Money and risk
Peter Lynch
Turning over rocks
Peter Lynch (United States · 1944–) — Turning over rocks.
What actually happened?
He used to gauge the market by what happened to him at parties. Stage one: people learn he runs a mutual fund and drift back to the dentist. Stage two: someone politely asks whether stocks are risky. Stage three: a ring forms and everyone wants to know what he is buying. Stage four: they start telling him which ones he ought to own, and that, he said, is when to leave. The indicator is not the price. It is how much authority strangers think they have.
Invest in what you know, and finish the sentence
The amateur's advantage is not more information but earlier information, in one corner: your own industry, the product your children use, the shop you walk past. The full version has a second half. The observation is a start, and between a good company and a good share sits a set of accounts.
Plenty of people shopped in Walmart every week for years while it went up many times over, and almost nobody connected the shop to the shares.
Six categories, six different rulers
Slow growers held for the dividend; stalwarts bought on a thirty per cent fall; fast growers judged on whether the store or product repeats; cyclicals bought at high multiples and sold at low ones; turnarounds judged only on how long the cash lasts; asset plays valued on what the books miss.
The common way to lose money is measuring a cyclical with a growth ruler. The first question is which kind of company this actually is.
Tenbaggers live in dull places
He liked companies with unpleasant names and boring businesses that no analyst followed: waste disposal, bottle caps, funeral services, motels. Nobody watching means a higher chance of mispricing. He was equally firm about what to avoid, which is anything described as the next something.
La Quinta was a budget motel chain growing profits over thirty per cent for five straight years. What it did right was cut the restaurant and the conference rooms.
Do not forecast the market
Spend thirteen minutes a year on economic forecasting and ten of them are wasted. Over thirteen years he sat through nine declines of more than ten per cent, dodged none of them, and still compounded at twenty-nine per cent. Avoiding falls costs far more over time than absorbing them.
The people in his own fund who traded around the dips ended with a fraction of what the fund returned, and many with less than they started.
Turn over enough rocks
This is the floor under all of it and the part nobody copies: hundreds of company visits a year, walking the stores, driving the product, looking in other people's trolleys. The edge is not intelligence, it is labour, and labour is the one thing a book cannot transfer.
The person who turns over the most rocks wins. It is a boring claim, which is exactly why it stays available.
How do I use it today?
Start a watch list from your own working life: things you use daily, that people around you have started discussing, that the press has not covered yet. Then force three answers before you buy. Which of the six kinds is it, which ruler prices it, and if it halved tomorrow would I add or panic? If the third has no answer, do not buy.
Deep read
Read alongside
Further
Lines to keep
The key organ for investing is the stomach, not the brain.
Investing without research is like playing stud poker and never looking at the cards.
Never invest in any idea you can't illustrate with a crayon.
The person that turns over the most rocks wins the game.