Peter lynch one up on wall street

Peter lynch one up on wall street

Lynch stock picking methodology

1) lynch contrarian, market cyclical, bottom up (individual performance of company not economy) fundamental analysis investing

i) Buy based on fundamentals like earnings rather than stock price or broker recommendations in buy/ sell decision. Don't overestimate skill and wisdom of professionals. Strong preference for undiscovered and un-monitored stocks. Usage of earnings line whereby stock price will trend towards earnings line and the importance of projecting how earnings will go.

ii) Buy companies that can successfully enter new markets, generate improving earnings, and leading to improvement in share price.

iii) Strong preference for buying shares within your circle of competence (everyday goods and services, work related vendors, hobbies and passion). Good to try out the products and services and visit stores, or buy companies within your circle of competence. understand the business, undervalued / fair valued with great fundamentals , well financed, growth phase (cyclical and focus on capital gain)

iv) Stock price is most widely tracked but least useful. |

v) good investing is boring. You are there to win money. Go to a casino for kicks and giggles, and losses will be far less painful

vii) Buy a undervalued good company (low P/E) and fair valued great company (low PEG)
For growth companies, make sure you know what stage of expansion (early or fully exhausted) and where is future growth to be sourced from

viii) Invest in houses before stocks. Value of house will generally stay constant or appreciate. Investment in individual stocks and not markets. Ignore short term fluctuations. Buy stocks not based on instant gratification but 3-10 years or more of holding period. Don't bother predicting the economy. Expect Large profits and losses. Focus on long term fundamentals for stock purchases. Keep track of the story of the company after purchase but don't get excited / frightened easily and let fundamentals run its course.

Viv) Know how to interpret trends and insider information within your circle of competence, line of business. Due diligence in research to understand what cards you are holding. Spend time to think it through, you are holding it for 3 to 10 years

vv) What proportion does that great product actually contribute to the company's income (think niantic Pokemon go Vs Nintendo). Product knowledge vs company knowledge

You cant win at every stock. Even the best analysis can be thwarted by random occurrences. Aim for 60% win rate. Rather bank on a few big winners and let the plus overwhelm the minus

20% of stocks will account for 80% of the results. large stocks in the index will prop up the overall index. Index can gain while you lose money

Futility of market timing. No one can predict the future and predict when to buy at peak and sell at trough. Random events, developments at unpredictable time can change how the share price performs. Choose those that has growth potential, good fundamentals, good track record

Bearish arguments, worries and risks always sound more intelligent. Bullish markets climb a steep slope of worries. Stocks are always overpriced. There is no point worrying about the uncontrollable. You have to be comfortable with making decisions in absence of full information (risk). Get out of markets when housewives get in.
Only put liquid funds and money you can afford to lose into stocks. You lose nothing (ignore opportunity cost) from not buying

base purchase decisions in company prospects, and not hype or manager speaking ability

Blossoms in a desert
Buy companies that have complete dominance in a sector whereby everyone is trying to get out. This leads to capturing of ever increasing market share. Get companies that have strong emphasis on reducing costs and increasing sales leading to ever improving profit margin. Get companies with strong financial health and not make unnecessary diwosifications, and focus on improving dividend yield and share buyback.

Lynch Stock picks
Post-it. P&g. Paint. Cement. Oil. Cameras. Printers. Scanners. Gizmos. Stp automatic data processing. Data and document storage. Drugs that alleviate but don't cure. Addictive products or items that require repeated purchasers. Water treatment. Energy. Razors. Waste management. Funerals. Weapons. Poisons and pesticides. Internet security. Payment systems. Dog food. Cornflakes .internet provision companies as utilities smartphone as utilities .rent a car. Plastic bags forks and spoons
Pick companies that are simple to understand and operate so that mismanagement have minimal impact
Pick companies that sound boring or repulsive so they will not be spotted. Hot companies on everyone watch-list will have numerous engineers figuring out how to reverse engineer and grab market share
Pick companies that don't diversify unnecessary but instead focus on core business and share buyback (increase share price) Companies should diversify only when core business has no prospects, or acquisitions has synergy with core business
Look out for shares that has insider buying, signaling insider information, great prospects and direct impact on share price (beware Enron or loss limiting subsidiaries)
Focus on franchises that has patents, sole managing rights, proprietary information and strong operating model and brands .drug companies and chemical / poison companies.
Focus on companies with products that requires regular purchases. Pampers, water, energy, food, tampons, cigarettes, drugs, razor blades
Buy companies that sell components and support price wars, improve efficiency (microchips for phones, gorilla glass, payment system, stp system)

