In this podcast, Motley Fool hosts Mary Long and Ricky Mulvey revisit Peter Lynch's investing classic, One Up on Wall Street: How to Use What You Already Know to Make Money in the Market.
They discuss:
- How to research a company beyond earnings statements.
- One common misunderstanding about Lynch's style of investing.
- Where regular investors can find an edge over institutional money.
To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.
This video was recorded on June 24, 2023.
Ricky Mulvey: It's all of this, think about your edge, if you're buying a stock. Are you walking in the entrance while everyone else is headed toward the exit, or is the reverse true? If you're doing that, if you're not a part of a herd, you will probably be doing better in the long run.
Mary Long: I'm Mary Long and that's Motley Fool Money book club member Ricky Mulvey. More than 30 years ago, Peter Lynch published the investing classic One Up on Wall Street. Ricky and I revisited the book and we discuss what investors can take from it today, some parts that might need a revision, and common misunderstandings about Lynch's fabled style of investing. Joining me live in studio in Denver, Ricky Mulvey to discuss and kick off our inaugural Motley Fool Money book club, where we've both read the best-selling book, I almost said novel, One Up on Wall Street, which has sold millions of copies, by Peter Lynch.
Ricky Mulvey: The Peter Lynch novel. The novelization of One Up on Wall Street, can't wait to see where that goes.
Mary Long: OK, Ricky, this is like a fabled investing book. Both of us, this is our first time reading it. We dove right in. What are your top-line takeaways?
Ricky Mulvey: I think my first big takeaway is that it's funny. It's actually funny, there's a part on page 20 about long-term investing, "Long-term investing has gotten so popular, it's easier to admit you're a crack addict than to admit you're a short-term investor." I'm like, this guy has zingers.
Mary Long: There are savage lines throughout. Also, I think that it was written in the '80s?
Ricky Mulvey: Yeah, late '80s.
Mary Long: Makes it funny, too. There's a line at one point which reading in 2023 is hysterical. He says, "In 1960, there couldn't have been a hotter industry than carpets."
Ricky Mulvey: Really. Nice.
Mary Long: That is funny.
Ricky Mulvey: I think you need that for any investing book. There's so many dry personal finance investing books. Some of them are classics and they are intensely hard to read just because it is a wall of information that you are getting through in more than 250 pages. I'm very glad that he sprinkled in some humor, and it's also good to see where a lot of modern-day stock investing philosophy comes from. It very much comes from Peter Lynch in this style of investing. But it's sometimes misunderstood because he makes it very clear in the beginning that the research part, the lived experience that you bring to investing is just the beginning, and you also need to actually look at the company. I think sometimes that's misunderstood as, I saw a bunch of Chewy boxes, that means that it's Chewy's a great investment, which it might be, but that doesn't whole cloth make it a good stock to buy.
Mary Long: Totally. But I do think that his focus on research and finding, getting your initial ideas on companies that you're interested in and stocks to potentially invest in, getting that from your real life, he spent so much time hammering that point home. I do think that it's really valid, especially if you're investing today, you could be forgiven for thinking, every stock is a tech stock, because that's so much of what's discussed in financial media and regular media. Lynch's point is, no, go out into the world. He actually talks all about why maybe you shouldn't be investing so much in tech stocks and these hot industries, but actually exploring boring, dull, perhaps gross industries.
Ricky Mulvey: Which, there's a couple of criticisms with that. People have done fabulously well with tech investing. In the beginning one of the things I like is, he makes this point of, you should not listen to financial experts. I think this is a good book to take what you need from it. He definitely has a beef with Wall Street analysts in terms of their expertise on companies, they don't know as much as they'd like you to think. It's a lot of presentation of authority. You still see that today, I remember listening to a popular show where analysts were going around a table explaining that Carvana was a good short candidate, and this was after the stock had completely plummeted. The stock had completely plummeted, and some crazy amount of the shares were already being borrowed against and they're all nodding together. It's like, yes, this is the position that everyone's taking, therefore, that's the position that I'm taking. I also like the way that he frames stock investing into six baskets. Generally, I think these hold up. He's like, if you're going to buy a stock, figure out where it fits, and then you can set your expectations for it. There's six baskets, you got the slow growers, the stalwarts, the fast growers, the cyclicals, turnarounds, and asset plays. When you buy a stock, it's like, where does it fit into these? Then you can set it based on that. I think a stalwart is undervalued. If it goes up 40%, then I'm going to sell, which I think that's more difficult style of investing, but I like how he sets those expectations.
