One up on Wall Street, written by Peter Lynch, is one of the financial books I have enjoyed the most.
I read it in January 2019, and it helped me a lot to design my strategy to invest in stocks.
It’s one of my favourite books about investing in stocks, only surpassed by the intelligent investor.
This is an easy-to-read book. Overall if you read it after the intelligent investor, like I did.
It’s also a very practical book, it’s easy to use Peter Lynch stock buying tips.
On this One up on Wall Street summary I am going to cover the main ideas of the book, and guide you through them.
I recommend it if you want to learn more about how to invest in stocks.
Introduction of One up on Wall Street
The book was first published in 1989. It is one of the best-selling stock investment books in history. To date, more than one million copies have been sold.
Peter Lynch stresses that anyone is able to get better results than professional Wall Street investors, and gives you the key ideas to do so.
The author contrasts the ideas presented with examples of his investments in the stock market. This gives you a simple and practical view of how to use the book’s concepts to invest in stocks.
In this summary I’m going to show you how to implement Peter Lynch’s investment theories, and why the individual investor has an edge over Wall Street professional investors.
Who is Peter Lynch?
Peter Lynch was born in the United States in 1944. He is a successful investor, mutual fund manager and philanthropist.
He has written two books, One up on Wall Street and Beating the Street. Both are very good books, but I prefer One up on Wall Street.
He earned a place in Wall Street history by achieving a 29% annual return between 1977 and 1990 as a manager of the Magellan fund in Fidelity Investments.
If you had put 10,000 euros into the Magellan fund in 1977, by the end of 1990 you would have obtained 280,000 euros. 28 more times, not bad, right? 🙂
During these 13 years he more than doubled the return of the S&P500, making the Magellan Fund the best mutual fund in the world.
Peter lynch performance as portfolio manager was outstanding.
When he started managing Magelland fund it had 18 million. 13 years later it had gone up to 14 billion.
Financial journalist Jazon Zweig described Peter Lynch as a legend, in his 2003 edition of the intelligent investor.
Due to his investing style and his great returns, he is often compared with value investing investor Warren Buffett.
Honestly, I think legend could fall short. 29% annual return for 13 years, just impressive.
Book Summary – Main Ideas
Now I’m going to summarise the main takeaways of the book, so you understand the most important concepts.
Pay attention to the companies you use regularly
This is one of the most important lessons of One up on Wall Street. Peter Lynch stresses the importance of looking at the companies you come across in your everyday life.
If you drink coffee every day at Starbucks, you like the coffee, you see that there are always people buying, and more and more stores are opening, Peter Lynch recommends you to analyse the company.
“If you like the store, chances are you‘ll love the stock”
He gives many examples of companies that he discovered on his day to day life. An example is Taco Bell.
He invested in Taco Bell because he really liked its tacos, and he saw that the shops were always crowded. When he analysed the company he confirmed that its financial condition was good, and its balance sheet was strong.
Taco Bell also had many opportunities to expand throughout the United States.
The result was a “ten bagger” – an investment that multiplied by 10 its initial value.
As you can see, just by paying attention to the companies we use every day we can discover good investment opportunities.
How can an individual investor beat Wall Street analysts
Professional investors usually invest in large and well-known companies because these companies are “more popular”.
Peter Lynch highlights that below sentences is common knowledge among Wall Street analysts:
“You’ll never get fired for buying IBM”
You have to keep in mind that analysts are not only looking to get good returns, but also to keep their jobs.
That’s why they often invest in popular companies and don’t pay attention to small businesses. If these big companies get poor results and the share price drops, they will excuse themselves by saying “the company has had a bad year”.
According to Peter Lynch, no one gets fired because a popular company has bad results.
This is why the average person has an advantage over Wall Street’s professional analysts.
The investor does not have to choose well-known companies to please his boss. You should search for companies that perform well, even if they are not popular.
Simply by using common sense, the investor can make extraordinary profits.
Invest in companies with low PEGY ratio
The PEGY ratio is introduced in One up on Wall Street as a way to value companies through the fundamental analysis.
It consists of dividing the P/E (Price to Earnings) by the sum of the expected earnings growth and the dividend yield. The formula is:
Peter Lynch advocates buying companies whose P/E is lower than their expected earnings growth. As a result, its PEGY ratio is less than 1.
Let’s look at an example. We have a company whose P/E is 10, its expected growth in 2020 is 15% and its dividend yield is 5%.
PEGY ratio is 10/ (15+5) = 10/20 = 0.5
This means that the share price would have to double in 2020 for the PEGY ratio to be 1!
In my opinion the PEGY ratio is the most important metric to assess the value of a company.
My strategy for selecting companies is based on the PEGY ratio.
Don’t invest in companies with very high P/E
The P/E represents the ratio between price and earnings. As discussed in the previous section, the P/E should be lower than the expected profit growth.
This implies that if a company has a P/E of 50, its earnings have to grow 50% annually. It is very difficult for a company to grow 50% every year, practically impossible.
“If you invest in a company with P/E 50, even if everything goes well, you won’t make just any money. And in case something goes wrong, you’ll lose a lot of money.”
Peter Lynch recommends that we do not invest in companies with very high P/E.
Companies like Amazon and Netflix have a P/E of 70. I consider them very good companies, but I don’t think they can grow at a rate of 70% every year, so the price will sooner or later suffer a correction.
Buy debt-free companies
Another important concept in One up on Wall Street is debt.
Peter Lynch categorises long-term debt as debt, not paying much attention to short-term debt.
It emphasizes the importance of investing in companies that have little or no debt. The debt must always be lower than the equity.
If the company has a debt lower than 50% of the equity, it is considered to be in a good financial position. If it is lower than 25%, it’s excellent.
