One of the first books I ask new investors to read is 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, where he generated an average annual return of 29% during 1977 to 1990.
Lynch wasn’t just a great investor, he had a wonderful way of getting across the secrets of his success in everyday language, exemplified by this warning of the perils of putting money into businesses that you don’t understand.
Another of his catchphrases was to “invest in what you know” and he believed everyone could use this advice to spot successful companies.
In fact, he got many of his best ideas at home or when wandering around shopping malls, rather than by poring over company accounts.
“I stumble on to the big winners in extracurricular situations,” he said. “Apple computers – my kids had one at home and then the systems manager bought several for the office. Dunkin’ Donuts – I loved the coffee.”
Now, he didn’t just go straight out and buy shares in the companies he spotted this way. Instead, he used these insights as a basis for further research. As he’s mentioned in his book, he was looking for shares that offered “growth at a reasonable price”. The idea was to avoid two common investment mistakes –
- Either paying too much for fast-growing companies;
- Or buying seemingly cheap firms without realising that they have stopped growing.
Lynch summarised his approach in 25 investing principles outlined as Peter’s Principles in his book Beating the Street.
Now, one of the Peter’s principles is – “Never invest in any idea you can’t illustrate with a crayon.”
He wrote in Beating the Street –
A class of seventh graders at an American primary school did a social studies project on stocks, the kids had to do their own research and dig up stocks for a paper portfolio. They sent their picks to Lynch, who later invited them to a pizza dinner at the Fidelity executive dining room, illustrating their portfolio with little drawings representing each stock. Lynch just loved this because it illustrates the principle that you should only invest in what you understand, the kids portfolio consisted of toy manufacturers, makers of baseball swap cards, clothing manufacturers and outlets, Playboy Enterprises (a couple of boys chose that one), Coke, and other stocks of that ilk.
With a portfolio notably lacking in glamorous technology ventures and entrepreneurial risk taking they went for solid stocks with excellent profits, their portfolio returned 69.6% against a background of a 26.08% gain in the S&P500 in 1990/91.
Now, this is a great idea – Never invest in any idea you can’t illustrate with a crayon – if you are searching for some great businesses to invest in for the long run. Of course, you must buy such businesses only after you research the ideas well, and only when they are available at reasonable prices as compared to the growth they promise.
Anyways, borrowing this idea from Lynch, I’ve tried to illustrate (through my poor drawing skills 😉 ) some great businesses you can find in your own living room, kitchen, and bathroom.
My list is in no way exhaustive, but it’s quite comprehensive as you can see in the two images below…
[Click here to open a larger image]
As you can see, most of us in India are connected to most of these businesses on a daily basis, and we also like the products/services of most of these companies.
So what stops you from researching them further if you are trying to search for those great investment ideas for your long-term portfolio?
Most of these are simple businesses, and have already created a lot of wealth in the past. But a lot of these businesses also have a great future potential, which you can identify only when you read about them, and understand them properly.
I find a lot of small, new investors complaining that they have a very small circle of competence. I’m sure this chart will erase all those complaints.
Knowing and researching 70+ stocks is, in no way, having a small circle of competence.
So go, find some great stock ideas by drawing things your understand, and then research them deeper. You never know when you paint a beauty! 😉