One Up on Wall Street by Peter Lynch - Book Report/Review Example

?ONE UP ON WALL STREET by Peter Lynch One Up On Wall Street by Peter Lynch and co ed by John Rothchild is an account of stock investor. He was the Fund Manager of ‘Fidelity Magellan Fund’. Though, Lynch’s journey to success started from humble beginnings. After death of his father due to cancer Lynch took up caddying in private golf clubs in Boston area. In 1950’s the golf club members were investing in stocks, as it was a very good time for investment. At that time Lynch came in contact with D. George Sullivan one of the big-wig in Fidelity Investments. This contact helped Lynch to shape up his career in an amazing way. While caddying for this big-wig Lynch became quite intrigued about stocks (Lynch, 49). This interest about stocks also reflected in his educational career.  He is an MBA with Finance major from University of Pennsylvania’s eminent Wharton School. Then he chanced upon to do his summer job in Fidelity due to urging of Sullivan who worked as President of the organization. After his completion of MBA he served army for 2 years and joined Fidelity as Research Analyst (Lynch, 36). After that he took over Magellan Fund and it was the first fund he managed. After managing the Magellan for 12 years he retired from this sector (Lynch, 42). He wrote his experiences and thoughts in the book named ‘One Up on Wall Street’. This book was first published in 1989 and it gained a huge popularity. This book breaks many myths about investments and explains about various precautions when an individual is making an investment on shares and securities. This book also shares Peter Lynch’s experiences during his stint as Fund Manager in ‘Fidelity Magellan Fund’. Lynch’s work offers many suggestions to ordinary investors about making investment, selecting stocks, different possibilities in investment and preparing one-self to take the plunge for making investment. The work also suggests in favor of making long-term commitment when investing on stocks and securities.       The approach of the author at the initiation phase of the book was to enlighten the reader on making investment at individual stock. He explained preparation of investing needs mental ability; it needs planning, patience, humility and detachment to succeed as an investor. Peter Lynch with his straightforward approach and simple selection of words conveyed an ultimate truth; that is an ordinary investor may be as good as or better than a professional investor. He meant to say, ordinary investors could also be good in selecting right kind of stocks. He added; to select right kind of stock an individual have no need to be a professional with knowledge base on economic theories and interpreting charts. Furthermore, he states, there is no need to be a financial analyst and acquire knowledge about economical prediction of corporate world. According to Peter Lynch, right stocks may be the one, which has never been analyzed by the financial analysts. May be the right stocks never gone under the scrutiny of tycoons or corporate for acquisition. Moreover, he states a right stock may have funny sounding name and may be lying low in the mad rush of the stock market.       In this book he shared his experiences about acquiring different stocks. He also shared how he used to decide in which stocks to made investments and what are the factors, which influenced his buying decision. He also shared some real life examples with his readers about this kind of situation. He also narrated a story about getting tip about a new car from its driver and after that he thought the company may earn huge profit and its share price may increase in future. Then he checked the company’s financial details like P/E- ratio, earnings of the company and dividends paid to its shareholders. Then he invested funds on the company. He also mentioned that any ordinary investor could do going through the basic financial details of the company. Ultimately, this stock helped him to earn good return. He also narrated another story of similar fashion when he ate an ice cream, which was excellent. He understood that the ice cream company will become successful and earn high profits. He expected the share prices of the company will increase and will help to reap high profits, which ultimately became true as per his expectation.       In this book he also used some interesting terms coined by himself to grab the attention of his readers. He used a term coined by himself ‘ten bagger’ (Lynch, 40). Actually ‘Ten bagger’ is a kind of share. This term coined by Lynch means price of the share will increase by 10 times. For an example, if a share is brought with $1 it will become $10. These shares are considered to be once-in-a-lifetime investment. In general, these companies issuing ten bagger shares have a market cap less than one billion dollar and they have huge potential markets. With passage of time this kind of companies grow and ultimately captures its potential market and provide its patient or long term investors with attractive return. He applied this ‘ten baggers’ theory during investing funds in different stocks. The stock world says if Peter Lynch had invested $10000 in the initial stage of his career as fund manager during the time of his retirement it worth millions. In this book he also mentioned about some change in rend of the stock market. The mentioned in 1989 the investment in mutual funds increased to $4 trillion from $275 billion (Lynch, 10). This situation got acceptance from him; as he managed mutual funds he suggested there must be many amateur stock pickers who chose stocks poorly. He also stated that it would have been better if the pickers had done fairly during the mother of all bull markets. If the stock pickers had done a fair job the migration of funds would not have occurred in such a huge extent towards the mutual funds. He also mentioned that this book would help the errant stock pickers to select a more profitable