When the debt is above 75% of the equity, it is recommended to avoid that company.
Another important idea is to get the current net cash position. To do this, we take the current assets and subtract the long-term debt.
The higher the current net cash the better.
If we divide the current net cash by the number of common shares we get the current net cash per share. According to Peter Lynch this is the minimum value that the stock can have.
Peter Lynch points out the importance of reviewing financial statements in order to make sure the company’s finances are good.
Taking a look at the investor relations section of each company should always be a part of the fundamental analysis done by the investor.
Peter Lynch’s conclusion is: a debt-free company cannot go bankrupt.
The types of companies
For the author there are six types of companies. Let’s look at its main characteristics:
- Slow growers: established firms with little growth. They tend to stand out for offering high dividends. Peter Lynch does not recommend including them in the portfolio because of the poor performance they offer
- Stalwarts: large and well-established companies. The key is to buy them at a good price, and get a 30-50% return in a couple of years. The author recommends having these companies in our portfolio as protection against economic recessions
- Fast growers: small, usually new, fast-growing companies, often at 25% annually. This is where we can find our tenbaggers
- Cyclicals: companies that alternate periods of growth with stagnation, due to the economic cycles of their sector. This causes stock price to go up and down. They are airlines, cars, mining, etc.
It’s important to buy them at the good part of the cycle, and sell them just before it’s over (which isn’t easy)
- Turnarounds: These are companies that are going through difficulties. They have bad results, and may even be about to go bankrupt, which makes their price be very low. If the company recovers, the profits are very large.
We must research these companies deeply since some may go bankrupt, thus losing our investment
- Asset plays: This category includes companies that have something valuable that few people know. It can be a new product about to be launched, inventory not valued correctly, or changes in company structure.
Again you have to be careful with this category. We must be very confident that we know the real value of the hidden asset, and its impact on the company’s accounts
Peter Lynch says his favorite category is fast-growing companies, which typically make up 30-50% of his portfolio. He also always has stalwarts and cyclical companies.
A small part of its portfolio is invested in tunrarounds and asset play companies.
I personally focus on stalwart businesses, and I add some cyclical and fast-growing ones.
Look for tenbaggers
In One up on Wall Street Peter Lynch shows us his passion for finding tenbaggers.
The term bagger comes from baseball, and Lynch uses it to refer to the growth of a stock price.
A tenbagger stock means that it has increased its value by 10 times. This means a 900% return.
Peter Lynch is passionate about finding companies that can give that huge growth. In the book he gives several examples of companies that have been tenbaggers, such as Cocacola, Toysrus and Chrysler.
Companies like Cocacola and Chrysler were well known business when Peter Lynch invested in them. As you can see, you only have to detect companies undervalued by the stock market and wait for the price to be corrected.
If you want to learn more about how to identify tenbaggers, buy the amazon book here.
Know the story – the reasons why you buy the company
One up on Wall Street highlights the importance of understanding why we buy a stock.
There must be a detailed investigation of the company to justify the purchase. Fundamental analysis must support it.
The author points out that the reasons cannot be “the price is about to go up” or “A friend told me it’s going to shoot up”
Peter Lynch suggests that we prepare a story with the reasons we have to buy the company. If we are able to explain these reasons to other people, then we are in a good position to buy the stock.
Once we own it, it is also important to review the company periodically. If the company’s financial situation deteriorates, we might need to sell it.
Ask yourself how you will react if the stock market sinks
The stock market suffers corrections from time to time, so you need to be prepared for them. These drops can occur due to recessions in the economy, or simply collective hysteria.
It’s important to assume that the stock market will eventually sink, and reflect on how you’re going to react.
When the share price drops a lot, this represents an opportunity. The investor can buy the same companies for a lower price.
If the fundamental analysis continues to indicate that the business is good, the investor should buy more shares and wait for the price to rise.
“The biggest mistake an investor can make is selling when the stock market drops”
To avoid making this mistake the investor must assume the volatibility of the stock market, and take advantage of it.
Common knowledge that is wrong
In One up on Wall Street Peter Lynch teaches us that there are many popular ideas that are not true. In his opinion, these ideas are very dangerous and it is important to realise they are false.
- “If it’s already so down, it won’t go any lower”: you can never know the lowest point of a share
- “If the stock is this high, then it won’t go any higher”: again, there’s no limit that defines how much the price of a company can grow
- “It’s just 3$ per share, how much can I lose?”: You can lose all your investment if the company goes bankrupt
- “They will come back”: there are some companies that never come back
- “When it gets back to $10, I’ll sell”: if the company does not meet your conditions, you must sell it immediately. If you wait, the price will go even lower
- “It’s been so long, but nothing has happened”: be patient. Sometimes it takes years for the market to recognise the value of a company
- “Look how much I’ve lost, I should have bought it earlier!”: you haven’t lost money because you didn’t buy anything. Do not have that point of view, it’ll only lead you to make mistakes
- “The stock’s high, so my predictions are right”: just because the price rises doesn’t mean your analysis is correct. Check the company’s financial status after some time to assess it
Many of these ideas are mantras said over and over again by people, which makes them very dangerous.
Make sure you learn the ideas on the above list, your portfolio will thank you for that 🙂
My review on One up on Wall Street
Reading this book is essential for anyone who wants to make money investing in the stock market.
This is a book about having common sense in investing.
Peter Lynch shows you the main concepts you need to know when buying a company’s stock. There is a reason why he is known as a legend in the investment world.
If you read this book and follow Peter Lynch advices, you will most likely do well investing in the stock market
If in this 2020 you want to improve your knowledge about the stock market and start your journey to financial freedom, I recommend you to buy the book and read it.
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