Mary Long: I think for the most part, all of those different categories are pretty self-explanatory, just based on their names alone. But do you want to walk us through and give us a brief, quick one-liner about what each of those actually means?
Ricky Mulvey: That would be helpful. Yes, slow grower is like a more established company that is described by being a slow grower. Stalwart is where you're looking for your dividend payers. Maybe McDonald's, Kellogg, that kind of thing which are referenced in the book, it's still holds up as those kinds of companies. Cyclicals, he would describe as a carmaker. When the economy is doing really well, those companies are doing well. Economy goes poorly, they might cut their dividend, they might not be doing so hot. I would actually throw advertising into that bucket as well for a cyclical. Turnarounds is exactly what it sounds like.
Company's gotten itself into trouble. This is more of a speculative bet in Lynch's mind, and also one that you have to be intensely patient on, and in one where you have to watch the story even more closely, making sure that the company has cash on its balance sheet to weather the storm they're going through. Then asset plays is a little bit more technical. I actually think this is more difficult for a regular investor. That's where you think that, let's say a company owns a lot of land next to a railroad and that is not being accounted for by the market. I think that's a lot. He uses a golf course as an example, is an asset play where investors don't see the value of Pebble Beach owning this wonderful golf course. I think that's a lot harder actually in the days of the internet and also just harder for a regular investor. I think the market might be a little more efficient on those plays.
Mary Long: I'm with you. I think as it plays are more advanced, but also turnarounds, I think are advanced, he's like that is where you need to really be diving deep into the balance sheet and seeing what other people might have missed. I guess it's a common theme with all the different types of companies that he talks about, seeing what other people might have missed, but especially true with asset plays and turnarounds.
Ricky Mulvey: That's where you want to look at leadership obviously. The act of judging a CEO is intensely difficult for an investor. I don't think there's like one way to do it. But one thing he suggests is listening to how a CEO talks about their competition. If they say nice things about their competition, that's usually a good sign, and I really liked that. I guess that's somewhat related to the turnarounds, but I don't know.
Mary Long: I think Lynch's perspective on management and how you should factor that into your evaluation of a company was interesting to me, especially today, we live in this practice was always true, but it feels especially true today that we live in this era of big personality CEOs and that's such a driver for a stock price. But a quote that Lynch says throughout the book is, I want a company that could be run by an idiot. I think there's something totally valid in that, but also, do you want a company that is run by an idiot? How much does management matter when you're looking at a business? Maybe you're looking at the basic business first, but management has to have a play a factor in your evaluation of it, right?
Ricky Mulvey: Yeah. There's also an element of this book where I would say take it seriously, but not literally. It was written 30-ish years ago, but I still think a lot of it holds true when he's looking for a company, there's a little bit of a treatise against just looking for growth. He says, "If you find a business that can get away with raising prices year after year without losing customers in addictive products such as cigarettes fits the bill, you've got a terrific investment." I still think that holds true today. He's very much looking for pricing power more than just top-line revenue growth and even expands it to the point of look for companies taking market share in a declining industry. You almost have more protection because you don't have to worry about entrance fighting for that market. I really like that as a frame to look for companies.
Mary Long: He talks, he loves fast growers, that's a thing, but he hates fast-growing industries. That was an interesting distinction to me. You don't want to go where everyone else is going, you don't want to go for what's fast. He talks about being interested in plastic forks and knives. That's a slow-growing, maybe even no-growing industry. But if you crack the code there, a company itself can see a lot of growth.
Ricky Mulvey: The picnicking industry might have [inaudible].
Mary Long: Ain't going anywhere.
Ricky Mulvey: With that, his advice would be avoiding hot stocks and hot industries. You can probably think of two of those for exactly right now in 2023. One of his big pieces of advice is, not being afraid to kick the tires and not just try to discover companies in your daily life, but going to stores and trying their food, that kind of thing. You might be wrong sometimes. But there's also, for a lot of, let's say, chain stores, chain retail stores, they're going to be very similar throughout the country. Your experienced in St. Louis might not be so different from someone's experience in Columbus, Ohio. With that, think about your edge if you're buying a stock. Are you walking in the entrance while everyone else is headed toward the exit or is the reverse true? If you're doing that, if you're not a part of a herd, you will probably be doing better in the long run.
