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10 Investing Gems from Peter Lynch’s One Up on Wall Street

This article was originally published in June 2012. I was re-reading Lynch’s book and thought of re-publishing these amazing lessons again.

Apart from Benjamin Graham’s The Intelligent Investor, there is no better book to get started for beginners than Peter Lynch’s One Up On Wall Street.

The easy-going and simplistic stock picking style discussed in this book brought Lynch great success in his profession as a fund manager at the US mutual fund company, Fidelity.

The best part about this book is that it’s low on number crunching but high on anecdotal stories. Moreover, readers are given a clear picture on how to get off to a good start in the stock market.

One Up On Wall Street offers insight into the mind of one of the greatest money managers of all times.

Lynch helps you discover that he is a normal guy (like you and me) who thinks rationally, believes in doing his own independent research on companies, asks plenty of questions, and gets caught off guard by the market at times, just like anyone else.

Anyone thinking about buying individual stocks must read this book before they ever make their first stock purchase.

While there are numerous lessons that Lynch dispels through this book, here are my personal “Top 10″ that really stand out. I have in fact benefited from incorporating each of these lessons in my personal investment philosophy.

I hope these also add to your investment arsenal. So let’s start right here.

Peter Lynch’s 10 investing gems

1. Understand the nature of the companies you own and the specific reasons for holding the stock.
A lot of people buy stocks with the mentality – “This stock is really going up!”

This reasoning of buying stocks has never worked in the long run. You might buy a stock that is going up in price, and you might make some money in the short run. But in the long run, this basis of buying stocks is going to suck you into a never ending whirlpool of losses.

A stock is just a share in a business. So it’s important to understand what is the kind of “business” that you are getting into. And then you must have specific reasons to buy and hold the stock (again, reasons that have less to do with how the stock price is doing and more to do with how the business is doing).

2. Consider the size of a company if you expect it to profit from a specific product.
You might say, “I love Maggi! In fact, everyone loves Maggi. So Nestle must be a very good stock!”

Let me ask you, “Great! But what if Maggi is just 1% of Nestle’s total sales, and the products that contribute the remaining 99% aren’t that great? Does Nestle still sound like a great investment just on the basis of one great product that contributes just 1% of its sales?”

Now what do you say?

See, companies selling products or services that everyone love or is talking about is worthy of “considering” as a potential investment.

But, as an investor, the greater task for you is to know how much of that great product or service means to the company. If it does not contribute meaningfully to the company’s sales and profits, it can’t be the core reason for buying that stock.

3. Be suspicious of companies with growth rates of 50-100% a year.
“Growth for the sake of growth is the ideology of the cancer cell,” goes a famous saying. In the same way, companies that are growing at rates of 50-100% annually must be looked at with suspicion.

One reason for this is that such growth cannot continue for long (for reasons like higher competition that might want to take a pie of this growth opportunity). The second reason is that if such a company still wants to push for higher growth for a few more years, it might have to infuse more capital in the business.

This could either mean stretching the balance sheet (by taking on debt) or diluting equity (by issuing new shares). Both these are bad omens for existing shareholders.

What is more, one year of slowdown in growth can come as a shock to the stock market, and might lead to a sharp fall in the stock price.

4. Distrust diversifications, which usually turn out to be diworsefications.
Experience suggests that most diversifications (acquisitions of companies in the same area or a different one altogether) are done to satisfy the egos of promoters, and not for real business reasons. And most of the diversifications end up as diworseifications.

So watch out for companies that are blazing guns in this space.

5. People get incredibly valuable fundamental information from their jobs that may not reach the professionals for months or even years.
Not many small investors appreciate this, but it is one of the best ways they can pick great stocks.

If I’m a banker, I know what makes up a bank’s balance sheet and I also know which banks are worth banking upon as investments.

Considering this, I would be a fool eyeing biotechnology or IT stocks, especially when I don’t understand the ABCs of these industries, but just go by what my broker or friend advises me.

Of course I might enhance my circle of competence and learn about these industries, but my first hunting ground must be ‘banking’.

6. Separate all stock tips from the tipper, even if the tipper is very smart, very rich and his or her last tip went up.
Even if I love my fund manager for his stellar track record in managing my money, toeing all his stock ideas without doing my own research would be fraught with extreme risks.

