One Up On Wall Street by Peter Lynch

One Up On Wall Street

This was one of the first books I ever read about investing way back in the day and it was one of the things that made me think, “Wait a minute, I can and should invest in stocks.” So I recently decided to re-read it and it’s still a great book. Some of the advice is a little old (the book came out in 1989), but this is a new edition with a new intro from Peter Lynch himself. With the advent of the internet, a lot of the information he thinks we should research is easily available and so his strategy is even easier to follow.

The Gist
Lynch’s whole concept is “invest in what you know.” By that he means that regular folk like you and me have enough knowledge to pick stocks. Sure, it helps if you learn a little bit about P/E ratios and earnings (which he teaches you in the book), but other than that you should look through your own life to see what you know about and which companies might be good choices for you to invest in.

I like this idea for a few reasons. First, I think it’s true: people do have more knowledge than they think. He gives the now famous example of buying Hanes because his wife let him on the secret of L’Eggs what great panty hose they were. So your knowledge and the people around you are important sources. Second, I think it’s a great way to get new people interested in investing. A lot of the concepts can get pretty complex and overwhelming, but the easygoing way Lynch describes “investing in what you know” is accessible to everyone.

Dog Eared Pages
When I read, I usually underline interesting passages or fold a corner of the page if I don’t have a pen. So here are some of the most interesting things I noticed from this book:

  • “Investing without research is like playing stud poker and never looking at your cards.” It’s easy to forget since Lynch seems to be saying that anyone can just look in their medicine cabinet and find a company to invest in, but research is the way to weed out the winners from the losers. It isn’t full proof, but without it you are just gambling.
  • Small companies are where you make big money. This is part of his strategy: picking small-cap companies means they have more room to grow but it also means they are riskier. Sure, Procter & Gamble is a safer bet, but they won’t have a big growth spurt any time soon. He makes a great analogy in terms of the salaries of inventors, musicians, and athletes: they are bigger gambles because most of them don’t “make it,” but the ones that do end up making huge amounts of money.
  • He has a nice little section called “Reading the Reports” that takes a quick overview of the art of reading financial statements. This stuff can be really dry and boring, but I think it’s really important. He makes it simple and easy to understand and, while it doesn’t go into a lot of depth, he gives you enough to know what you’re looking for and which numbers to pay attention to. It kind of reminded of Rule #1 in that they both make the numbers very approachable.
  • Near the end he has a section called “The Final Checklist” that gives a quick overview of everything he’s talked about: the different kinds of stocks out there, what to look for in each one, etc. It’s a nice little go-to guide to refresh your memory after reading the book.
  • He also has an interesting discussion (near the end) about index funds, which I’m a huge fan of. He acknowledges that they are useful but as a (former) mutual-fund manager, he doesn’t believe the idea that they can beat managed funds. He is one of the few examples out there that managed funds can beat the averages (Warren Buffett being the other). He says you should try his “system” and if “after three to five years or so you find that you’d be just as well off if you’d invested in the S&P 500, then either buy the S&P 500 or look for a managed equity fund with a better record.” The thing about that is you’d have to re-check your holdings every year and that takes time most of us don’t have.
  • Lynch also has a nice section right at the end titled “If you take anything with you at all from this last section, I hope you’ll remember the following:” I like that and it’s part of the helpful/easygoing way that the whole book is written. Here he repeats his common-sense tips about not trying to time the market, not panicking when the market drops, etc. He also repeats one of the key ideas of his book that I really feel would serve people well if they embraced it: “To come out ahead you don’t have to be right all the time, or even a majority of the time.” With smaller companies all you need is a few big winners and they will take your portfolio into “better than the indexes” territory. Most of us make decisions based on the fear of losing money but Lynch candidly talks about the many times he’s lost money or missed a great/obvious opportunity, and he is still considered one of the most legendary stock pickers out there.

My example of investing in what I know: I am a Bank of America customer and since before the financial industry plummeted I’ve been keeping my eye on the stock. I read through their annual report and have read as much as I can about them and the banking industry as a whole. I was torn between Citigroup and BofA but I stuck with BofA because that’s the bank I’ve been with for so long, I know it, and I’ve done the research. They have a healthy dividend right now so I went with BofA in my Roth account (to protect myself from getting taxed on those dividends). I still believe that index funds are the best choice, but I also think that setting aside a small amount of my total portfolio for stock picking can only help me. This isn’t “Mad Money” where I’m speculating (I haven’t gotten to that point yet), it’s still responsible, Lynch money and I don’t intend to sell anytime soon. As with everything I do in terms of investing, this is for the long term. I’ll let you know how it goes.

I also discovered Life Time Fitness back when I first read this book a few years ago by following “what I knew.” It was exciting and the stock did well (it was in my mock portfolio) before the whole market exploded.

Conclusion
One Up On Wall Street is a great read for anyone that doesn’t know about investing and wants to really get into it. It’s also a great new way for people who already invest to squeeze a little extra out of their strategy. Lynch writes in a very easygoing, approachable way that anyone can understand. He is quickly becoming one of my favorite people in the investing world, along with (who else) Warren Buffett.

Between this book and Intelligent Investor (and maybe Rule #1), you have yourself enough information to put together a nice, simple, investment strategy that can only help your returns. After you read Lynch’s boo, you’ll look at everything you do (and the markets in general) in a whole new, exciting way.

Other Posts You May Like:

2 Responses to “One Up On Wall Street by Peter Lynch”

Leave a Reply

CAPTCHA Image
*