As a rookie investor, I've had the following conversation with myself: "I want to put some money into the market, but where should I start?" With stocks, funds, options, bonds, and all sorts of other alternatives abounding, the view from the top of the investing mountain can be quite intimidating. If you ask Peter Lynch, the solution is quite simple. He'd recommend that you just jump in.
In his book, One Up on Wall Street, the philosophy is slightly more complex than that, but not much. Lynch believes that with a little research and steady discipline, a regular guy like me can sprint right past so-called investment gurus.
Don't listen to the hype
Lynch explains his investing style in an extended analogy to a cocktail party and the chatter that inevitably turns to the next hot stock. Depending on how the market is doing and a few other factors, the guest with the stock tip will either be the life of the party or the guy who gets pushed to the back near the vegetable platter. Either way, he says, most people take an irrational approach to investing.
People become interested when a given stock becomes the new, hot thing or is a player in the "now" industry. If companies like Celgene (Nasdaq: CELG ) or RF Micro Devices (Nasdaq: RFMD ) sound familiar, then pay attention. Like lemmings, people naturally get caught up in the crowd and lose sight of what's really important. Lynch stresses the basics.
If you find a company that's the new hot thing and, without bias, you can say that its numbers still look impressive, then go ahead and invest. You might still catch an impressive return on that investment, popularity aside.
But Lynch seemingly isn't concerned with the companies that people are talking about near the punch bowl, or with the tip he got about that new, amazing company that will change life as we know it on planet Earth. The best companies are most often right in front of your face. They're the ones you encounter on a daily basis and that you can easily understand. Lynch loved eating tacos and other treats from fast-food mover Taco Bell, so he invested in Yum! Brands (NYSE: YUM ) . Like many Americans, he was startled by the excessive amount of refuse produced by the average consumer, so he bought Waste Management (NYSE: WMI ) . Invest in what you know. With a little bit of fundamental research, the rest will take care of itself.
People don't care about garbage collection
We tend to disregard the everyday regulars as potential investments, because no one really wants to talk about them. They're not sexy, they're not hot, and they surely won't make you the center of attention in conversation. But boredom and disinterest are two critical elements in finding the next 10-, 30-, and 50-baggers -- Lynch coined the term, after all.
Some of Lynch's favorite (and most profitable) investments have come in the form of generally disagreeable industries, such as funeral home services and trash removal.
These aren't the companies that people secretly tell their best friend about when they owe them a favor (even though they probably should). In many cases, they're solidly run, with strong market share, great numbers, and little competition. Furthermore, few people pay them any attention until they've become the behemoths in their respective industries. And that's why anybody can get in on them.
Here are 13 questions that a "Lynchian" investor will ask about a company:
- 1. Does it sound dull or, even better, ridiculous?
- 2. Does it do something dull?
- 3. Does it do something disagreeable?
- 4. Is it a spinoff?
- 5. Is it disregarded and not owned by institutions/not followed by analysts?
- 6. Do rumors abound involving toxic waste and/or Mafia ownership?
- 7. Is there something depressing about it?
- 8. Is it a no-growth industry?
- 9. Has it got a niche?
- 10. Do people have to keep buying it?
- 11. Is it a user (not producer) of technology?
- 12. Are insiders buying it?
- 13. Is the company buying back shares?
If you answered yes to these questions, you might have found the next undervalued, underappreciated pick of the decade. While it may not be the be-all and end-all to investing, it may get you thinking about the right types of companies.
This one's a keeper
One Up on Wall Street was written in 1989, so don't expect to find any great stock tips from the investment master himself in there. The former Fidelity fund manager does, however, provide the reader with an investment approach that can last a lifetime.
Without a doubt, this is a must-read for the rookie investor. His thesis is simple, logical, and easily replicated. Even if you don't agree with his philosophy, you should be able to draw some simple, yet important lessons from his advice on buying stocks. If you're an advanced investor savvy to the thrills and spills of the market, I still recommend this Foolish favorite. It might categorically change your investment strategy. Either way, the reader wins with this book.