The stock he is recommending on CNBC might form just 0.001% of his total portfolio. I might be so enamored by his story on the stock, that I may buy it in bulk and it forms around 10% of my small portfolio.

Now when this stock crashes, the fund manager would appear smart for taking a very small risk with it. I might lose my shirt.

So the idea is to always do an independent research on a stock before you even think of buying it.

7. Invest in simple companies that appear dull, mundane, out of favour, and haven’t caught the street.
Such a company is rarely covered by stock analysts and bought by fund managers. So there is a great chance that the stock could be available at a great bargain.

8. Companies that have no debt can’t go bankrupt.
This is the most important lesson that you would remember (or forget) when it comes to identifying the right businesses for investment.

Companies that borrow money to grow their businesses might appear good (because they are ‘growing’).

But more often than not, such companies get so much intoxicated by the growth that they end up making a mess of their balance sheets, and in the process, destroying whatever shareholder wealth they created during “growth” years.

Look at realty and construction companies, and you won’t have to look anywhere else for such examples.

9. Devote at least an hour a week to investment research. Adding up your dividends and figuring your gains and losses doesn’t count.
I have been shouting this from the rooftop of Safal Niveshak all this time, but not many seem to hear. So now, let me tell you how much Peter Lynch believes in the power of “independent investment research” in the success of an investor.

Lynch suggests that you must invest at least as much time and effort in choosing a new stock as you would in choosing a new refrigerator.

10. When in doubt, tune in later.
Now this is where the emotional part about investing comes into play.

I have spent ten days researching a stock, and thankfully on the eleventh day, I find that it’s a great business and even available at a good discount to the intrinsic value. So it seems like a perfect “buy”.

Now, what in the world should stop me from buying this stock?

Well, here are some questions that must stop me from buying that stock (call it XYZ) instantly:

  • Am I biased towards XYZ just because I’ve spent ten days researching it?
  • Am I getting over-confident with my analysis?
  • Am I impressed by just the company’s recent performance?
  • Do I like the stock just because it has fallen in price?
  • Do I like it just because my friend advised it to me in the first place?

If the answer to any of these questions makes me uncomfortable, it’s an indication that I must sleep on the stock idea instead of buying the stock then.

There have been numerous instances where I have waited weeks or even months before committing money to a stock idea I liked.

As Peter Lynch says, “The key organ for investing is the stomach, not the brain.”

The 15-20 days after I complete my analysis on a stock help me know whether my stomach is ready to digest the stock even when the mind answers in the affirmative.

What do you say?
If you have read One Up On Wall Street, which are the other key lessons from Lynch you learned from this book?

Please share in the Comments section below.

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Comments

  1. 7th one is the best.
    Invest in dull boring businesses.

  2. Dear Vishal,

    I will never ever forget the following in investing lifetime (reasons are given also based on my own experience, again for the benefit of the readers):

    1. Understand the nature of the companies you own and the specific reasons for holding the stock.

    My case: Investment in MIC electronics. Touted as the most promising company and monopoly in LED business with long term contracts in LED displays. A hidden gem and a multibagger. Invested in that company without understanding the business. Multibagger was the only reason for buying this stock. Purchased at 36 sold at 15 loss of 50% around 40K. There are other examples like Allied Digital.

    2. Be suspicious of companies with growth rates of 50-100% a year.
    My case: Allied Digital. Look for any research reports before 2011 including ET article about the stock and the high growth rate shown. Stock is down from 225 level to 25. My loss is 2Lacs, 1/3rd of capital wiped out.

    3. Distrust diversifications, which usually turn out to be diworsefications.
    My case: Reliance is a potential candidate for it. Although I made good profits 3 years back (25% annualized). But in last 2 years loss is about 35K. Although cannot write off RIL. Diwrosefication is at work in RIL with retail to financial to 4G.

