Peter Lynch and His Book One Up On Wall Street
Growth is as important as value?
The book by Peter lynch titled One Up On Wall Street
outlines his experience with stock investing as the former fund manager of the very successful Fidelity Magellan Fund
This fund was the best performing fund in the world under his leadership from 1977 to 1990.
This discussion is a Peter Lynch biography of his investment approach, rather than of his life. He had no particular investing style as his approach varied with the times.
His Investing Approach
A number of key comments regarding his investing approach can be discerned from reading the book. This investing approach included ...
Why Fund Managers Can Rarely Outperform
- a strong focus on good management
- selecting stocks that had not yet been discovered by analysts
- an acceptance that being able to pick one or two 'multibaggers' (stocks that be sold for many times their buying price) can more than compensate for losses on other stocks in a portfolio
- that good stocks can be observed by being alert to what is happening in one's neighborhood
- ignoring the ups and downs of the market and interest rate movements
- investing for the longer term (five to 15 years)
As an ex fund manager,Peter Lynch is strongly of the opinion that the average investor can outperform most fund managers because of the restrictions fund managers have on the way they can operate.
An example of this provided in the book is that fund managers are not normally in the position to invest in smaller companies as they commonly need to invest large sums, as well as being restricted to not owning more that 10 percent of any one stock.
As a result, they often miss out on the exceptional growth that successful smaller companies can generate, which is reflected in the multiplying effect on their share price over time.
Different Types of Stock
Peter Lynch divided stocks into six categories: slow growers, stalwarts, fast growers, cyclicals, asset plays and turnarounds.
Slow growers were usually once fast growers. He identified them via charts that show a low upward slope of earnings growth (2-4 per cent) and stock price. They can also be identified by the size and generosity of their dividend. Lynch did not like to spend time on these 'sluggards'.
The stalwarts he describes are usually large companies that have earnings growth in the 10-12 percent range - higher than the slow growers.
He suggests that while you might get a 'four-bagger' (four times your buying price) from this category, you may have to wait a long time to do it. They might be good performers at the right time but not star performers.
The fast growers are his favorite investments. These he describes as ... "small aggressive new enterprises that grow at 20 - 25 percent a year". He does not underestimate the risk in this category of stock that can get hammered if they run out of steam and become a slow grower.
He looks for fast growers with good balance sheets and which have good profitability. His trick is to figure out what to pay for the growth and when they will start slowing down.
The Cyclicals are distinguished from the fast growers that keep expanding. The cyclicals expand and contract, then expand and contract again. They tend to flourish when coming out of a recession into a vigorous economy.
He identifies cars, airlines, chemicals, steel and tire companies as cyclicals. Their charts tend to be very up and down over time.
His advice is not to buy cyclicals in the wrong part of the cycle as it could be years before they perform.
Timing is everything and you need to be able to detect the early signs that business is falling off or picking up.
The turnarounds are identified by Lynch as 'no growers' rather than 'slow growers'. They are potential fatalities that have been badly hammered by the market for one or more of a variety of reasons. But they can make up lost ground very quickly.
He identifies different types of turnarounds in his book and admits to being burnt by a number of them, but suggests that the occasional success can be exciting and rewarding.
The Asset Plays are those stocks that have assets overlooked by the market. These assets may be simply cash that the company is holding but which is not valued when there has been a general market downturn. The cash may be worth more than the market capitalization of the company.
The asset may also be real estate that hasn't been revalued for years and which doesn't represent what the company is normally recognized for.
Appreciating the value of the assets a company holds is something that local knowledge may be better at recognizing.
It is difficult to do justice to One Up on Wall Street in a short discussion of the book other than to indicate what impact the book has had on my thinking.
The major message that I received is to give as much attention to growth as I do to value when selecting stocks.
Time is money, and while a stock may be good value, that value needs to be recognized by the market in a reasonable period of time. Strong growth provides a signal that the market will recognize.
By categorizing stocks in the way he has, Peter Lynch provides the average investor with a way to focus on growth as well as value.
The fact that my copy of the book is littered with yellow stickies says something about the range of other messages Peter lynch conveys in his book.
From Peter Lynch to Best Investment Books
Return to Value Investing Home Page