path. He also discussed and compared about the stock market of 1929 and 1982 (Lynch, 1971). There he discussed about the lull in stock market of early 1970’s and how the demoralized investors kept great patience during that period (Lynch, 141). The investors motivated themselves by reminding themselves that bear market do not last forever. He also reminded the stock market players through his book that bull market also do not last forever. In this book he also provided an understanding about the Dow’s index and its relation with share prices and the prevailing market condition of the late 1982. In this book he also revealed that he was not so much keen in using technology or Internet. He also revealed himself as a technophobic person. From his experience he suggested it is not so much important to use technology to achieve success. He also discloses many great investors like Warren Buffet were also technophobes and they also did not use things which they do not understand. He stressed on the analysis supported by bank statements, savings/loans of the company and other financial statements. During his narration about his technophobic nature he also mentioned his acquaintance with the amazon.com when he was purchasing gift for his wife and how he took experts help i.e. mostly from his wife, children and close friends during any work related to web (Lynch, 11).       In this book he also revealed how he found out some of his best stocks during eating or shopping. The book also reveals in many cases he used to be the first pickers of stock related with food and shopping, after that many professionals invested on those stocks. But he stressed on the fact that he overlooked Amazon as it was beyond his intellectual capacity. The stock of Amazon was good enough in 1997 and reasonably priced than its prospects. But due to his ignorance to web world he was inflexible and overlooked the prospect of Amazon and missed a great opportunity. He also approves about his mistake and stated if he would have done serious research on Amazon it would had helped him to get an insight about the huge potential market of Amazon (Lynch, 11). But he missed the opportunity and during that time stock of Amazon reached ten-fold or ‘ten bagger’. He also mentioned Amazon is one of the 500 hundred ‘dot.com’ firm whose stock growth was exceptionally well. In website and high-tech circles, it was not unusual for a stock to grow up by ten-fold within a less span of time. He also mentioned investment in companies related to high-tech and website circles does not require much patience (Lynch, 12-13). As, these companies achieve billion-dollar valuation before they start to collect revenues. He also explains mere appearance of a dot & com with an exciting concept is enough for the optimists to invest on the stocks. He also backed his opinion by giving example of the Maserati sales in Silicon Valley. He suggested these types of website are beneficial to entrepreneurs by making it public to reap high rewards. Early investors also reap great reward those who make a timely exit. These stock buyers invest huge amount of money based on forecasted fundamentals of these companies. He also warns investors who want to buy the stocks after the price of the shares is levitated, as the websites may not achieve the target earnings they had forecasted earlier and the share prices may fall. He also laid stress on the fact the issues of dot.com stocks show early increase in prices in the first few sessions of trading. The price of the stocks may increase by 2-fold, 3-fold or may be by 4-fold in the first trading day. Any mistake from broker in making allotment of shares and stake of claim on behalf of his investor at initial offering price may affect the entire profit of the investor as these stocks only hits high price on first few sessions of trading. After these trading sessions the stocks never reaches such of high price. He suggests the readers that the lack of earning in these ‘dot.com’ stocks is a vital issue. It is owing to the fact that there is no ‘e’ or earning in the part of ‘p/e’ ratio. So, without a ‘p/e’ it becomes difficult for an investor to invest fund in these stocks with confidence for dividends (Lynch, 1989, 159). The stocks may be good for returns in the term of capital appreciation but it is not a viable investment for long-term commitment to generate high profits through dividends. He stated in this book to select the right stocks and the only factor on which investors should stress to select the stock is the earnings of the company. He also narrated how Microsoft issued 15 cent a share and afterwards it became ‘eighty bagger’ (Lynch, 14-15). This book “One Up On Wall Street” by Peter Lynch shares many of his experiences about how he became a pro and ultimately a winner as a Fund Manager.       As an ordinary reader when I read this book I was quite intrigued by learning the author’s experiences in Fund Management sector. This book motivates ordinary investors like me to make investments keeping risk factor in mind. It felt like a crash core experience in investing at individual stocks under the guidance of an expert from the field. In this book Peter Lynch also argued in favor of stock compared to making investment in Bank deposits even for the lay investment makers. He also advised the investors who gambles in selection of stocks and warns ordinary investors to give an ample amount of time to think before making stock purchase. I accept this suggestion from Lynch as an ordinary investor. He also suggested making investment in real estate sector in the form of buying or constructing a house. He argued and made it very clear that it is better for ordinary investors to choose the realty sector instead of stocks to make investment. He meant to say it is better to acquire a house and then opt for investment in stocks. When I read his argument about this topic I liked it very much and accepted his suggestion, as investment in realty sector is relatively stable