    4. People get incredibly valuable fundamental information from their jobs that may not reach the professionals for months or even years.
    My case: This is the most important one I will never forget. I am an Engineer from construction field. If you ask me it is one of the worst business you can run (unless you have political connections, inside hand to help you) and the margins are so poor. Cash needs are always high, talent retention is a very big issue and there are several other issues involved. Unless otherwise your a gigantic co., it is very difficult to run the business. Further the book value and cash value are all useless factors here. A dead stock in a yard can be shown in a book value based on your purchase rate but when you want to sell it out, it will not even fetch peanuts, that is the nature of business. It is a business I will hate to run as a owner. Although I know this fact I didn’t apply while buying stocks and purchased IVRCL and C&C both have eroded the capital. Loss of about 1L and 50K on each of them.

    5. Separate all stock tips from the tipper, even if the tipper is very smart, very rich and his or her last tip went up.
    My case: I did not go by the Tips. I paid for fundamental analysis from a reputed co. and still lost lot of money. Lesson learnt: It can at best only be taken as a starting point for our own research before buying a stock.

    6. Companies that have no debt can’t go bankrupt
    My case: Deccan chronicle. Touted as a value stock with good dividend yield, strong balance sheet (which I dont Understand), high promoter holding, very min. debt, lots of hidden subsidary value. The stock fell from 160 to 32 today. Loss of 1Lac.

    • Sanjeev Bhatia says:

      Ajay, I think for the benefit of readers, you can tell the name of the company you paid for Research Reports too so that others are also not taken in by flashy ads.

    • Thank you Ajay for sharing your invaluable thoughts and experiences with other readers…and especially your inputs on the construction industry. I agree to the fact that accounting policies are a sham in this industry.

      Your inputs serve as great lessons for people just starting out in investing, as also for those who are already into the game. So thanks again!

    • Manish Sharma says:

      Thanks Ajay for sharing your experience with everyone. This is an invaluable lesson and a must-read for anyone interested in putting money in the market…

    • shravan says:

      dude
      theres something PRETTY WRONG in deccan chronicle
      they ve DONE A WILFULL DEFAULT on ncds of 20 crore despite an fd of like ten times this amount..pls chek capital mind or the care website for details
      GOLMAAL HAI BHAI!

  3. shreyas says:

    Good points Vishal. For me the important lesson has been – over a long term earnings has a strong correlation with price. So as one of my steps in stock analysis, I construct a chart with both earnings and price over the past years and see if there is a mismatch to be taken advantage of or be wary of.

  4. karthik says:

    hi vishal,
    Saw the veritas report on RCOM. Need your Views.

    • Karthik, if you ask me what has been my one (and only one) resolution as an analyst over the last 9 years, it is that I will never give a view on any Reliance group stock. The only two recommendations I’ve ever made on these stocks was on RCom (“Sell”, in Oct. 2007), and Reliance Power (“Avoid” during the IPO in 2008, with a target price of Rs 60 :-)).

      Anyways, if you still want my view on Vertias’s report on RCom, I’m still confused why they are so bullish on this stock. LOL!

      • thanks vishal… thats true… seems there are more skeletons in the cupboard and veritas has been hitting them now and then…

  5. Sanjeev Bhatia says:

    Great Lessons from a great guru.

    I personally find this book much more engaging then The Intelligent Investor. IE is too academic and text book type (this might be because of MY limitations). The lessons in this book are superb and have to be ingrained and permanently etched in mind. However, I have found out that the risk is not in Knowledge but in Discipline/Passivity. So many times, we know about the risks attached with a particular action, but still we succumb to fear/greed and end up doing things which we wouldnot do in our sane minds. Atleast this has happened with me a number of times. Knowledge is one thing, and doing things based on that knowledge is another.

    All lessons given above are great and have to be inculcated in toto. Investing in stock market is a multi-disciplinary job and ALL things have to be kept in mind.

  6. Sunny Gupta says:

    Thanks again Vishal for a nice post. I’ve read “Learn to Earn” by Peter Lynch but still need to read this one, and I’m sure it’d be a good book.

  7. Manish Sharma says:

    I think along with glamorous stocks we must also avoid glamorous annual reports, as you mentioned in your previous post ;) Anyway, a good post to go through the important points of One Up… once again.