Buy companies by doing product testing, utilizing its services, understanding how its core processes make money Conduct a write-up on the blog to make sure you understand what you are buying. Bottom up analysis instead of top down. What is its life stage What type of company it is and what fundamentals I wish to gain from the stock. When to sell when it's fundamentals are exhausted

Young people got time to leverage on capital gain. Old people have to safeguard assets and focus on stalwarts and dividend gain

Due to constant noise in the market, for picking of individual stocks, use a bottom up approach. Unless you are certain that the macroeconomic effect and policy directly affect company's bottom line

Price / Earnings Ratio - Pe should only be used to compare companies in same industry Slow growers low pe.
Fast growers high pe.
Cyclical fluctuating pe.

Advantages of retail investors

1) with prevalence of smartphones and accessibility of financial statements and analytical tools, no one has superior access to information

2) large organizations and investors are overly regulated are required to buy from certain stocks, ensured balanced position on a short term yearly basis whereby their performance is rated. They are forced to deter from small firms with no track record, non growth industry.

3) Unproven management, heavy competition Risks and uncertainty are not investigated thoroughly but snap decisions are made. You will never lose your job losing money at IBM. It is easier to blame the institute or attune poor performance of a large company to a bad year, compared to you taking responsibility when the stock price falls Clients compare fund performance and ask fund managers funny questions. Acceptable mediocrity is more comfortable than diverse performance

4) top fund managers worth investigating
john Templeton, max Heine, Michael price, John neff, Ken heebner, George soros, Peter deroetth, Jimmy Rogers
5) If you don't want to sell all of it, you can sell some of it . You are free to get out of situations whereby fundamentals are worse and price have increased, and in when fundamentals improve and price drops. When I am down 25% I am a buyer and not sell.
6) Periodically check the stock every 6 months but don't overreact to news or short term performance. Read it with stoic mindset and don't make decisions unless certain change in fundamentals. Go for undervalued companies, companies with a low PE or PEG with respect to competitors, good company at a discount, great company at a fair price

7) 1) understand how company operates, catagorise it, and reasons for holding it
2) smaller cap companies have bigger price movements
3) look for small profitable companies, that has track record in duplicate their success
4) caution in companies with 50-100% growth rate yearly
5) avoid hot stocks in hot industry
6) steer away from money losing unrelated diversifications
7) always hold for the long term, no need to rush to buy in can always wait for it to produce results, buy a stock as if you are buying a refrigerator
8) fundamental information can be derived from work and daily occurrence which is not accessible to mere mortals
9) never trust sleazy brokers on word, conduct Your Own research. Take stock tips instead from experts in that field
10) preference for fast growers in non growth industry (20-25% growth) ,Porter 5 forces, niches, minimal institutional ownership, insider buying and share buyback,
11) When company I own is taken over, acquisition company stock is converted to parent company stock. Make sure you know whether to keep the store as there is a change in fundamentals. If company is not alike failures might occur (think boa-ml) .
12) look out for symptoms of outspoken complaints and negative news that affect bottom line, brands and franchises
13) lynch screening indicators
peer comparison for PE ratio
What life cycle is this company at
Insiders buying and share buyback
Low percentage of institutional ownership
Earnings growth Vs mature company consistency of earnings Vs cyclical company
asset play Vs earnings
Strength of balance sheet (debt to equity ratio)
Financial strength rating
Cash position as floor of stock
Classification of company type,why you should buy or sell the stock