Mary Long: This goes back to the whole research conversation, but there's a fine line I think between looking at your own life for stories, which is something that Lynch is obviously advocating for, for stories for companies and also going where it's gross and where things are dull. What's interesting to me about that as well, if you're looking at your own life, you might not immediately be seeing what's gross or dull. You have to look around you, but also go deeper than you would just typically as a regular consumer to look for the company behind what's in front of you. Or that's doing the dirty work that you don't typically see but that you understand because you're paying attention needs to get done.
Ricky Mulvey: I understand what you're saying. I think all of it is just like tactics and both of those make sense. Also, there are parts of this book where they might be less applicable to you because he is a professional stock picker who owns very clearly 1,500 companies.
Mary Long: Insane.
Ricky Mulvey: Part of his advice is that you want to be able to keep up with that story for all of the companies that you own. There's this write-off line of I own 1,500 but don't you worry about me. Yes, I will leave it at that. One other thing that I think is misunderstood in the big takeaways is this section on don't pull flowers and don't water the weeds. There's a section where he suggests doubling down on an underperforming stock. "To me, a price drop is an opportunity to load up on bargains from among your worst performance and your laggards that show promise." I think sometimes that can be a little misunderstood, but also there's the advice that if the story changes, you should sell. I don't know. Again, this is a book where you want to take what you need from it.
Mary Long: When talking about those six different types of companies and realizing up front which category, whatever company you're looking at falls into. He admits, after going through all this, well, companies change categories all the time. The story changes, that shifts. Maybe that means it's time to leave or it's time to sell and if a company, a stock has done what you wanted it to and you got in. But it might also mean that it's time to rewrite the story and come up with something new. That's something that I quite like about this book is he doesn't just drop those six categories on us early on and leave them there. That is carried on throughout the entire.
Ricky Mulvey: Two sections I found really valuable. One is the lies that investors tell themselves. I think many of those are true today. There's the portion, what is it? A stock does not know that you own it. The other section I really like is when he breaks down how he views the balance sheet. If you're a stock investor, I think those two sections in particular are worth visiting.
Mary Long: When I've read investing books before and there's a section dedicated toward going through the balance sheet. Often it's going through the balance sheet line-by-line and explaining very blandly and clearly, this is what this means. He doesn't really walk through it line by line. But he still walks through the metrics that he values and pays attention to in a way that makes sense, but it's very conversational and less formulaic. I found that appealing. But I also wonder, if you're reading this to really get started, is that helpful? Or do you need more of a background and what these metrics have done?
Ricky Mulvey: You need to understand an income statement and balance sheet before you walk in. I think that's fair. Also, not to judge the book with a 2023 lens, if you can't figure it on the balance sheet, go to this paid directory of stocks where they will explain what's going on.
Mary Long: Or call your broker.
Ricky Mulvey: Or call your broker. There is a lot of love in this book for both the broker and active stock pickers, which makes sense because that's what he does for a living, or that's what he did for a living.
Mary Long: I will say real quick while we're on this topic and what we found helpful. I thought the description of a P/E ratio was one of the clearest and best that I've read. The P/E ratio can be thought of as the number of years it will take the company to earn back the amount of your initial investment, assuming of course, that accompanies earnings stay constant. You've pointed this out that he doesn't really distinguish between forward P/E and trailing P/E. But I still thought that rather than just talking about this ratio as what it means numerically, but what it means practically, that was quite helpful.
Ricky Mulvey: A lot of the book is how to think about investing and I enjoyed that. Shall we move to quibbles?
Mary Long: Let's quibble.
Ricky Mulvey: There are some quibbles. We do have some quibbles. But first I mentioned. I'm going to skip past the fact that he owns 1,500 stocks.
Mary Long: Fifteen hundred stocks.
Ricky Mulvey: There are parts of this book, Mary, where you can imagine his co-author, John Rothchild, sitting in an office while Lynch paces around pointing a pen in the air, declaring that this is the law of stock picking. The first of which is in the beginning of the book, he describes what you need to be a stock investor.
Mary Long: Yes, this is good.
Ricky Mulvey: The personal qualities required are a little tough. They are, "The list of qualities ought to include: patience, self-reliance, common sense, a tolerance for pain, open-mindedness, detachment, persistence, humility, flexibility, a willingness to do independent research and equal willingness to admit mistakes, and the ability to ignore general panic. In terms of IQ, probably the best investors fall somewhere above the top 10%, but also below the top 3%." That is a lot. I think sometimes through this kind of thing, you can be imperfect and you can maybe strive for these things, some of which probably are a little repetitive. But I don't think you have to build a perfect version of who you are as a stock investor before you get started.