  8. Ajay,
    Thanks a lot for sharing your personal experiences as this is extremely useful for newcomers like myself.

  9. Ramanand says:

    Hi Vishal,
    Reading all this (article and comments), as well as various traps such as “Growth Traps” and “Value Traps”, is it any wonder that the Stock Market is just a bunch of “traps” to any investor without a specific edge over others? Specific edge can be things like insider information, front runner, market operator, full time disciplined trader etc.
    I just read an article in Yahoo today on Macro vs. Micro by Deepak Shenoy. This is another nail in the coffin of any person wishing to invest his hard earned money into the stock market. If even value investors cannot do a reasonable analysis due to so much uncertainty, is it any wonder that retail participation in the equity markets is declining day by day?
    So now, on top of concerns like share price/value, market capitalization, company position, pricing power, market share, growth rate, EPS/ROC/ROE, and management competence….you have to additionally deal with unethical management, corrupt auditors, fudged balance sheets, fake earnings, hidden liabilities…and *NOW* you also have to worry about dollar exchange rates, govt inaction and policy about-turns, oil price shocks, terrorist attacks (both domestic/elsewhere), diplomatic relations *between* foreign countries (India may not be involved at all), Spanish Interest rates(!??!), Greek Utility companies payments (?!??!) and what not.

    I’m beginning to wonder whether it is worth remaining in the Markets! Wouldn’t I be better off investing my savings in tangible assets (to protect against inflation), suspend my recommendation services, close my demat/trading account, and stay away from the stock markets for good (of course not making the mistake of coming back just because they went up after a year).

    What do you say Vishal? Is this a real possibility now?

    • Dear Mr. Ramanand. Let me say that these were some brilliant observations that you made…and I’m sure a lot of other readers are suffering from a similar fear psychosis. Believe me, enduring such psychosis hurts like hell, and that’s why your questions deserve a complete post, which I’ll write soon.

      • Sanjeev Bhatia says:

        This fear psychosis all around is making me wonder whether the time to start building portfolio aggressively has come. Maybe the mother of all bull runs is just around the corner. ;)

    • Sanjeev Bhatia says:

      Sorry, pressed the post button early..

      On a serious note though, do we have a option? Which of the asset classes – Cash (decrease in purchasing power -ve , -ve), Debt (negative real returns), Gold (speculative, long term rate just abt near inflation), Real Estate (poor liquidity, big ticket expense, opaque policies) and finally Equity (you listed all the possible ills)- is Risk free? The ironic part is , all these risks with equity (as mentioned in Shenoy’s article) were still there in 2007-2008 too, but all were glossed over since market was rising. Why is it that we tend to see negatives only when the fear looms large? If , despite two wars, two PM assassinations, multiple scams, long periods of political instability (13 day government), long periods of passive market (2000-2003), market has managed to give a CAGR of 17%, do we still have to be so pessimistic?

      Saw a beautiful poster at a Doctor’s Clinic: “This too will Pass”.

  10. vishal

    honestly not read this book. will definitely try to read this weekend.
    for me when you post under the title 10 gems, this must be complete essence of the book. so feel wld’ve not missed anything by not reading the text… first thanks to you and your beautiful post.
    second, key is whether we adopt all this sayings of experienced and successful investors in real life…dont think so..as we carried away as you again explained very well in your last post “vividness”
    anyway..thank you once again for bringing such wonderful, educative and thought provoking posts…

    • Sri, even if you click a photograph of the Taj Mahal, you can’t capture it’s eternal beauty. This is what I believe is true with such amazing books as well.

      I might try to capture the big ideas from such books, but when you read them in their entirety, you will realize that the beauty of their ideas magnifies.

      As far as the “vividness” of such ideas is concerned, see vividness is never always bad. When you visualize a bright future, which gives you the confidence of working towards it, then vividness is giving you a positive feedback. In the same way, the ideas that great investors like Peter Lynch enumerate, come from their own experience as investors. They might not always be right given that the context might change (like US markets versus Indian markets), but the root of the idea will always be, as I say, “eternal”.

  11. Ramanand says //I’m beginning to wonder whether it is worth remaining in the Markets! Wouldn’t I be better off investing my savings in tangible assets (to protect against inflation), suspend my recommendation services, close my demat/trading account, and stay away from the stock markets for good (of course not making the mistake of coming back just because they went up after a year). //

    Sanjeev Bhatia says //This fear psychosis all around is making me wonder whether the time to start building portfolio aggressively has come. Maybe the mother of all bull runs is just around the corner. ;)//

    this is dilemma every serious investor faces and probable psychological answer may be the poster at a Doctor’s Clinic: “This too will Pass”.

    thanks sanjeev for reminding the powerful words.