Lynch blacklist
Avoid stocks or markets that is overheated and even housewives know about it
Avoid companies that have no way to protect intellectual property rights, pricing power (Porter 5 forces). Technology stocks often have PhD's reverse engineering the other companies success
Avoid companies that diversify into unrelated business purpose its circle of competence. Unless core business is inevitably declining. Unless diversify into components related to its business (synergy)
Never buy stocks that business prospects are unproven, seem too incredible or too complicated, no fundamentals. Learn to wait for it to develop it's track record.
Don't buy companies with excessive short run debt and without backing, it may go bankrupt

Company Categories

1) Cyclical types
Periodic increasing and decreasing in earnings. May appear like blue chips but in actuality fluctuating earnings in accordance to market cycle. Commodities, Energy, autos, airlines, tires, steels, minerals, chemicals, shipping, oil. Auto industry, the worse the slump the better the recovery. Lose billions in downturns and earn billions in economic expansion. High fluctuation in P/e and earnings according to market cycle. Take note Porter 5 forces, new entrants into market, length of cycle and phase of cycle,. Dividend gain risky if high proportion of profits paid out in dividends (not consistent for cyclical company)


When to Buy
Master the cycle specific to the industry and company, buy ahead prior to expansion and at a high P/E
Focus on business outlook, economic data, sales, restructuring to manage cash flow.
Deep knowledge of market cycles are required. Buying when commodity prices are improving and leading to trickle down effect starting from upstream to downstream operations. Usually there will be high P/E, when earnings have reached the minimum signifying the bottom of the cycle. Downturn can languish for several years, where many competitors are taken up, supply dried up before the demand will return, resulting in explosive earnings for the remnant survivors.


When to sell
Master the cycle specific to the industry and company, Falling commodity prices as leading indicator, future price of commodity lower than spot price
Sell ahead prior to decline at a low PE. Symptom of Low P/e despite improvement in share price. Earnings will increasing to a level before collapsing.
Monitoring of industry news and commodity prices.
Increase in cost. Cost cutting unable to compete with foreign producers and lower profit margin.
Existing plants at full capacity and expanding capacity (no forecasting of business cycles), large expenditures in building new plants instead of upgrading present ones,
Buildup of inventory,
New entrants and rivals (commodity products and price wars)
Union power for employees,
Decreased demand of product



2)Slow grower. Slowdown in earnings growth. Stable / growing dividend. Focus on dividend policy. Low risk low gain (slower growth, some competitors)

When to Buy
When markets are overvalued and you need a cushion for any impending crash. When it is undervalued when people are chasing the nifty fifty
dividend policy, consistency of dividends (dividend history or fixed dividend policy) ,

When to sell
30-50% appreciation, deteriorating fundamentals, lost marketing share, no rnd and new products, 2 acquisition of unrelated business (singpost) 'at the leading edge of technology '(which is untested and unproven ), tight cash flow and debt and no surplus fund for share buyback for depreciation in price, low dividend yield
dividend gain risky if high proportion of profits paid out in dividends (not consistent for cyclical company)


3) Stalwarts.10-12% growth in earnings. Middle of life cycle. Low risk moderate gain
Mature /dividend (red ocean, slow growth)
won't go out of business unless deep fundamentals change

When to Buy
Low p/e and PEG ratio. Increase in price of the goods it sells, investigate if any improvement in future growth rate. Look for undervalued stock by comparing long term growth rate and recent history


When to sell
Aim 30-50% capital gain before selling and moving to undiscovered stock.
Sell when pe too high (overheated) compared to peers
New products mixed results or 1 year late release of products .
No insider buying or share buyback,
Major contributor to earnings (25%) vulnerable to economic slump
Slow in growth rate despite cost cutting and further cost cutting opportunities are limited
Bad diversification




4) Fast grower. 20-25% growth. Prospect of company differ from industry
(starbucks, dunkin doughnuts). High risk high reward. Potential ten-bagger)(Blue ocean unsaturated)


