One up on Wall Street by Peter Lynch is an impressive book about fundamental analysis for stock picking. Following is my terse summary of the same.

Emphasis on Fundamental Analysis

  • Look around for companies that are performing well and invest in them before Wall Street institutional investors pick them
  • In the long run, common stocks give the best rate of returns
  • Only basic math is needed to analyze and pick stocks
  • “Don’t gamble, invest your savings to buy good stocks and hold them till they go up and then sell them. If it doesn’t go up, don’t buy it”
  • Investing directly in common stocks is a seven-card stud-poker hand

Rules of investing in the market

  1. Buy a home (≠ house) before stocks
  2. Only invest what you can afford to lose (without impacting your daily life)
  3. Patience, Common sense, and willingness to do independent research

Ignore short-term fluctuations

There is nothing called a good or bad market Predictions are futile

Six categories of companies

  1. Slow growers eg. electric utility
  2. Stalwarts (faster than slow growers) eg. Coca-cola
  3. Fast growers (small companies)
  4. Cyclicals (eg. Auto industry)
  5. Turnarounds (which is coming out of bankruptcy to perform well)
  6. Asset play (sitting on an asset that is growing in value) eg. railroad companies

Companies move from one category to another over their lifetime.

Perfect Stock to buy

  1. Its name is dull (eg. pep boys)
  2. It does something dull (eg. bottle cap maker)
  3. It does something disgusting (eg. cleaning company)
  4. It is a spin-off from a big company
  5. Institutions don’t own it and investors don’t follow it
  6. Is associated with rumors (eg. to the mafia)
  7. Is associated with something depressing (eg. Services Corporation International)
  8. Is in a no-growth industry (which implies that chances of development of competition are low)
  9. It has got a niche (eg. exclusive franchise)
  10. People have to keep buying it
  11. User of technology (hence, its inputs become cheaper with time)
  12. Insiders are buying (the reverse is not a bad sign)
  13. The company is buying back shares

Stocks to Avoid

  1. Hot stocks - which everyone is talking about
  2. Diworsifying companies
  3. whisper stocks - everyone hears the same unrealistic argument
  4. Which has few customers - which can cancel the contract and kill the company
  5. It has an exciting name

Stock is not a lottery ticket, it is a proof of ownership. P/E ratio = years it will take the stock to earn back the original investment with zero growth Buy stocks with P/E ratio below the industry average of that industry Do not buy stocks with extremely high P/E ratios

Get info from the broker, even call the company, and do read the annual report. Some important numbers - % of sales (how much the particular product contribute to company revenues), P/E ratio, cash position (higher the better), debt factor, dividends (how much, is there a record of paying through recessions), book value, hidden assets(due to appreciation of asset over years and weird accounting practices), Inventories(piling up is bad), pension plans, growth rate. Keep verifying the old analysis from time to time to ensure it still holds.

  • Market declines are frequent and inevitable, they are a great opportunity to buy stocks
  • Different categories of stocks have different rewards
  • In the long run, stock prices are in line with fundamentals.
  • Stock going down does not mean it cannot go any worse.
  • Stalwarts with huge coverage by Wall Street and investment by institutional investors are ready for decline.
  • If you cannot beat the market yourself, buy a mutual fund instead.