ONE UP ON WALL STREET SUMMARY (BY PETER LYNCH)

Summary

The script discusses how amateur investors can beat Wall Street professionals. It highlights Peter Lynch's perspective - amateurs have advantages as they face no restrictions on capital or pressure to conform. Lynch advises leveraging personal knowledge of products and services to identify promising investments. He categorizes stocks into six types, each requiring a tailored strategy. Finally, Lynch lists traits of stocks likely to multiply in value tenfold, and traits foreshadowing stocks that will severely underperform.

Takeaways

• 😀 Individual investors can beat Wall Street pros due to the pros' disadvantages like size, mediocrity, and capital dependence
• 👌 Leverage your personal knowledge and experiences as an edge to identify promising investments
• 📈 Categorize potential investments into slow growers, stalwarts, fast growers, cyclicals, turnarounds or asset plays
• 👍 Tenbaggers have traits like a dull/ridiculous name, niche focus, or insider buying
• ❌ Avoid hot industries with lots of competition
• 😊 An investor's passion and personal experiences are an advantage
• 🔎 Do your homework and research investments thoroughly
• 💰 Dividends and reoccurring revenues are positive signs
• ⚖️ Size and mediocrity constraints cause fund managers to underperform
• 📉 Reverse tenbaggers show warning signs like overdiversity

Q & A

What are some of the disadvantages professional investors have compared to amateur investors?

Professional investors tend to have large amounts of capital to invest, which limits their investment opportunities. They also spend a lot of time explaining their decisions to stakeholders and their capital depends on fickle clients who make emotional investment decisions.

How can an amateur investor's personal consumption habits give them an edge?

Amateur investors often have specialized knowledge of industries and companies related to their hobbies, jobs, and personal consumption. This gives them an information edge Wall Street doesn't have.

What are Peter Lynch's 6 categories of stock investments?

The categories are: slow growers, stalwarts, fast growers, cyclicals, turnarounds, and asset plays.

What is an example of an 'asset play' stock investment?

An asset play is when a company's assets are worth more than its market valuation. For example, a company with valuable real estate or patents that the market has underestimated.

What is meant by a 'tenbagger' stock?

A tenbagger is a stock that appreciates to 10 times the purchase price. Having a few tenbaggers in a portfolio can lead to great returns.

What are some traits of a potential tenbagger stock?

Traits include: a dull or ridiculous name, boring or disagreeable business, no institutional ownership, depressing aspects, niche product/service, recurring revenue, insiders buying shares.

Why can being in a 'hot' industry be a negative for a stock?

Hot industries draw lots of competition, which can hurt profits. It's harder to find bargains in industries everyone wants into.

What risks come with a company relying on a single major customer?

Dependency on one major customer for significant revenue gives that customer huge bargaining power. They could squeeze the supplier company at any time.

What does Peter Lynch mean by 'diworseification'?

He considers unjustified diversification into unrelated businesses as 'diworseification'. It spreads focus and rarely adds value.

What are examples of 'whisper' stocks to avoid?

Whisper stocks are speculative long shots people whisper might do something incredible one day, like cure all disease or end addiction globally.

Outlines

00:00

😊 Why the individual investor can beat the pros

Peter Lynch argues that the professional investor has many disadvantages compared to the amateur investor. Professionals have to manage large amounts of capital which limits opportunities, play it safe to keep their jobs, spend time explaining decisions, depend on fickle clients for funding, and invest more when markets are expensive. Meanwhile, amateur investors have none of these issues.

05:04

😃 Leverage your personal interests and experiences

Peter Lynch says "if you like the store, chances are you'll love the stock." We all consume products and services from publicly traded companies. This gives us an information edge in those companies over Wall Street. When looking for investments, consider which products you enjoy and research if they significantly impact the company's bottom line.

10:05

😉 6 categories of stock investments

Peter Lynch categorizes stocks into: slow growers (mature, low growth, dividends), stalwarts (moderate 10-12% growth), fast growers (20%+ growth), cyclicals (revenue/profits rise and fall with business cycles), turnarounds (struggling companies that rebound), and asset plays (undervalued assets).

🌟 10 traits of tenbaggers (stocks that appreciate 10x)

Tenbaggers often have dull or ridiculous names, do something boring or disagreeable, aren't mainstream, have niche competitive advantages, recurring revenue, insiders buying shares, and stock buybacks. Meanwhile avoid hot industries, diversifying into unrelated areas, relying on single customers, or being far-fetched ideas.