When to Buy
Listen to market sentiment and product feedback
look for good balance sheets and substantial profits.
Figure out how much to pay for growth, and when they stop growing.
Where is it growing? Can it continue to grow fast? Can it duplicate it's success in new markets? What are its plans of expansion?
High Earnings growth and low indebtedness.
Ideally modest P/e and low PEG.
Room for growth in capturing unrecognized market share for present products.
Drives revenue without huge increase in cost
(McDonald's breakfast, drive through orders, healthy eating, desserts and apple pie, mccafe, Chicken and fish > beef to reduce overreliance on beef market)
fast growers - investigate whether that great product is company core business (Pokemon go Vs niantic Vs Nintendo), earnings growth (20-25%, >25%overheated),
Track record of duplication of success story in different countries / markets,
Is it a blue ocean and is there room to grow? Is expansion is speeding up or slowing down? Undercovered by analysts

When to sell
Listen to market sentiment and product feedback.
High risk in aggressive expansion and under-financed.
Reevaluate its fundamentals as it tapers off growth stage and transiting to slow grower or stalwart. Watch for end of second phase of rapid growth whereby companies fall apart and earnings shrink affecting pe ratio.
Stop opening new stores and no renovation of present stores, no more room for expansion and additional market share
Overhype of stock from wall Street, PE ratio grows to absurd projections (pe 40-50) whereby earnings cannot keep up to expectations, PE of 30 Vs projection of earnings growth 15-20% for next 2 years
Decrease in sales from present and new stores
Poaching of top executives to rival firms,


5) Asset play
Book value is a dangerous way to valuate a stock. If you certain of the value of asset, low risk high gain, nothing much left to lose.
Each blue chip in each industry is different asset play. Focus on book value. McDonalds as a slow grower and asset play with its franchise and prime estate. Book value can overstate asset values or understate them. Always conduct investigation on how book value is derived. For highly indebted companies, after bankers claw-back assets from secured loans and cannot recoup enough money, company is left with its debts and can have negative value. Increase in debt,wait for raider to restructure company.

When to Buy
Pile of cash as cash floor, outstanding shares,
real estate, exclusive rights
land with commodity resources.
Tax loss carry forward.
Managing rights and proprietary technology, patents
brand names and franchises, Subscribers and client base.
distribution transportation and information networks. Hidden value in reservation systems, distribution networks, client base, Investigate companies that has cash flows related to the high performer (dairy farm)
Assets that are already worth more than the share price, making cost of investment minimal Buy up undervalued stock and wait for analysts to value it properly.
what assets? How much is it worth?
Insider buying. Steady earnings, no debt
subsidiary network and advertising gains from parent company as hidden book value. These assets are carried at original cost and incur depreciation expense until they are gone.
Franchises have intangible assets (goodwill in accounting statements) such as branding and customer base, and are worth more than original book value .
Hidden value in pharmacy companies. Patents prevent rivals from copying the drug for 17 years. Any small improvement in the drug allows company to keep it for another 17 years. But on book value, patents and managing rights are worth 0. Operating structure is similar to utilities. High cost of research and setup but low cost on producing additional unit of sales
hidden assets,
franchises patents branding distribution network client base,
how much debt to deduct from asset,
Is company taking up new debt to make assets less valuable,
is there corporate raiders to identify and liquidate assets


When to sell




6) Turnabout play / Special situations
Buy when Close to chapter 11 or temporary troubled times affecting the company. High risk high Reward. If it goes right I can earn 400%. If I am wrong I lose 100%. Can company survive corporate raiding?

