On the front cover of Lynch’s book “One Up On Wall Street,” this phrase sits under the main title:
“How to use what you already know to make money in the market.”
To some, making money in the stock market can feel as challenging or difficult as learning to speak a foreign language. I know I’ve heard people say at least one of these reasons for not investing:
- I don’t have time to invest.
- I don’t know where to start!
- I don’t have enough money to invest.
- I’m waiting for the market to improve. (ouch)
I’m sure you can think of more reasons why someone would hesitate when investing in the market.
If you read anything about Peter Lynch, you’ll find him saying over and over that the everyday person has tremendous exposure to excellent companies that are being ignored by Wall Street analysts. He gives examples in the book about companies that were ignored by analysts – Taco Bell, The Limited, Pep Boys. Lynch is passionate in sharing that if you can recognize a ‘good’ company because you use them or see others using them on a regular basis, you might be onto a good investment opportunity. These ‘close to home’ opportunities are the very ones that can turn into what Lynch calls a tenbagger, or a stock that increases in value by ten times.
Once Lynch identifies a potential company to invest in, he likes to categorize them into six different categories.
These are usually large companies that are generally older and expected to grow slightly faster than the country’s gross national output. Utilities are common slow growers and companies that provide regular dividends often fit the slow grower description. Lynch is not against these companies, he simply says not to expect huge returns on these companies.
The stalwarts are companies that don’t do a lot of shaking during recessions and economic downturns. Most of these are multibillion-dollar giants that are slow to move with new products, but remain strong with recession-proof products like dog food or Cornflakes.
You don’t need to have a fast growing industry to find a fast growing company. You simply need a company that is on the move and gaining the market share faster than other companies in that industry. These types of investments are Lynch’s favorites, as many new, fast growing companies can turn into 10 to 40-baggers or more (in Lynch’s experience).
According to Lynch a cyclical company is one ‘whose sales and profits rise and fall in regular if not completely predicable fashion.” The expansion and contraction of sales is typical of these companies, most of which are found in these types of industries: airlines, automotive, chemical, etc.
Companies that can barely make it to the bankruptcy lawyers before completely dying are candidates for the turnaround category. Back in the 80’s, Chrysler was the star turnaround along with Lockheed. These obviously have the potential for great gain, but you really need to consider the risks.
These companies have a certain known asset that will set it apart from other companies in the future. The asset might be cash or it might be an island full of oil off the coast of a country. Patience is the most important aspect for investing in these companies, because it may take a while before you see any profits come from it.
The next time you’re enjoying a trip to the mall or driving around your city, look for companies that might fit into these categories. It’ll help you stay on top of the movers and shakers and might just lead you to a great investment!