Mary Long: He talks about timing. I think a key theme throughout this book is, it's not too late, it's not too early, just get started and look in your life and bring that in. If you're waiting until you achieve human optimization to become a stock picker, I hate to break into you'll probably never become a stock picker.
Ricky Mulvey: It's going tough. Well, there is one thing that you need to do and this is another little quibble that I have. Early in the book he describes his journey where he starts picking stocks as a sophomore in college, he buys Flying Tiger Airlines, it becomes a five-bagger. Then little by little he sells it off and look at that. He's able to go to Wharton business school on this Flying Tiger stock scholarship, how phenomenal. Twenty-two pages later, "Before you buy a share of anything, one of the personal issues that you have to address is do you own a house? Before you invest anything and stocks, you ought to consider buying a house, since a house, after all, is the one good investment that almost everyone manages to make." I don't think that's necessarily a bad idea, but I think getting someone starting investing earlier is better than hitting the checklist before you start.
Mary Long: One of the quibbles that I have and I go back and forth on this is, you've alluded to this earlier on. He says at one point, I'd rather invest in a company that makes drugs, soft drinks, razor blades or cigarettes, addictive things, minus the razor blades than a company that makes toys. I get what he's saying on his face. But I also asked myself like, what kind of companies do I want to invest in? How do I want to feel about the company personally before I become an investor? How much does that matter? How much does it not? Not necessarily a quibble, but that's sent me down like an internal debate a little bit.
Ricky Mulvey: Should you buy tobacco stocks?
Mary Long: I don't know. Go back and forth, he's a big fan of Philip Morris.
Ricky Mulvey: He is. But I think it's more illustrative of focusing on things that people need to buy, and that's where the razor blades fit in, versus maybe, I guess you'd argue against a Hasbro. Which has not been a fabulous performer over the past 10 years. The biggest quibble of all, I actually love this because the book gets a little unhinged around the section of when to call the company's investor relations department. My first thought, when I was reading through this, was like, thank goodness for the internet. Because there was a period of time where if you wanted to know the Wall Street estimates for a company, you had to get on the phone, which you might not know the number of the Investor Relations Department. You have to call your broker, get the number for the Investor Relations Department, hope they pick up, and then tell you the Wall Street analysts for earnings.
Now it gets a little unhinged because Lynch has some helpful questions and topics about what to do when you call the investor relations department including possibly lying to them. Let's say the investor relations department gives you the cold shoulder. What do you do? This is Lynch's advice, "In the unlikely event that investor relations gives you the cold shoulder, you can tell them that you own 20,000 shares and are trying to decide whether to double your position. Then casually mentioned that your shares are held in 'Street name.' That ought to warm things up. Actually, I'm not recommending this, but fibbing is something that people would think of in the odds of you being caught in it or nil. The company has to take your word for the 20,000 shares because shares held in street name are lumped together by the brokerage firms and stored in undifferentiated masses." I love this. Because you can see he's changing his mind mid-paragraph.
Mary Long: Actually.
Ricky Mulvey: Now, I don't know. I just found this entertaining where let's say you want to call the investor relations department, but you don't know what to ask them, Mary. What do you do? What do you ask them? "Even if you have no scripts, you can learn something by asking general questions. What are the positives for this year and what are the negatives? Maybe they'll tell you about a plant in Georgia that lost $10 million last year, but it's now been closed down, or about the unproductive division that's being sold off for cash. Maybe some new products has come along to speed up the growth rate." That feels a little bit like insider trading. Like, oh, now that you're on the phone, we're going to tell you that we're laying off employees.
Mary Long: My couple with that also is really do I believe that if I were to call up the investor relations department in today's day and age that I wouldn't be given corporate PR gobbledygook like just packaging everything up really nicely with a bow. Do I really think that I would get something all that different from that?
Ricky Mulvey: Yeah.
Mary Long: I don't know that I think I would.
Ricky Mulvey: I think it depends. I think it's if you email them with a specific question that they're not discussing in their earnings, they'll probably get back to you with that. I know we're probably unfairly judging it decades later. Those general questions can probably be answered any other places. What were your quibbles?
Mary Long: This is not so substantive, but this book is illustrated with stock charts and I found them absolutely impossible to read. They have what appears to be Peter Lynch's handwriting annotating them and it's over just dark grid lines. To me, you could barely even see the direction that the stock was moving. That was a big quibble that I had, but I digress, it's not terribly substantive.
Ricky Mulvey: That's more with the editor than Lynch.
Mary Long: Who do I going to talk to? Honestly, other than that, we mostly covered it. But if you put the editor hat on what you're reading this book in 2023, what do you add? What do you take away?
