One Up On Wall StreetOne Up On Wall StreetPeter Lynch

With John Rothchild

Presented by: Kevin Clark

Facts About LynchFacts About Lynch

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

Lynch’s Initial AdviceLynch’s Initial Advice

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

Lynch’s Initial AdviceLynch’s Initial Advice

“Kick the tires”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?

Picking WinnersPicking Winners

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

Six Categories of StocksSix Categories of Stocks

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

Six Categories of StocksSix Categories of Stocks

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 carry-

forward – Be careful here! Asset Plays

– Company sits on valuable asset that you know about but Wall Street doesn’t

Picking WinnersPicking Winners

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.

Picking WinnersPicking Winners

– It’s a spin-off.– The institutions don’t own it and the analysts

don’t follow it.– There’s something depressing about it.– It’s a no-growth industry.– It’s got a niche.– People have to keep buying it.

Picking WinnersPicking Winners

– 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

Earnings, Earnings, EarningsEarnings, Earnings, Earnings 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.

Assets, Assets, DAssets, Assets, Deebbtt

Important in determining the “health” of the company

Companies with a strong cash position versus relatively low debt will not go bankrupt in downturns

Picking Winners: ConclusionPicking Winners: Conclusion

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

Picking Winners: ConclusionPicking Winners: Conclusion

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 non-

growth industries idealLook for companies that buy back their own

stock

Picking Winners: ConclusionPicking Winners: Conclusion

Companies that have no debt can’t go bankrupt

Be patient—watched stocks never boltInvest 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!

Interesting “Lynchisms” Interesting “Lynchisms” Pertaining to FI635Pertaining to FI635

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