Originally published at: https://blog.12min.com/beating-the-street-pdf-peter-lynch/
As the manager of the Magellan Fund, he averaged 29.2% annual return during a period of thirteen years.
No wonder they call him a legend.
Ladies and gentlemen, let us introduce to you Peter Lynch, explaining the art of “Beating the Street.”
Who Should Read "Beating the Street"? And Why?If we’re asked to compare them, we’ll probably have to say that as much as "One Up on Wall Street" serves as Peter Lynch’s investing theoretical framework, "Beating the Street" demonstrates this theory in practice.
If you have the time and you’re serious about investing, then read them both.
If not – then we guess it’s sounder that you start with “One Up on Wall Street,” and then move on to “Beating the Street.”
However, if you are younger, you have an even better option than the two: buy Lynch’s “Learn to Earn,” appropriately titled “A Beginner’s Guide to the Basics of Investing and Business.”
About Peter LynchPeter Lynch is an American investor and mutual fund manager, who currently spends a great deal of his time mentoring young analysts and giving away some of his money to charity.
After graduating from Boston College and earning an MBA from the Wharton School, Lynch got a job with Fidelity Investments.
In 1977, he was named the head of the then-obscure $18 million worth Magellan Fund. When Lynch resigned from his position thirteen years later, the fund was worth more than $14 billion in assets.
In fact, during his tenure, the Magellan Fund averaged a 29.2% return, the best in the world and in history – to this day.
Lynch has co-written few books – including this one – with John Rothchild, a freelance writer who has authored few financial books on his own as well, such as “A Fool and His Money” and “Going for Broke.”
"Beating the Street PDF Summary"Let us start our summary the way Peter Lynch starts his book – with a tale.
Back in 1990, Joan Morrissey, a teacher at St. Agnes School (a Boston area parochial school), was inspired to test the theory that you don’t need a Wharton or a Quotron MBA to excel in equities with her seventh-graders.
So, she tasked them with making mock investments.
The only rules of the game: they have to research their choices and explain to their classmates the reasons behind their investments.
The seventh-graders beat the S&P 500 index by a significant margin, their portfolio returning 69.6 as opposed to the S&P 500 total return performance of 26.08 for the period between January 1, 1990, to December 31, 1991.
Know your investments and try not getting too fancy: the stock-picking methods of the successful investors are usually “much simpler and generally more rewarding than many of the more baroque techniques used by highly paid fund managers.”
Speaking of stocks – Lynch is very adamant that bonds and certificates of deposit are never the right way to go, since carefully chosen stocks with dividends pay returns and, over a lengthy period, will almost certainly increase substantially.
Chapter 3 – titled “A Tour of the Fund House” – is the one many may be tempted to read first, since in it Lynch explains, for the first time, how to devise a mutual fund strategy, comprehensively and in detail.
The next three chapters are, as Lynch says, a “three-part retrospective: how I managed Magellan during 13 years and 9 major corrections.”
In them, Lynch analyzes the factors which ultimately contributed to his successes, concentrating on the methodology behind his decisions, and steering away from “idle reminiscence.”
Lynch explains why he chose certain stocks – Philip Morris, GM, Ford, Chrysler, Volvo, General Electric, and Fannie Mae – and how the investments paid off, transforming the small, closed Magellan fund from a $100 million obscure fund to a $10 billion giant.
Most of the book – from Chapter 7 to Chapter 20 – chronicles Peter Lynch’s way of choosing the 21 stocks he recommended in the 1992 Barron’s.
Now, you know that if you had bought many of these 21 stocks, you would have probably been a millionaire.
If you didn’t do that – or haven’t had a chance to – these chapters demonstrate how thoroughly you should research something before finally making a buy.
After all, the length of this section proves this.
For Lynch, the most natural place to start is to look for stocks in the retail sector, since people will always eat and, consequently, shop there.
Next, you should conduct a research on the depressed industries, since there you’ll find the most undervalued stocks on the market.