than the fluctuating stock market. From this book I also understood Lynch had his own style for making wonders out of less known stocks. He was not imitated by some of the world’s most successful investors like Warren Buffet, as Buffet used to maintain a few stocks and invested on those blue chip companies, where as Lynch expanded the portfolio from 50 to 1400 companies. I completely appreciate this view of Lynch as a broad portfolio helps in lowering the risk of the investment and also helps to generate a good return. He also explained how this kind of diversified portfolio helps to allocate funds on many companies with low investment. He also mentioned being patient with a long term commitment helps the investor to achieve success as these low investment stocks takes some time to grow. Lynch also motivates ordinary investors by revealing how to beat the stock market and explains when an individual can say Mr. Market got a beating from him or her. He mentioned, to beat the stock market one has to keep an eye on the growth of the investment, if the investment growth is more than the sensitive index of Mr. Market (stock market according to Lynch’s terminology). I also admired the humorous and simplistic attitude in conveying his views and experiences. This helped in gaining popularity of the book, as many ordinary investors without any knowledge in economics and analytical background also felt attracted towards it. He made the analysis of investing in stocks very simple to the lay and ordinary investors, which only revolved around the ‘p/e’ ratio, and other financial parameters, which are easily available from any investment magazines. This view also made me confident in making investment and I accepted it completely without any doubt when I read the arguments he produced for his views. Lynch also outlined the stocks as fast growers, stalwarts and slow growers (Lynch, 110-111). Fast growers are stocks with 20-25% EPS or earnings per share and a P/E- ratio less than 40. Stalwarts are relatively slow than the fast growers with EPS of 10-20% and two billion dollar in sales figure. While, slow growers are large companies, which show very little growth, and sales figure over one billion dollar. Its dividend rate is typically higher than the S&P 500 stocks. This outline helped me to understand in which stocks an ordinary investor like me should invest on. He also explained that there are many stocks in market with funny sounding or dull names and gave some examples like Pep Boys - Manny, Moe and Jack, Bob Evans Farms, Shoney’s, Crown and Cork. He suggested funny sounding names like Pep Boys – Manny, Moe, and Jack and the others can become a ten bagger whereas stocks with name like GeneSplice International may go down (Lynch, 131). I liked this view of finding companies. Companies with dull and funny names according to him do something boring with less awareness within the market, but these companies have the potential to be ten baggers. This outlook of Peter Lynch will also help ordinary investors to focus on stocks which are not much aware of in the market but may have a good potential in future due to huge market potential of the company. A specific thing which I liked in this book is he tried to convey a message toward the ordinary investors like me to focus on the ‘p/e’ ratio of the company and relate it with the growth of the stock; this helps to gain an insight about the future of the stock. Specifically, I liked his forecasting capabilities, which can be observed from his narration about some of his real life experiences such as selection of companies, and stock by observing their potential market during his visits to eateries and shopping malls, his selection of stocks by analyzing the basic financial parameters of the company is also exceptional. His proactive nature of approaching companies of diversified nature for investing before any other investment firms was also highlighted in this book. I admire the topics in this book, which highlights his proactive nature and his analyzing skill of finding out companies with good prospect very much. As there always remains a probability to earn huge profitability when an investor is much early in investing on companies, which have a developing market. These story topics also enable investors like me to learn about making decision during stock selection and purchase. I also admired the portion of the story about his proactive nature during the upturn of market in 1987, he made his investment on stocks at the time of bearish market and when Mr. Market swung and took an upturn everybody was excited for investing but Lynch was calm and relaxed waiting to reap huge return (Lynch, 288).       As an ordinary investor this book gave me insight about the simple techniques to select right kind of stock and apply common sense to analyze the prospect of the company. But in this book Lynch just tried to give a crash core lesson to the lay and ordinary investors. He also warned the errant investors about their mistakes in selection of stocks. But this book does not have the ability to teach ordinary investors like me to think like Peter Lynch. This book is comprised of topics, which were mostly prepared by Lynch for Barron’s roundtable in 1992. In this meet a panel of pro investors tried to pitch their ideas about selection of right stocks to purchase. The most vital thing, which I disliked, is his apathy toward technology, which he mentioned as technophobic nature (Lynch, 11). It is very true that this book will not attract non-investors or motivate the non-investors to invest on stocks. But to sum up a conclusion about this book, according to me I liked it very much and it is quite interesting for ordinary investors like me and will help to get a grasp on matters like in what to invest and how to select the stocks and about keeping patience to reap the returns.                     References Lynch, Peter & John Rothchild (1989), ONE UP ON WALL STREET, New York: Simon & Schuster Read More