😐 5 traits to avoid

Stocks to avoid exhibit: hot industry with lots of competition, claimed as "the next" big thing, diversifying into unrelated industries, relying on a single customer, or requiring a miraculous development.

Keywords

💡Individual investor

An individual investor refers to a retail investor, someone who invests their personal savings rather than managing money professionally. The video argues individual investors have advantages over Wall Street professionals due to flexibility, niche knowledge, and alignment of incentives.

💡Wall Street professionals

Wall Street professionals refer to money managers, hedge fund managers, analysts and other investment professionals working for banks, asset management firms etc. They are seen as experts but face constraints like client redemptions, benchmarking, and regulations.

💡Niche knowledge

Niche knowledge refers to the specific, granular understanding of industries that comes from personal experience and interests. For example, a video gamer has better insight into gaming companies. This edge allows individual investors to find opportunities professionals may miss.

💡Tenbagger

A tenbagger refers to a stock that appreciates 10 times from the purchase price. Lynch argues even amateur investors can find tenbaggers by leveraging their niche knowledge about consumer products and services.

💡Growth rate

The growth rate refers to the year-on-year increase in earnings or revenue. Analyzing expected future growth is key to evaluating companies. Fast growers (>20% annually) require different investing approaches than slow growers.

💡Cyclicals

Cyclicals are companies whose fortunes fluctuate with the overall economy. Examples include automakers and builders. Cyclicals require particular timing and care around economic cycles but can reward investors greatly.

💡Turnarounds

Turnarounds refer to struggling companies that manage to recover from periods of declining earnings or other problems. If properly identified, investing in turnarounds early can lead to huge gains.

💡Share buybacks

Share buybacks are when a company purchases its own outstanding shares to reduce the share count. Lynch sees buybacks, unlike dividends, as a sign of management confidence in the business and future growth prospects.

💡Diversification

Also called "diworseification", this refers to companies expanding into unrelated business areas rather than focusing on their core competencies. Lynch sees overdiversification as a warning sign diluting management focus and strategic positioning.

💡Whisper stocks

Whisper stocks refer to companies hyped as on the verge of major breakthroughs or discoveries, yet unproven. While tempting, whisper stocks rarely live up to their promise and are better avoided by prudent investors.

Highlights

The professional investor has many disadvantages compared to the amateur investor

Size is a disadvantage for professional investors. Large funds can't invest in small companies

Professionals focus on mediocrity to keep their jobs rather than taking risks

Professionals spend a lot of time explaining decisions which reduces returns

Amateurs invest their own money so can make independent decisions

Leverage your personal knowledge of products and services for investing ideas

Analyze how much products you use drive company profits before investing

There are 6 categories of stocks: slow growers, stalwarts, fast growers, cyclicals, turnarounds, asset plays

Look for stocks with dull names, dull businesses, niche markets, recurring revenues

Avoid stocks in hot industries with lots of competition

Stay away from stocks that depend on one major customer

Don't invest in "next big thing" stocks with unproven ideas

Avoid stocks diversifying into unrelated industries

Beware of stocks promoted as achieving miracles

The individual investor has advantages over Wall Street professionals

Transcripts

Have you ever talked to someone, and when you mentioned that you're an investor in the stock market you've been asked this:

"Aren't there plenty of professionals out there who dedicate their life's to earn money in the stock market?"

"What makes you think that you can beat those guys at their own game?"

I know I've been asked this on multiple occasions.

And It's an important topic: can the amateur investor earn money while there are so-called "professionals" in the same market?

Could it even be so that the individual investor has the upper hand?

In One up on Wall Street, the legendary investor Peter Lynch

reveals how his amateur approach to investing has led him to become one of the most successful investors of all time.

I will now present five of his greatest findings.

Takeaway number 1: Why the individual investor can beat the pros.

Surely the amateur doesn't stand a chance against the might of Wall Street?

Doesn't Wall Street have a ton of analysts from the fanciest Ivy League schools working 80 hours

every week to find bargain stocks?

Surely there can't be any left for the amateurs, right?

According to Peter Lynch this assumption is dead wrong.

In fact, the professional investor has many disadvantages compared to the amateur. Here are a few of them:

Size.

A successful money manager will naturally attract a lot of capital, and more capital means less opportunities.

For instance, a $10 billion fund cannot invest in a company with a market cap of $10 million and

expect the investment to have a meaningful impact on the fund's overall performance.

