Thoughts on Investing---20
insights from Peter Lynch (11-15)
11. THE
CYCLICALS
A
cyclical is a company whose sales and profits rise and fall in regular if not
completely predictable fashion. In a growth industry, business just keeps
expanding, but in a cyclical industry it expands and contracts, then expands
and contracts again. The autos and the airlines, the tire companies, steel
companies, and chemical companies are all cyclicals. Even defense companies
behave like cyclicals, since their profits’ rise and fall depends on the policies
of various administrations.
Coming
out of a recession and into a vigorous economy, the cyclicals flourish, and
their stock prices tend to rise much faster than the prices of the stalwarts.
This is understandable, since people buy new cars and take more airplane trips
in a vigorous economy, and there’s greater demand for steel, chemicals, etc.
But going the other direction, the cyclicals suffer, and so do the pocketbooks
of the shareholders. You can lose more than fifty percent of your investment
very quickly if you buy cyclicals in the wrong part of the cycle, and it may be
years before you’ll see another upswing.
12.
Boring is good
A
company that does boring things is almost as good as a company that has a
boring name, and both together is terrific. Both together is guaranteed to keep
the oxymorons away until finally the good news compels them to buy in, thus
sending the stock price even higher. If a company with terrific earnings and a
strong balance sheet also does dull things, it gives you a lot of time to
purchase the stock at a discount. Then when it becomes trendy and overpriced,
you can sell your shares to the trend-followers.
13. Who
are the winners in a cyclical recovery?
Depressed
enterprises on the edge of disaster can become very big winners on the rebound.
It happens again and again in the auto, chemical, paper, airline, steel,
electronics, and nonferrous metals industries. The same potential exists in
such currently depressed industries as nursing homes, natural gas producers,
and many retailers. What you want, then, is a relatively high profit-margin in
a long-term stock that you plan to hold through good times and bad, and a
relatively low profit-margin in a successful turnaround.
14.
Embrace market corrections
It is
not entirely clear what causes deep market corrections (a clear prove that
markets are irrational), but without them many of the best performing long-term
investors would have never achieved their spectacular returns.
15.
Hunting for bargains
There
are two particular periods when great bargains are likely to be found. The
first is during the peculiar annual ritual of end-of-the-year tax selling. It’s
no accident that the most severe drops have occurred between October and
December. It’s the holiday period, after all, and brokers need spending money
like the rest of us, so there’s extra incentive for them to call and ask what
you might want to sell to get the tax loss. For some reason investors are
delighted to get the tax loss, as if it’s a wonderful opportunity or a gift of
some kind— I can’t think of another situation in which failure makes people so
happy. Institutional investors also like to jettison the losers at the end of
the year so their portfolios are cleaned up for the upcoming evaluations. All
this compound selling drives stock prices down, and especially in the
lower-priced issues, because once the $ 6-per-share threshold is reached,
stocks do not count as collateral for people who buy on credit in margin
accounts. Margin players sell their cheap stocks, and so do the institutions,
who cannot own them without violating one stricture or another. This selling
begets more selling and drives perfectly good issues to crazy levels. If you
have a list of companies that you’d like to own if only the stock price were
reduced, the end of the year is a likely time to find the deals you’ve been
waiting for. The second is during the collapses, drops, burps, hiccups, and
freefalls that occur in the stock market every few years. If you can summon the
courage and presence of mind to buy during these scary episodes when your
stomach says “sell,” you’ll find opportunities that you wouldn’t have thought
you’d ever see again. Professionals are often too busy or too constrained to
act quickly in market breaks, but look at the solid companies with excellent
earnings growth that you could have picked up in the latest ones.
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