How to Be ‘One Up On Wall Street’

How to Be ‘One Up On Wall Street’ July 27, 2011

I recently read Peter Lynch’s book One Up On Wall Street.  Lynch was fund manager of the top performing Fidelity Magellan Fund from 1977 to 1990.  Though the book was written in 1989, Lynch’s wisdom still holds true today.  In fact, as I was reading, it was fun to insert the words ‘2008/2009’ recession in the places that he referenced the 1987 recession.  In just 20 short years, we’ve forgotten how our human behavior can keep us from taking advantage of good investments.  One Up on Wall Street aims to reshape the reader’s perception of the stock market and guides you along Lynch’s thought process behind buying individual stocks of companies.

Before I go any further, I’ll start by saying this; buying individual stocks isn’t for everyone.  According to Lynch, if you do not have the patience or confidence in yourself to “do the homework on the company’s earnings prospects, financial condition, competitive position, plans for expansion and so forth,” you should never invest in that company.

Sound a little extreme?  To some it may, but for Lynch, the valuation of a company is the key for stock success.  Anything else is pure speculation.  You might as well gamble your money away at the casinos, says Lynch.  When you think about it, though, he’s right.

Predicting The Market

I’ll be covering a few more of the chapters in detail, but one of them really stood out as a great introduction to his book.  Lynch titled it: Is This a Good Market?  Please Don’t Ask.

You would think that a well-seasoned mutual fund manager would have a relatively good idea as to how the market will perform, but this isn’t the case.  Lynch shares that even with all the fancy numbers and predictors out there, no one can predict with absolute certainty if the market will do well or poorly this year.

Lynch’s Cocktail Party Theory

He actually puts a humorous spin on his thoughts with a theory he calls the “Cocktail Party Theory.”  He goes on to say that while at a party, he may introduce himself and say that he manages an equity mutual fund.  Normally people nod, walk away, and go talk with the dentist across the room, pegging him with questions about cavities and plaque.

At the next party when the market may be up 15%, a few people may linger around him and tell him how ‘risky’ the market is before they politely nod, walk away, and talk with the dentist about plaque.

Lynch shares that by the time the market is up 30%, the crowd suddenly changes their mind about the dentist and everyone is discussing great stock picks and giving recommendations left and right.  At this point, Lynch says, it’s time to get out of the market.

No, Lynch doesn’t REALLY expect us to bet on the cocktail party theory, but his point was that he does not believe in predicting markets.  Lynch believes “in buying great companies – especially companies that are undervalued and/or underappreciated.”

How do you find these companies exactly?  That’s something he shares in the book in greater detail.  I’ll be sharing it here, but I’d definitely recommend a copy if you’re looking for expert advice on choosing which company to invest in.

(If you haven’t already subscribed via email, now might be a good time to suggest it – especially if you don’t want to miss the other parts of Lynch’s book. )

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