Mediocrity is the safest play.

There's a saying on Wall Street that "you'll never lose your job losing your clients money in an IBM."

Meaning that, if you're just another sheep in the herd, you'll get to keep your job.

Remember that fund managers have their own agendas, and that they too are employees with jobs that aren't guaranteed.

There's a lot of explaining.

Fund managers tend to spend about 25% of their time explaining to various stakeholders about why they made certain decisions.

Unfortunately, stocks aren't sympathetic enough to yield an extra 25% for this increased effort.

Capital is dependent on clients. As a fund manager is investing other people's money,

other people are also deciding how much money the manager has at disposal.

The issue is that these other people aren't savvy investors themselves.

They tend to pull back their money during bear markets and put in more of it during bulls,

which is exactly the opposite of what one should do.

This leaves the manager with the following dilemma:

He has a lot of money to invest when everything is expensive, and too little of it when everything is cheap.

Does the individual investor have any of these disadvantages?

NO!

In fact, the amateur investor often has a great advantage over the professionals, which we'll discuss in the next takeaway.

Takeaway number 2: If you like the store, chances are you'll love the stock.

If you're a software engineer, a cashier at the local mall, a professional musician, a surfer,

a fast-food addict or a crazy cat lady, you have an edge over Wall Street.

Wait ...

Whaaaaat?

Let me explain: We all have certain industries, products and services that we know more about than the average person does.

Perhaps we know more about the fashion industry because we work at a local clothing store.

Or perhaps we know more about the gaming industry because we consume games ourselves as our primary leisure activity.

The point is that we all have valuable information about publicly listed companies through our everyday life, and

this is information that Wall Street either doesn't know of yet, or had to spend hundreds of hours of market research to realize.

Peter Lynch famously said that "if you like the store, chances are that you'll love the stock."

Think about it! Which products do you enjoy and use from publicly listed companies?

Here's a list of some of mine:

Spotify

An awesome Swedish music streaming service, which I use for 1 to 2 hours a day.

I love to use it when I work out, and I've spent about $120 on it during the last year.

Pepsi

This summer the new flavour Pepsi Lime was released in Sweden

and I've been a complete addict of it lately. I probably drink three of them every week or so, so I spend more than

$200 on these every year.

Amazon. Well, I've probably been their best customer of

2018, as I buy all the books that I read for this channel from them.

Not only that, but I prefer buying both the Kindle and the audio if possible, as

I've found that I can finish the books in half the time that way.

On a yearly basis I spend

$1,500 or more for this service.

When you're looking for investment opportunities this way you must always remember to check how much the product or service that you enjoy

affects the bottom line for the company.

For example, sure, I'm an addict of the new Pepsi Lime flavor,

I admit it. But let's say that this product only makes up 2% of the company's total profits.

Then it doesn't really make sense for me to buy Pepsi based on me loving the Pepsi Lime.

Take away number 3: The 6 categories of stock investments.

All investment opportunities aren't created equal.

To lump them all together and treat them accordingly would be a foolish and not so profitable a strategy.

Peter Lynch argues that there are 6 different categories of stock investments. These are ....

Slow growers. This company is typically large and operates in a mature industry.

The growth of the company is expected to be in the low single digits of percentages.

If you invest in such a company, you typically do it for the dividends.

Lynch doesn't like this category of stocks too much, as he thinks that if the company isn't going anywhere fast,

neither will its stock price.

Stalwarts.

The stalwarts are the inbetweeners.

They're not exactly the stock market's equivalent of cheetahs, but they are no snails either.

An earnings growth rate of 10-12% per year is standard for this category.

Under normal conditions you want to sell these companies off if they make a quick 30-50% gain.

Fast growers.

These are aggressive new enterprises, growing at 20% or more per year.

They're often priced thereafter,

but if you can conclude that a company is likely to be able to keep up the growth for several years,

it can be a great investment.

Always remember to verify your assumptions regarding the growth rate though.

For instance - if Amazon can keep up its revenue growth rate of 30% per year for the next 10 years,

its revenue will be equal to the GDP of France in 2029!

Is this reasonable?

Cyclicals.

Cyclicals are companies whose revenues and profits rise and fall with the business cycle.

Typically, they produce services and/or products that the consumers will postpone consumption of in times of financial uncertainty.

An example is the automakers. People don't necessarily have to switch cars every 6 years or so, even if they prefer to.

