Sunday, August 31, 2014

More on Peter Lynch

My previous post was a critical review of two of Peter Lynch's books. I was critical because the books promote the idea that stocks, particularly "wonderful companies," are always great investments. (At one point he deems Micron Technology "a wonderful company from Idaho.")

Despite that, Lynch makes a lot of good points, and it was unfair of me not to mention them. His first book, One Up on Wall Street, offers a list of common-sense rules for when to buy and sell stocks, along with rules of thumb for how to analyze and value various kinds of companies like cyclicals, turnarounds, retailers, etc. Lynch also warns against mistakes that individual investors commonly make.

An experienced investor will be familiar with his ideas, although someone who's just starting out should find them useful. Some of his incidental observations are also quite good. E.g. Lynch writes a lot about the limits of growth and the danger of "diworsification":
"The period of the late 1960s discussed earlier ought to be remembered as the Bladder Years... [T]here is a propensity among corporate managers to piss away profits on ill-fated ventures"

Companies tend to diworsify when their growth slows:
"When The Limited had positioned itself in 670 of the 700 most popular malls in the country, then The Limited finally was.

At that point The Limited could only grow by luring more customers to its existing stores, and the story had begun to change. When The Limited bought Lerner and Lane Bryant, you got the feeling that the fast growth was over, and that the company didn’t really know what to do with itself."

Asset value varies with the type of assets:
"The closer you get to a finished product, the less predictable the resale value. You know how much cotton is worth, but who can be sure about an orange cotton shirt? You know what you can get for a bar of metal, but what is it worth as a floor lamp?"

Investors should avoid the urge to buy the dip:
"There’s a very human tendency to believe that things that have gotten a little bad can’t get any worse. In 1981 there were 4,520 active oil-drilling rigs in the U.S., and by 1984 the number had fallen to 2,200. At that point many people bought oil-service stocks, believing that the worst was over. But two years after that, there were only 686 active rigs, and today there are still fewer than 1,000.

Sometimes it’s always darkest before the dawn, but then again, other times it’s always darkest before pitch black."

...and the urge to buy the tip:
"Separate all stock tips from the tipper, even if the tipper is very smart, very rich, and his or her last tip went up."

...and beware of Batesian mimics:
"Another stock I’d avoid is a stock in a company that’s been touted as the next IBM, the next McDonald’s, the next Intel, or the next Disney, etc. In my experience the next of something almost never is—on Broadway, the best-seller list, the National Basketball Association, or Wall Street. How many times have you heard that some player is supposed to be the next Willie Mays, or that some novel is supposed to be the next Moby Dick, only to find that the first is cut from the team, and the second is quietly remaindered? In stocks there’s a similar curse."

"The trouble is, the 'next' one rarely works... If you missed Toys 'R' Us, a great company that continued to go up, and then bought Greenman Brothers, a mediocre company that went down, then you’ve compounded your error...

The same thing happened if you missed Piedmont and bought People Express, or you missed the Price Club and bought the Warehouse Club. In most cases it’s better to buy the original good company at a high price than it is to jump on the 'next one' at a bargain price."

Curing patients isn't how drug companies make their money:
"A great patients’ drug is one that cures an affliction once and for all, but a great investor’s drug is one that the patient has to keep buying."

El Pollo Loco investors take note:
"If the [fast food] prototype’s in Texas, you’re smart to hold off buying until the company shows it can make money in Illinois or in Maine... Does the idea work elsewhere?"

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