Lynch proves this by showing how digging deeper into the problems of the real estate market of the early 1990s revealed that there was no problem at all and that it was a minor hiccup: the inherent value of some companies promised big in the long run.
A well-run company in a depressed industry may emerge stronger and victorious in more than one sense, using the circumstances to swallow some of its competitors.
When the economy is stagnating, Lynch goes on, “the professional money manager begins to think about investing in the cyclicals.”
Some industries – “aluminums, steels, paper producers, auto manufacturers, chemicals, and airlines” – are always stuck in cycles, following a pattern of boom and recession and then boom again.
These are called cyclicals, and Lynch explains how you can profit from this, concluding his book with a recommendation that you need to do a reevaluation of your investment strategies every six months – since a healthy portfolio – just like a healthy man – requires a regular checkup.
Key Lessons from "Beating the Street"1. Know What You Buy: There’s No Other Formula 2. Peter’s 21 Principles 3. Peter’s 25 Golden Rules
Know What You Buy: There’s No Other FormulaI have no pat formulas to offer," writes Peter Lynch at the end of the "introduction" to "Beating the Street."
So, why should you bother reading this book?
Well, because the best way to learn where and how to invest is by reading.
And because even though “there are no bells that ring when you’ve bought the right stock, and no matter how much you know about a company you can never be certain that it will reward you for investing in it,” you can improve your odds if you know the factors that make a bank or a retailer or an automaker profitable or unprofitable.
“Beating the Street” certainly lays out these factors.
Peter’s 21 PrinciplesThroughout this book, at various places, Peter Lynch presents his 21 principles (both funny and enlightening) – things he learned from his experience, which, as he says is always the most expensive teacher.
So, you owe him.
And because we’ve handpicked the best of them – you owe us also, by proxy:
#2. Gentlemen who prefer bonds don’t know what they’re missing.
#6. As long as you’re picking a fund, you might as well pick a good one.
#8. When yields on long-term government bonds exceed the dividend yield of the S&P 500 by 6 percent or more, sell your stocks and buy bonds.
#11. The best stock to buy may be the one you already own.
#14. If you like the store, chances are you’ll love the stock.
#15. When insiders are buying, it’s a good sign—unless they happen to be New England bankers.
#16. In business, competition is never as healthy as total domination.
#17. All else being equal, invest in the company with the fewest color photographs in the annual report.
#18. When even the analysts are bored, it’s time to start buying.
#19. Unless you’re a short seller or a poet looking for a wealthy spouse, it never pays to be pessimistic.
Peter’s 25 Golden Rules (Or 8, If You’d Like)The last chapter of "Beating the Street" is titled 25 Golden Rules – and it summarizes the most important lessons Peter Lynch has learned during his illustrious career.
In a checklist he distributes to young investors, Lynch has further trimmed these 25 golden rules to eight.
And here they are:
#1. Know what you own.
#2. It’s futile to predict the economy and interest rates.
#3. You have plenty of time to identify and recognize exceptional companies.
#4. Avoid long shots.
#5. Good management is very important - buy good businesses.
#6. Be flexible and humble, and learn from mistakes.
#7. Before you make a purchase, you should be able to explain why you’re buying.
#8. There’s always something to worry about.
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"Beating the Street Quotes"[bctt tweet="This is one of the keys to successful investing: focus on the companies, not on the stocks." username="get12min"]
[bctt tweet=“The popular theory that small growth stocks were the major factor in Magellan’s success falls wide of the mark.” username=“get12min”]
[bctt tweet=“Corporations, like people, change their names for one of two reasons: either they’ve gotten married, or they’ve been involved in some fiasco that they hope the public will forget.” username=“get12min”]
[bctt tweet=“The extravagance of any corporate office is directly proportional to management’s reluctance to reward the shareholders.” username=“get12min”]
[bctt tweet=“In business, competition is never as healthy as total domination.” username=“get12min”]