Investing for Survival---20 insights from
Peter Lynch (1-5)
1.
Invest In What You Know
This is
where it helps to have identified your personal investor’s edge. What is
it that you know a lot about? Maybe your edge comes from your profession
or a hobby. Maybe it comes just from being a parent. An entire
generation of Americans grew up on Gerber’s baby food, and Gerber’s stock was a
100-bagger. If you put your money where your baby’s mouth was, you turned
$10,000 into $1 million.
2. Let
Your Winners Run
It’s
easy to make a mistake and do the opposite, pulling out the flowers and
watering the weeds. If you’re lucky enough to have one golden egg in your
portfolio, it may not matter if you have a couple of rotten ones in there with
it. Let’s say you have a portfolio of six stocks. Two of them are
average, two of them are below average, and one is a real loser. But you
also have one stellar performer. Your Coca-Cola, your Gillette. A
stock that reminds you why you invested in the first place. In other
words, you don’t have to be right all the time to do well in stocks. If
you find one great growth company and own it long enough to let the profits
run, the gains should more than offset mediocre results from other stocks in
your portfolio.
3. On
Growth Stocks
There
are two ways investors can fake themselves out of the big returns that come
from great growth companies. The first is waiting to buy the stock when
it looks cheap. Throughout its 27-year rise from a split-adjusted 1.6
cents to $23, Walmart never looked cheap compared with the overall
market. Its price-to-earnings ratio rarely dropped below 20, but
Walmart’s earnings were growing at 25 to 30 percent a year. A key point
to remember is that a p/e of 20 is not too much to pay for a company that’s
growing at 25 percent. Any business that an manage to keep up a 20 to 25
percent growth rate for 20 years will reward shareholders with a massive return
even if the stock market overall is lower after 20 years.
The
second mistake is underestimating how long a great growth company can keep up
the pace. In the 1970s I got interested in McDonald’s. A chorus of
colleagues said golden arches were everywhere and McDonald’s had seen its best
days. I checked for myself and found that even in California
4.
Career risk is more highly regarded than market risk
In fact,
between the chance of making an unusually large profit on an unknown company
and the assurance of losing only a small amount on an established company, the
normal mutual-fund manager, pension-fund manager, or corporate-portfolio
manager would jump at the latter. Success is one thing, but it’s more important
not to look bad if you fail. There’s an unwritten rule on Wall Street: “You’ll
never lose your job losing your client’s money in IBM .”
5.
Stocks are most likely to be accepted as prudent at the moment they’re not.
For two
decades after the Crash, stocks were regarded as gambling by a majority of the
population, and this impression wasn’t fully revised until the late 1960s when
stocks once again were embraced as investments, but in an overvalued market
that made most stocks very risky. Historically, stocks are embraced as
investments or dismissed as gambles in routine and circular fashion, and
usually at the wrong times.
