (stocks whose price goes up ten times) are likely to come from fast growers or from turnarounds—both high-risk, high-gain categories. In designing your portfolio you might throw in a couple of stalwarts just to moderate the thrills and chills of owning four fast growers and four turnarounds.
Going into cash would be getting out of the market. Author’s idea is to stay in the market forever, and to rotate stocks depending on the fundamental situations. Some people automatically sell the ‘winners’—stocks that go up—and hold on to their ‘losers’—stocks that go down—which is about as sensible as pulling out the flowers and watering the weeds. Others automatically sell their losers and hold on to their winners, which don’t work out much better. Rotating in and out of stocks as per the fundamentals is better.
The Best Time to Buy
And Sell
Much useful information is given in this book about this chapter. In short best time to buy is during the end of the year or during the collapses, drops, burps, hiccups, and freefalls that occur in the stock market every few years when the stock prices were at bargain.
The stock should be sold when the fundamentals start to deteriorate. The stock should be bought when fundamentals sound strong and when the fundamentals start deteriorating replace that stock to other stock whose fundamentals are good.
The Twelve Silliest
(And Most Dangerous)
Things People Say About
Stock Prices
(1) IF IT’S GONE DOWN THIS MUCH AlREADY, IT CAN’T GO MUCH LOWER
(2) YOU CAN ALWAYS TELL WHEN A STOCK’S HIT BOTTOM
(3) IF IT’S GONE THIS HIGH ALREADY, HOW CAN IT POSSIBLY GO HIGHER?
(4) IT’S ONLY $3 A SHARE: WHAT CAN I LOSE?
(5) EVENTUALLY THEY ALWAYS COME BACK
(6) IT’S ALWAYS DARKEST BEFORE THE DAWN
(7) WHEN IT REBOUNDS TO $10, I’LL SELL
(8) WHAT ME WORRY? CONSERVATIVE STOCKS DON’T FLUCTUATE MUCH
(9) IT’S TAKING TOO LONG FOR ANYTHING TO EVER HAPPEN
(10) LOOK AT ALL THE MONEY I’VE LOST: I DIDN’T BUY IT!
(11) I MISSED THAT ONE, I’LL CATCH THE NEXT ONE
(12) THE STOCK’S UP, SO I MUST BE RIGHT, OR…
THE STOCK’S GONE DOWN SO I MUST BE WRONG
Options, Futures, and
Shorts
The author has neither bought a future nor an option in his entire investing career, and he can’t imagine buying one now. Reports out of Chicago and New York, the twin capitals of futures and options, suggest that between 80 and 95 percent of amateur players lose. Options are very expensive. They may not seem expensive, until you realize that you have to buy four or five sets of them to cover stock for a year. Warren Buffet thinks that stock futures and options ought to be outlawed, and the author agrees with him.
Shorting is the same thing as borrowing something from the neighbors and then selling the item and pocketing the money. Sooner or later you go out and buy the identical item and return it to the neighbors, and nobody is the wiser. It’s not exactly stealing, but it’s not exactly neighborly, either. The difference is kept with the shorter. For instance, if you figured out that xyz stock is overpriced at $200 a share, you could have sorted 600 shares for an immediate $120,000 credit to your account. Then you could have waited for the price to drop to $20, jumped in and bought back the same 600 shares for $12,000, and gone home $108,000 richer. During all the time you borrow the shares, the rightful owner gets all the dividends and other benefits, so you’re out some money there.
But what if the price of xyz goes up? What if it is doubled once more to an even more ridiculous $400 a share? If you are short then, you are very nervous. The prospect of spending $240,000 to replace a $120,000 item that you’ve borrowed can be disturbing. If you don’t have the extra hundred thousand or so to put into your account to hold your position, you may be forced to liquidate at a huge loss.