by Goal1
One Up on Wall Street
Here is all that I’ve digested in the past from reading Chapters 1-15 of Peter Lynch’s, One Up on Wall Street. It’s very dry cut but it has helped me out and I believe it can help newer investors!
Words of Wisdom Chapters 1-15
Stay away from DiWORSEification. Make sure a company isn’t investing into things it doesn’t understand. Find companies that focus on what they’re good at (niche).
You know stuff before the Wall Street investors. Possible stock purchases are in front of you. Look around and pay attention to your surroundings. Look locally. Try products. Get a taste when you can. Know people in industries and ask them what’s selling or doing well. Ask friends and family.
It’s good to have the institutional ownership at a lower number rather than a higher number. As Acquirers Multiple would say, be different, Zig when others Zag.
Just because a company works in one state, doesn’t mean it will work somewhere else. Sometimes waiting to see if their growth will be the same on more of a national level isn’t a bad idea at all.
The investors relations office isn’t just for the pros. Get questions ready and studied, then make a call to the company you’re interested in buying. Two good questions. If unsure the good question always is, “What are the positives this year and what are negatives?”
Look at current assets and take the cash figure and add it-to the marginal securities. This gives you the total overall cash position. Socking away money is a sign of prosperity.
Check the debt. Lowering debt is also a sign of prosperity. When cash is increasing and debt is decreasing is what we want. Our cash – debt is our NET cash position.
It’s important to know what each product means to the company. How much of their profits come from this product?
You want a PE ratio that’s half the growth rate. This is good. PE at twice growth rate is very negative. (PEG =<1)
Debt determines the survivability of a company. There’s two types. Bank debt and funded debt. Bank is worse because it’s due on demand. Bank debt is due sooner, also he can ask for it whenever he sees trouble. Funded is best debt. As long as interest is being paid, the business can’t be forced to immediately repay it.
Dividend paying is good! Companies that don’t pay dividends can waste money on diWORSEification. Dividends create a positive aura. It also stops stocks from falling as much if they didn’t have a dividend during downturns.
Lower debt is still more important than dividend paying.
Book value understates or overstates actual value because a company realistically won’t be able to sell assets for as much as balance sheets show. But remember that the debt in the sheets will always, always beed to be paid.
There can be hidden assets such as assets not being projected by interest gain. Company might buy gold at $500 five years ago. Now it’s worth $700. They will still show it on balance sheets as $500. That’s a hidden asset.
Cash flow is amount of money in result of doing business. Look for companies that don’t need to spend as much cash to stay competitive. Cash flow needs to be looked at ‘free cash flow’ for this reason.
You don’t want inventory buildup. Inventory growing faster than sales is a bad sign. Two types of inventory reports on balance sheets. LIFO AND FIFO ( last in first out. First in first out )
Growth is not synonymous with expansion. Earnings is the most important metric for growth.
Recheck companies story every couple months. 3 phases of a growth company. Startup phase, rapid expansion ,and mature phase (saturation phase)
First phase is riskiest, Where stock is growing and finding its ground. Second phase is when they are really performing. This is where you make most money) third phase is when the company needs to innovate to keep making more money.
Example is $ADR , the beer company. They own over 40% of beer market. They are a phase 3 business. They must find innovation.
FINAL CHECKLIST:
P/E needs to be compared at industry level. Is it lower or higher?
Institutional ownership preferably low!
Insider buys and buybacks are positive signs!
Are their earnings consistent?
What is their debt to equity ratio?
What’s their free cash position?
Have dividends always been paid and routinely raised?
If you’re holding long term make sure to check long term growth rate and how they do during market declines and recessions.
Cyclical companies you must pay attention to the inventory levels to gauge what part of cycle they are in.
Check for fast growers that their supposed enriching product is a big part of their actual business. Example is Hanes had a supper popular leggings company. Unfortunately it was a small part of their full product range!
Check to see if a company has room to grow. How does the PE ratio compare to the earnings growth?
Do they have enough cash to come out positive in a liquidation?
Big companies make small moves. Small companies make big moves. Look for smaller companies that are already profitable and have a proven concept.
Stay out of ‘hot’ stocks in hot industries. Invest in out of favor, dull mundane companies.
The ideal investments are companies with niches. Moderate fast grower with 20-25% growth are ideal investments.
When checking depressed stocks. Look for ones with superior financial situations. Stay away from ones with a lot of debt.
Look for companies that consistently buy back their own shares. Insider buying is a positive sign.
A watched stock never boils!
Spend more time or as much time looking for a stock as you would for your own refrigerator
I hope this helped. I’m going to continue to offer more words of wisdom that I will post here as I reread many of the staple books in my collection
if you guys have any questions I will be happy to answer them!