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My Book Reviews

Category: Investing strategy (stocks)
Published: 1989
Read: 1993
Reviewed: Aug 2010

This is Peter Lynch's first book. Part biography and part tutorial, it is considered a classic by everyone in the investment community. After a brief description about his life before Fidelity (he was a caddy, went to Wharton, was in the army), he quickly gets to the main point of the book - that individual investors have an advantage over institutions when it comes to investing. To prove his point, Lynch details all of the disadvantages that institutions face when they invest money (like restrictions on what stocks they can buy, or how many they can buy). Hence, he recommends that you stop listing to investment industry "pros" and learn how to invest your money yourself.

Lynch then teaches readers how to become their own stock analyst. He explains the different types of companies (low-, medium-, and fast-growth, cyclicals, turnarounds, asset plays, spinoffs) as well as key numbers to look at (P/E, debt, dividends, book value, hidden assets, cash flow, growth rate, inventories, earnings). He also explains the best time to buy and sell each type as well as the metrics to use to analyze each type. He also talks about the personal qualities needed to become a successful investor.

He also gives some random advice about buying stocks. He says to favor companies: that have a dull name, that do something dull or disagreeable (sin stocks) or addictive, that institutions don't own and analysts dont follow, that has a niche, or that has insider buying or is buying back their stock. He says to avoid: hot stocks and industries, "diworsification" (when a company expands into areas that it shouldn't), any company that is "the next" (e.g. "the next Microsoft"), stock market rumors, and options.

One of the book's central themes is that a company's long-term stock trend will correlate with it's long-term earnings trend. Another theme is that investors should do hands-on research in order to get to know the company better. They should use the company's products themselves or, at the very least, talk to people who do.

Lynch talks about some of the great growth stocks that he owned, such as L'eggs (a recommendation from his wife), The Limited, and Chrysler (a turnaround). He also points out certain stocks that he missed, such as mutual fund company, Dreyfus - a company that operated in the very industry he worked in.

Here are some interesting quotes and useful points:

  • From Warren Buffett: "As far as I'm concerned the stock market doesn't exist. It is there only as a reference to see if anyone is offering to do anything foolish."
  • "There seems to be an unwritten rule on Wall Street: 'If you don't understand it, then put your life savings into it.'"
  • Cyclicals are the most misunderstood of all types of stocks.
  • "When someobody says 'Any idiot could run this joint', that's a plus as far as I'm concerned, because sooner or later any idiot probably is going to be running it."
  • "Logic is the subject that's helped me the most in picking stocks."
  • "All the math you need in the stock get in the fourth grade."
  • "There was no ticker tape above my cradle."
  • Picking the wrong stocks in good markets will make you broke.

This is one of the books that I recommend to beginning investors because it does a very good job of conceptualizing the process of stock investing. Beginners tend to look at investing as a very abstract process and they often have a difficult time understanding what investing in stocks even means. This book does an effective job of teaching investors how to do research a company, and to center their research around the company's earnings. It is easy to read and is worth the 2 dollars and 3 hours that it costs to read. It should be noted though that this book teaches general principles as opposed to specific techniques, so readers looking for more "actionable" information may be disappointed.

Although this book is definitely good, it has also lost some of its value over the last 20 years. Most of the content is still relevant (do your own research, etc) so it still serves as an adequate introductory book to new investors. But the book's concepts are no longer revolutionary, and there are newer books on the market with fresher content that convey the same ideas.

There are some specific things that I disagreed with or simply didn't like. (1) I don't think that investors should call investor relations or visit headquarters. Calling investor relations gives investors a false impression that they somehow have control over how the company is run. And visiting company headquarters is simply not an efficient use of time. But even if it was, beginning investors, who are a particularly impressionistic group of people, wouldn't even know what to look for. Most of them would probably be seduced into thinking that a company's expensive building means that it is a good company to buy. (2) Buying when the fundamentals are improving often means that you are buying way too late. If you were to buy Bank of America after it's fundamentals improved after the financial meltdown, you would have bought the stock at $15 instead of at $3. (3) Lynch's books have always been too narrow and have underweighted crucial investment concepts like valuation and investor psychology. Because of this, some investors interpret Lynch's advice too literally and think that going to the mall is all you need to do to be a good investor.

Lynch also commits my most annoying pet peeve when he preaches about how the market can't be beaten but then immediately turns around and teaches you how to do it. He does this apologetically, but this self-awareness doesn't negate his hypocrisy:

"After all that's been said, I don't want to sound like a market timer and tell you that there's a certain best time to buy stocks....However, there are two particular periods when great bargains are likely to be found."

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