Beating the Street (Book)

Beating the Street - Peter Lynch

Snippets and Highlights

• On the best time to buy stocks

This was the perfect scenario for the disciplined stockpicker to search his or her buy lists for likely prospects. The headlines were negative, the Dow Jones average had lost 600 points over the summer and the early fall, cabdrivers were recommending bonds, mutual-fund managers had 12 percent of their fund assets in cash, and at least five of my fellow panelists were predicting a severe recession.

When even the analysts are bored, it’s time to start buying.

When yields on long-term government bonds exceed the dividend yield of the S&P 500 by 6 percent or more, sell your stocks and buy bonds.

When your best-case scenario turns out to look worse than everybody else’s worst-case scenario, you have to worry that the stock is floating on a fantasy.

• On his investment style

The fact is that I never had an overall strategy. My stockpicking was entirely empirical, and I went sniffing from one case to another like a bloodhound that’s trained to follow a scent. I cared much more about the details of a particular story—for instance, why a company that owned TV stations was going to earn more money this year than last—than about whether my fund was underweighted or overweighted in broadcasting...

What could happen is that I would meet with one broadcaster who would tell me that business was improving, and then he’d give me the name of his strongest competitor, and I’d check out the details, and often end up buying the second broadcaster’s stock. I followed scents in every direction, proving that a little knowledge about a lot of industries is not necessarily a dangerous thing.

The publicity I received for having bought 900 stocks, or, later, 1,400 stocks, may have caused some investors to shy away from Magellan. This is unfortunate. Of the 900 stocks in the portfolio in 1983, 700 accounted for less than 10 percent of the fund’s total assets... I wasn’t convinced they deserved a substantial commitment. Most of the stocks in Magellan fell into this “tune in later” category. It was easier to follow the story when you owned some shares and were put on the mailing list.

The best stock to buy may be the one you already own.

• On cyclicals

It’s important to get out of a cyclical at the right time. Chrysler is an example of how quickly things can go from good to worse.

Cyclicals are like blackjack: stay in the game too long and it’s bound to take back all your profit.

With most stocks, a low price/earnings ratio is regarded as a good thing, but not with the cyclicals. When the p/e ratios of cyclical companies are very low, it's usually a sign that they are at the end of a prosperous interlude. Unwary investors are holding on to their cyclicals because business is still good and the companies continue to show high earnings, but this will soon change. Smart investors are already selling their shares to avoid the rush. When a large crowd begins to sell a stock, the price can only go in one direction. When the price drops, the p/e ratio also drops, which to the uninitiated makes a cyclical look more attractive than before. This can be an expensive misconception. Soon the economy will falter, and the earnings of the cyclical will decline at breathtaking speed. As more investors head for the exits, the stock price will plummet. Buying a cyclical after several years of record earnings and when the p/e ratio has hit a low point is a proven method for losing half your money in a short period of time.

The most important question to ask about a cyclical is whether the company’s balance sheet is strong enough to survive the next downturn.

• On style-drift and why it is dangerous

In fact, when a value fund does better than its rivals in a lousy year for value funds, it’s not necessarily any cause for celebration. (This also applies to growth funds or any other kind of fund.) It may be that the manager has gotten disenchanted with value stocks and has invested some of the money in blue chips or utilities. He or she has gotten frustrated with the value style, especially when it hasn’t been working. The manager’s lack of discipline may produce good results in the short run, but the benefits may be fleeting. When value stocks come back, this manager won’t be fully invested in them, and his or her shareholders won’t be getting what they paid for.

• On managing research teams

Knowing that the blame will be passed along to them, the analysts soon learn to protect themselves by not sticking their necks out. Instead of making imaginative recommendations to the fund managers, they prefer to tout acceptable, worn-out companies like IBM. Because they recommend acceptable stocks, they don’t get criticized as much when the fund managers have a lousy quarter.

Later, I presided over these meetings with a small kitchen timer, which I pretended to set at three minutes—the official time limit for any defense or explanation of a pick. In fact, I was setting the timer at progressively shorter intervals, until I got it down to a minute and a half

When you are openly criticized for your ideas, you may tend to hold back the next time... To avoid undermining one another's confidence, we allowed no feedback at our presentations—the listeners were free to follow up on the leads or ignore them as they chose.

• On industry dynamics

I find general gloom in an industry far less bothersome than if a specific company struggles while its competitors thrive.

As a place to invest, I’ll take a lousy industry over a great industry anytime. In a lousy industry, one that’s growing slowly if at all, the weak drop out and the survivors get a bigger share of the market. A company that can capture an ever-increasing share of a stagnant market is a lot better off than one that has to struggle to protect a dwindling share of an exciting market. This leads us to Peter’s Principle #16: In business, competition is never as healthy as total domination.

A technique that works repeatedly is to wait until the prevailing opinion about a certain industry is that things have gone from bad to worse, and then buy shares in the strongest companies in the group.

“We also have a fortress balance sheet. When we get in trouble, other guys are walking the plank.”

• On management communication and listening to management

If Joe Oddlot can’t always speak to the president, he can get the information from the investor relations department. Having the ear of management will not necessarily make you a better investor, any more than having the ear of the owner of a racehorse will make you a better handicapper. Owners can always give you a reason their horses will win, and they are wrong 90 percent of the time.

All else being equal, invest in the company with the fewest color photographs in the annual report.

Corporations, like people, change their names for one of two reasons: either they’ve gotten married, or they’ve been involved in some fiasco that they hope the public will forget.