    • That’s the beauty of being an investor, Sri! You listen to extremely opposite viewpoints from two sides. But then the idea is to be non-judgmental, think independently, and then do what you think is right for you.

  12. vishal

    one suggestion please..
    definitely you would’ve read or exposed to some of the best material on investing ..like books, videos, analyst reports etc..
    is it possible a small ebook outlining the essence for time constraint people….to act as catalyst for readers to explore further ..
    you have done for value investing course….doing for personal financial planning….
    know you have time constraints…still keep it in mind…

    • Hi Sri, I try to capture the essence of whatever I’ve learned and whatever I’m learning each day, via the posts I write. :-)

      By the way, do you mean an ebook that captures the best ideas from the best investors? If yes, it’s a great idea and should be possible. Let me see when I can work on that.

      In the meanwhile, I’m working on a “Wall of Fame” that will capture the best investing ideas from some long term investors who are part of the Safal Niveshak tribe (and some of them have 20-30 years of investing experience…one Mr. Chandrashekar started investing when I was born :-)).

      If you wish, you can also share, say your 10 biggest lessons you’ve learnt in your investing lifetime…and I’ll put them on the “Wall” as well. Whatsay?

  13. vishal
    //By the way, do you mean an ebook that captures the best ideas from the best investors? If yes, it’s a great idea and should be possible. Let me see when I can work on that.//

    thanks. exactly what i had in mind but somehow yesterday in sleepy mood, not able to bring out the words properly. It will very good desk reference not only for the present but also you are leaving a guiding light for the future generations..
    anyway, thanks for considering the idea as positive…

  14. vikrant says:

    Hi Vishal,

    Very Nicely summarized, and we must say that you have already covered most of it or all of it in your post so far. so you see its not to far that we see you writing a book on investing :)

  15. Mansoor says:

    Nice article Vishal, this book has been on my wishlist for a long time but now I wonder if you have covered it all in one article and if I should still buy it :)
    I would dare not forget point # 8 & 9. No debt and independent research. Although all of these are gems, I think point #9 touches me deep, in a time where everyone gives off tips. I hate those moneycontrol tippers. I have seen my colleagues lose a lot of money because of following these bunch of jokers who claim to have all the knowledge and do a social service. Anyway, they are not solely responsible, people who take their advice blindly are.

    • Thanks Mansoor! And you have touched the right chord by stressing on the need to do independent research before buying stocks. This is what separates the 1% successful investors from the 99% who lay the blame for their losses on others.

      And yes, you must buy the book. It’s only then that you’ll realize that what I’ve covered in this post is just a fraction of the amazing ideas that Peter Lynch has written about. :-)

  16. Prashant says:

    Hi Vishal,
    Thanks for these Gems from Peter Lynch.
    For a newbie investor like me trying to understand/implement the basics of Long term investment, your’s blog is a gold mine.
    Going through comments of many of the experienced investors at a single place helps to understand different dimensions of investing.
    Already added the link to my Favorites :)
    Thanks.

  17. This is a really great article mentioning the highlights of the book, Vishal. Kudos for your effort!

    I just had a doubt about the 7th point. Where can you find companies like this to invest in?

  18. Hi Vishal, been trying for years to motivate myself to do my own investments as l don’t trust financial advisors. I like your ten points, can you tell me how you investigate a company, where do you find the information and how do you read that information, Regards

    Vern

  19. I have also written a blog after reading One up on Wall Street. The link is here.

  20. Thanks Vishal, For sharing the important points from “One up on Wall Street”, I have read this book twice and got more clarity on my second read, of course I will re-read many times as its wonderful book to go through.

    I have one doubt, Throughout the book, Peter lynch compares the earnings with the price of the stock in the form of charts. How do we plot that chart and what is the base rate to be taken to compare the Earnings and price of the stock. I was not plot the earning and price without the base point. Please help on this…

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