Book Review: One Up On Wall Street

One up on wall streetFidelity Investment’s “Magellan Fund,” was a mutual fund that Peter Lynch was given control over from 1977 – 1990. The fund boasted approximately $18 million in assets at the time Lynch took over, and was ballooned to approximately $14 billion in 23 years under his watch. Ergo, “legendary” feels like an appropriate term to describe Mr. Lynch, who in his book One Up On Wall Street, conveys the message that anybody with the right temperament and a little research can essentially invest in the stock market and have success. The book focuses on the idea that observations that you make every day can help you identify stocks that you can make you a killing.

Lynch insists that individual investors are able to outperform Wall Street fund managers as a result of several factors, one being that fund managers are usually limited to stocks that are established, have solid credit ratings, and are of a certain size. This can leave huge opportunities for individuals that are willing to do some research and invest in smaller companies. Another factor would be that individuals are often able to spot trends before similar data can makes it’s way to Wall Street. A hot new product that’s being flashed by friends or family, or a chain of restaurants that is getting popular really fast are examples of ways that individuals might spot such a trend.

A great example Lynch offers is when his wife bought a new product called L’eggs. The egg-shaped containers that held women’s tights weren’t too popular at the time, but his wife kept raving about how they were so great. Lynch did a little research on L’eggs and discovered that they were made by Hanes, which was a publicly traded company. He turned it into one of his fund’s biggest positions. Hanes was eventually bought out, but not before increasing in value by about 3000%.

The Origin of the “Tenbagger”

I’m sure many of you have heard the term “tenbagger.” You’ve heard it as a result of Peter Lynch. He coined the term to describe stocks that increase ten times in value. Lynch believed that just one of these stocks could increase your wealth greatly over a lifetime. While we use “tenbagger” often to describe a 1000% win in options trading, Lynch used it to describe a name that literally increased it’s overall value by 1000% or more over time. Massive runners. He believed that a few “tenbaggers” would make up for numerous failures, stating “All you need for a lifetime of successful investing is a few big winners, and the pluses from those will overwhelm the minuses from the stocks that don’t work out.” He makes a point that if you were to you buy 6 stocks, 5 go to zero, and only one is a “tenbagger,” your rate of return on the 6 trades would still be 66%.

Lynch’s method was focused on longer term investing. This isn’t a book for day traders, but for someone looking to gain insight into their longer term trading mentality.

Lynch’s Six

Lynch lays out six different categories that he believes all stocks fall within. He believed that by being aware of which category a stock falls within allows one to assess what to look for, and therefore what to expect in profits. The six categories highlighted are as so:

Fast Growers – High-growth companies which have a potential to eventually result in a “tenbagger.”

Slow Growers – Mature companies with slow growth in the future, mostly bought for the benefit of dividends.

Stalwarts – Like Slow Growers, they are maturer companies, but still have years of steady growth left in the future.

Asset-Plays – Companies sitting on an asset that has been undervalued or overlooked by Wall Street.

Cyclical – Companies that have profits that rise and fall at regular, predictable intervals.

Turnarounds – Companies that have been hit hard. Hitting lows, but still might have a chance to turnaround.

He believes that prior to buying a stock, one should know and understand the category that the stock falls within and adjust their trade accordingly. He also believes this gives better insight into when to sell utilizing the same process.

Lynch argues that in order to see massive returns over time, long term investing is a must… which is hard to argue with. He goes on to state that following daily price movements of a stock is a waste of time and in the end, nothing short of a distraction… which isn’t hard to argue with. He claims that one should be focused on is the earnings of the company they choose to invest in, as a stock’s price will follows earnings in the long run. He claims that the typical big winner within his portfolio generally takes anywhere from 3-10 years (or more) to play out.

Conclusion

I’ll admit, I was a bit disappointed in some areas, as I don’t agree with his views in certain regards (but what do I know? This dude turned $18M into $14B!). An example of what I’m talking about is Lynch believes that studying history and philosophy better prepares someone for the stock market than something like analyzing statistics (which I agree with). But then he goes on to say that trading in the market isn’t a science, but an artform, and those who quantify data suffer a large disadvantage (which I certainly don’t agree with). In markets that offer up specific angles, patterns, measured moves… you go with “artform?” No way. I’ll go with math all-day-long. Fibonacci is all I have to say about that.

At the time of reading this, I was in the process of reassessing my strategy for trading within a long term account moving forward. Referred to by many as an “investment manual,” once it’s owned and you’ve invested, you may turn to this book on occasion for study. That being said, again… it isn’t a book for a day trader. However, One Up On Wall Street will likely be an eye-opening read for anyone considering taking on a long-term portfolio.

 

One Up On Wall Street

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