This is a follow-up to a previous article called Lessons Learned From One Up On Wall Street. These are my notes from Peter Lynch’s second book Beating The Street.
Some of this info could be outdated since the book was published thirty years ago. Nothing in this article should be taken as investment advice, it’s merely notes I jotted down while reading the book. Also, these notes aren’t comprehensive—it’s mainly things I didn’t already know, as well as things I wanted to remind myself of.
-Don’t worry about trying to beat the market in the short term. Whenever the stock market was down Lynch’s portfolio was down even more than the market. When the market was up his portfolio was up more than the market.
-It’s usually better to buy small companies, because big companies tend to be slow growers. But many of Lynch’s “best performing” stocks were large companies. In the early years of his run as a fund manager he bought mostly big companies. He later started buying a lot of small companies.
-Small companies tend to go up a lot more than large companies immediately following tax loss selling season. Average stock goes up about 1.6% in January, small companies 6.7%.
-Lynched liked regional banks with a “strong local deposit base” and that were efficient and careful in their commercial lending.
-Equity to asset ratio is most important for determining financial strength of banks. A ratio of 6 is average.
-Check the bank’s 90-day delinquency rate to see if mortgage customers are paying their mortgages.
Restaurants and Retailers
-When investing in restaurants and retailers, see if there’s a lot of room for expansion—new stores.
-New restaurants and retailers that are expanding fast tend to do so for about 15-20 years and then slow down.
-A company can get into trouble if it expands at too fast a rate. One-hundred stores per year is too fast. Look for “slow and steady” expansion.
-Companies that sell franchises can expand without using their own money.
-Restaurants have no foreign competition (he probably meant in the U.S.) and restaurant chains from opposite sides of the country tend to take a long time before they become competitors with each other.
-Same stores sales going up quarter after quarter is ideal.
-When the economy is very weak, is the company still making money while expanding?
-Are inventories going up because of new stores being opened, or because of poor management?
-Inventory build-up can mean the company is deferring losses by not discounting merchandise to liquidate it. This may have to be done eventually. This will hurt future earnings.
-Having a sense of what each subsidiary is worth, gives you a sense of what the parent company is worth.
-Distressed utility companies usually don’t go to zero, because they’re essential services. Don’t worry about missing the bottom—sell when the dividend gets cut and buy when it gets restored. Remember that the price could stay depressed for several years.
-When government corporations are sold to the public they tend to be a bargain so investors won’t lose money and blame the government.
-Cyclicals are twice as difficult to invest in successfully, because of the timing aspect and the extra patience needed when the stock is depressed.
-A cyclical with a low P/E might be low because of high earnings and at the end of a cycle. Conversely, a high P/E might mean it’s at the bottom of a cycle.
-Research “units of pent up demand,” to get a sense of what future sales will be like.
-Look for at least twice as much equity as debt.
-When is funded debt due?
-Closed-ended funds are investment funds that trade on the stock exchange. Shares are traded, but the number of shares stay the same—they don’t get redeemed. Sometimes closed-ended funds trade below net asset value (the value of its holdings).
-Sometimes buying sector funds when they’re depressed can be a good idea, instead of trying to identify a single company in a particular sector.
-Convertible bonds yield 1.5% to 2% less than regular corporate bonds. When the gap widens, convertibles are overpriced. When it narrows or exceeds, they’re cheap.
-Convertibles tend to go down less in value than owing the stock
-Don’t worry about liquidity in thinly traded stocks.
-Don’t be too rigid about categories of stocks.
-Important question to ask yourself: will next year’s earnings be better?
-Jump on bargains when you see them, before it’s too late (provided you’ve done your homework).
-Are costs coming down? Remember that SG&A is the place to look for cost cutting.
-The rule of 72 is handy for quick thinking about the power compounding. Divide annual growth rate into the number 72 to see how long it takes for stock to double.