Peter Lynch
With John Rothchild
Presented by: Kevin Clark

 Graduated from Wharton School of
Business
 Managed Fidelity Magellan Fund (1977-
1990)
– Most successful fund in the world
– Owns over 1400 stocks
 Believes in Fundamental, Bottom-Up
Approach

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Lynch’s mantra: Average investors can become experts in their own field and can pick winning stocks as effectively as Wall
Street professionals by doing just a little research.
Don’t listen to the pros – “Oxymorons”
 Observe your environment for potential winners

 “Kick the tires”
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Don’t worry about the market—it’s the stock! (bottom-up)
Pass the “mirror test”
–
–
Do I own a house?
Do I need the money?
– Do I have the personal qualities it takes to succeed?

 Look for “tenbaggers”
– Stock that goes up ten-fold or 900%
 When looking at the strength of a company’s product, judge the effects on the bottom line
– Is the company too big?
 Categorize

 Slow Growers
– Large companies growing around rate of GNP
– Expect dividends
 Stalwarts
– Annual growth around 10 to 12%
 Fast Growers
–
–
Small and aggressive with 20 to 25% annual growth
Plenty of risk
– Expect stock appreciation, not dividends

 Cyclicals
– Profits and sales rise and fall in regular fashion
– Timing is everything; detect the early signs
 Turnarounds
–
–
No growers usually in Chapter 11 or on verge
Upside: Bargain stock with huge accounting loss carryforward – Be careful here!
 Asset Plays
– Company sits on valuable asset that you know about but Wall Street doesn’t

 One characteristic of the perfect company
– “Any idiot can run this business.”
 Look for companies with these characteristics:
– It sounds dull—or, even better, ridiculous.
– It does something dull.
– It does something disagreeable.

–
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It’s a spin-off.
The institutions don’t own it and the analysts don’t follow it.
–
–
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There’s something depressing about it.
It’s a no-growth industry.
It’s got a niche.
– People have to keep buying it.

– It’s a user of technology.
– The insiders are buyers.
– The company is buying back shares.
 What is the one single stock to avoid?
– The hottest stock in the hottest industry

 The number one factor when analyzing a company
 P/E ratio
– Use it to get hints about whether a stock is overvalued or undervalued. (relative to others in the same industry)
– Think of it as the number of years it will take to earn back your initial investment.
 Future earnings can’t be predicted
– Find out how a company plans to increase earnings, then periodically check to see if plans are working.

e b t
 Important in determining the “health” of the company
 Companies with a strong cash position versus relatively low debt will not go bankrupt in downturns

 Understand the nature of the companies whose stock you own
 Putting stocks into categories gives you a better idea of what to expect from them
 Big companies have small moves, small companies have big moves
 Avoid hot stocks in hot industries

 Invest in companies that appear dull and haven’t caught the eye of Wall Street
 Look for companies with good earnings growth
– Moderately fast growers (20 to 25%) in nongrowth industries ideal
 Look for companies that buy back their own stock

 Companies that have no debt can’t go bankrupt
 Be patient—watched stocks never bolt
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Invest at least as much time in choosing a new stock as you would in choosing a new refrigerator
Don’t take the “pros’” advice—YOU CAN
DO IT ON YOUR OWN!

 Lynch says Value Line is good for research, but he doesn’t pay attention to timeliness rankings
 Lynch has never bought a future or an option in his investing career
– Says he doesn’t understand them
– 80 to 95% of all amateurs lose money