Timing is everything here.

If you can identify early signs of a booming or busting cycle, you'll have the advantage.

Turnarounds. The turnarounds are potential fatalities - companies with declining earnings and/or problematic balance sheets.

If the company doesn't go down and instead manages to flourish once again, stock owners are rewarded thereafter.

An interesting characteristic about the turnarounds, is that their ups and downs

aren't as related to the market in general as the rest of the categories.

A situation where a company has gotten a temporary bad reputation is usually a profitable turnaround case.

Asset plays.

Situations where the value of the company indicates that the market has missed out on something valuable that the company owns are asset plays.

Such undervalued assets could be: real estate,

patents, natural resources,

subscribers, or even company losses (as these are deductible from future earnings).

Benjamin Graham was a strong advocate of this approach.

He famously looked for companies where the value of the assets were higher than the market cap of the stock.

Then he you just waited, until the stock market realized its mistake and corrected it.

The 6 categories are explained in much greater detail in the book.

When using these categories one must understand that companies can belong to more than one of them at once.

Also, companies don't stay in the same category forever. Take McDonald's

for example. It's gone from being a fast grower ,to a stalwart, to an asset play to slow grower.

Takeaway number 4: 10 traits of the tenbagger.

A tenbagger is the expression that Peter Lynch uses to describe a stock which has appreciated to ten times your purchasing price.

If you have a few of these you in you're investing lifetime, you'll become a legend.

Different types of stocks must be treated differently, as stated in the previous takeaway, but there are also similarities.

Here are 10 positive signs for a stock, regardless if it's an asset play or a fast grower.

1. The company name is dull, or even better, ridiculous.

Such companies tend to be overlooked. The pros of Wall Street will think twice before bragging about their recent investment in

"Maui Land and Pineapple Company Incorporated"

It just sounds way too ridiculous!

2. It does something dull.

3. It does something disagreeable.

Better yet, then doing something dull is to do something disagreeable.

Swedish Match is a good example, which is the producer of the Swedish tobacco snus.

4. Institutions don't own it, and it's not followed by any analysts.

Such companies haven't been discovered yet by the big boys, which gives them an extra potential upside.

5. There's something depressing about it.

The burial company Service Cooperation International is a classic example.

6. The company's industry isn't growing.

In the high-growth industries, thousands of people are constantly thinking about how they can grab a part of the market share.

Stalling industries, on the other hand, aren't as prone to competition.

7. It's got a niche.

These are the companies with moats that Warren Buffett is famously looking for.

8. It has reoccurring revenues.

The product is a subscription or something that is consumed so that the customers are forced to return for more.

9. Insiders are buying.

The insiders know more about the company than anyone else.

When they are buying, you can be pretty sure that, at the very least, the company isn't going bankrupt soon.

10. The company is buying back shares.

If a company has faith in itself, it should invest in itself. Peter Lynch prefers share buybacks for dividends.

Takeaway number 5: 5 traits of the reversed tenbagger.

And of course, there are also general don'ts, that you don't want to see in any type of company that you are investing in.

1. It's in a hot industry.

As previously mentioned,

everyone is looking for ways to get into the hot industries.

Competition is typically a bad omen for profits.

2. It's "the next" something.

Beware when someone expresses that It's the next Amazon! The next Facebook! The next Google! Or similar.

Usually, it's not.

3. The company is diworseifying.

Some call it diversification, but Lynch likes to refer to it as

diworseification. If the company is acquiring other companies in unrelated industries, stay away!

4. It's dependent on a single customer.

Some companies are relying on one customer for a significant share of profits.

Usually, this is a weak bargaining position to be in, and the company can potentially be squeezed by this only customer.

5. It's a whisper stock.

These are the long shots, often thought of as being on the brink of doing something miraculous, like curing every type of cancer,

completely removing any addiction or creating world peace.

One up on Wall Street recap:

The individual investor can beat the pros at their own game because the game is rigged in the favor of the amateur.

Use your consumption habits and your 9-5 to identify investing

opportunities in companies where you have an edge over the rest of the investing community.

All investment opportunities aren't created equal.

You can usually categorize them into one or more of the following 6: slow growers,

stalwarts, fast growers,

cyclicals,

turnarounds and/or asset plays.

There are general positive traits of a stock, such as a dull business, reoccurring revenues and insider buying.

And there are also general negative traits, such as diworseification and dependency on a single customer. Cheers!