When to Buy
Ideally find companies with low short term callable bank debt, low likelihood of bankruptcy
Revive due to government bailout, loan guarantee,
Recover from scandals and disasters.
solving of debt and business problems
what strategy is it implementing? Is it successful so far? Restructuring and focusing on core business
After successful turnabout, company can be reclassified to the other 5 categories. Stock price appreciation most likely not high and similar to industry type
how much free cash flow and debt, debt structure and short term liquidity
Cost cutting and restructuring,

When to sell
Deterioration in fundamentals, increase in debt, turnabout not successful and getting worse.
%. Decline in debt replaces by increased in debt. Inventory increasing at twice of sales growth. Pe inflated relative to earnings. Large client slowdown in own sales.
stock dilution to raise capital (bad)

Investor superstitions in US
Prices drop between Oct to Dec.
(tax selling in us) (jettison of losers in managed funds) (when prices drop below margin threshold, margin accounts have to sell cheap stocks to raise funds) (fi regulations)

US stock exchange has 20% tax on investment proceeds, and lower capital gain tax compared to dividend tax. This leading to companies scrapping their dividend policies and trending towards share buyback.

On Trading
Stop orders (10% below price which stock is purchased). You may cut your losses, but you are ascertained to make losses.
Not good in highly volatile markets.
Transaction fees erode profits.

On chasing the hype
Stay our of industries / companies with heated price wars. Highly contested industries will increase gross profit but also cost of production (advertising, price wars) and there is no real benefit to comfort bottom line. There is no additional market share to be captured. (example comfort switching to flat pricing will not lead to capturing additional consumer share or creating additional demand in a saturated commodity market.)

Trend followers somehow believe think comfort is a good buy, believing resistance lines will hold. In the long run what have gone low can always go lower.

Keynes
Transaction motive
Speculation motive.
Liquidity preference

On bonds
Perils of money market .Bonds are callable and debtors can buy them back when it is advantageous and i/r falls. If interest rate rises, bondholders are left with a lower capital gain asset
On margin trading
margin trading is leverage. You borrow money to trade larger amounts of assets. If asset drops in value. You have to margin call / top up. If you don't have sufficient cash flow to sustain the losses, the brokers will force liquidate your holdings. The market can stay irrational longer than you can stay liquid.

Beware of Human cognitive errors.
I) fear keeps people from buying undervalued
ii) complacency because some of his assets made gains, leading to him ignoring fundamentals
iii) when stocks started to plunder, anxiety force him to sell at loss
iv) know how to be disciplined, stay stoic to turmoils in the market, stick to fundamentals

On Technology stocks
You don't have to be trendy or own technology stocks to make money on the stock market. There are very few exceptional winners among a pile of corpses,
Technology companies thrive on hype and expectations leading to high valuations. Most have no proven earnings or ability to generate profit, and can reach billion dollar valuations even before they earned a cent. The price is exciting but when it cannot live up to expectations, corrections will occur. There is no rush to get into a technology stock if its prospects is that incredible.
Technology stocks are hard to value, with hard to understand business, UN-forecast able growth, no certainty of assured/ constant growth and earnings , hard to project to present, often over-hyped and overvalued
To value technology stocks, find supposed stock price, multiply by shares outstanding to get market capitalisation. Project how much earnings, and how many years will it take to meet investors expectations Apply a generic price earning ratio for fast growth companies (eg 40x earnings) and check if it is reasonably valued.

Risk management in technology companies
Picks and shovels. Buy companies that sell accessories or support equipment that are required to chase the hype. Sell the fuel that drives the flames between big players
Gorilla Glass and batteries in smartphone war, Telcos in fintech wars, Jeans in gold rush

Free internet play. Buy internet business that are embedded in non internet company with real earnings and reasonable stock price. That internet company can derive real earnings from companies with real earnings and reasonable stock price. Earn if internet companies succeed. If internet company fails, Use reliable real earnings to hedge downside (Google ads, Facebook ads, Amazon, Wechat payment services, Paypal, Silverlake Axis)
Tangential benefit. Use technology to cut cost, streamline operations, increase efficiency and profitability, reduce pilferage, manage inventory
Use technology to cut cost, streamline Operations, increase efficiency and profitability, reduce pilferage, manage inventory (automated payment counters in Macdonalds, one cashier manning 4 automated cashier booths Dairy farm, inventory control using technology)