Ricky Mulvey: There are many examples that he uses to get a single point across, such as experience a product before you buy the stock. We get it. In golf courses, we get it in hotels. There seems to be a lot of repetition in some cases, to drive home a main theme which granted, I understand sometimes you need multiple examples to communicate something. But in some cases, I found it a little repetitive.
Mary Long: I'm with you on this. I loved a lot of the examples, especially when it was company names that I could recognize and that I could look at 40 years later and be, whoa, he was spot on. That was really rewarding and fun and made this read more like a novel. But there were other times when I thought, OK, it's another example. I can skip and skim this and go ahead because I know what the point of the story is, and it's one of 75,000 examples in the book.
Ricky Mulvey: One thing I really liked though, with the examples is that there is an amount of balance and humility. I think he generally, if he talks about like one big winner he's had, he's also discussed a mistake he's made or times he's been wrong about a stock. You know what, maybe that is one of the personal qualities you need to be to be an investor. I do respect him for walking the walk a little bit on that.
Mary Long: Totally. He also brings up, and this is one of the lines that he says, people used to stop themselves from investing in the first place. But he says at one point, you can't win them all and you can't spend all your time regretting that you sold. You still made money, but you sold when you could have held on and made even more money. And that's a point that he makes in the examples. He does admit, oh, if I had done X, Y, or Z, I could have benefited in this way or another. But he's also quite humble about it. It's like you shouldn't get hung up on the potential unrealized wins or losses that you missed out on, especially if you still made a good decision at the end of the day.
Ricky Mulvey: Mary, any revisions for decades later? Anything else you want to talk about?
Mary Long: We know Lynch managed the Magellan Fund. So he is totally engrossed in this world, but I really appreciated the time that he spent talking about just how much money it costs to keep this whole charade. Don't want to call it a charade, but this whole operation going. He mentions at one point that it's just like I forget the exact number, but it's this massive number of money just to have your fund look one way on January 1, do a whole bunch of shuffling throughout the year, and then have it changed throughout the year. But on December 31st, effectively look exactly how it did with the exact same stocks held as it did in January 1. I think that that's interesting. He's in this world, but he also addresses, there's a lot moving around and I do this for people. You can do this yourself. That's pretty core also to The Motley Fool philosophy.
Ricky Mulvey: A lot of this book is like I am in this world, but I am not of this world.
Mary Long: I'm just like you.
Ricky Mulvey: I'm just like you. I think one thing that would be interesting to hear him discuss now is about how much more stocks fluctuate. Whether it's in Nvidia gaining the full market share of McDonald's in one day, FedEx lost I think, 30% in one day late last year. That might actually make the case for cycling Stalwarts stronger in his mind. I'd be more curious to read a revision about maybe a more volatile market in part because of more options trading. Also if any of his philosophy has changed now that trading costs are zero.
Mary Long: He does have some thoughts on options.
Ricky Mulvey: He does. He compares options trading to alcoholism, which I --
Mary Long: Another one of those savage lines.
Ricky Mulvey: Raised a little bit of a question mark, but it's toward the end of the book. He puts his thoughts on shot selling and options toward the end of the book for a reason, I think.
Mary Long: It's brief.
Ricky Mulvey: Mary, overall review.
Mary Long: Overall review. I hate number scales, so I'm not going to put it on a number scale. But I think it's definitely a worthwhile read and it's fabled for a reason. I think that I understood the Motley Fool philosophy of investing a lot better because I have read this book and again, I know I've hit on this before, but I loved the focus on research and how there is a story everywhere. You just have to keep your eyes open. That was the biggest takeaway for me. Highly recommend.
Ricky Mulvey: Highly recommend. I would recommend it as well. I think some of the advice is a little dated. That's fine. Take what you need from it. I think the fundamentals of the book are really strong. I also really like how it gives you investing frameworks to there's suggestions on how to write an investment thesis based on which bucket your stock falls into. I think that it helps you kind of set those expectations for stock picking and investing really well. Go for it. Parts of it are long, but it's not that long of a read if you listen to a daily investment podcast.
Mary Long: It's worth your time.
Ricky Mulvey: It's probably worth your time.
Mary Long: If you do give it a read and you haven't already, let us know what you think.
Ricky Mulvey: That's podcasts with an [email protected]. [email protected].
Mary Long: As always, people on the program may have interest in the stocks they talk about and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. I'm Mary Long. Thanks for listening. We'll see you tomorrow.
