One Up On Wall Street

"Invest in what you know"

• Average investors can beat professionals by using their own knowledge and experience
• Your everyday observations can lead to great stock picks before Wall Street notices
• If you understand a business as a consumer or employee, you have an edge

Key insight: The best investment ideas come from your own circle of competence—shopping malls, workplaces, and daily life.

1. Slow Growers – Large, aging companies growing slightly faster than GNP (2-4%)
2. Stalwarts – Multinational companies (P&G, Coca-Cola) with steady 10-12% annual earnings growth
3. Fast Growers – Small, aggressive new enterprises growing 20-25% a year. Land of 10-40 baggers, even 200 baggers. (Note: Better if NOT in a fast-growing industry)
4. Cyclicals – Companies whose sales and profits rise and fall in regular (if not completely predictable) fashion. Unlike growth industries that keep expanding, cyclicals expand and contract repeatedly. (Ex: Auto, Airline, Tyre, Steel)
5. Turnarounds – Companies recovering from crisis or near-bankruptcy
6. Asset Plays – Companies with hidden assets the market hasn't recognized

Key insight: Different categories require different strategies. Know which type you own.

⚠️ Lynch's advice: Avoid 2-4% slow growers—if companies aren't going fast enough, neither will the price of their stocks.

A ten-bagger is a stock that increases 10x in value.

• One ten-bagger in a portfolio can make up for many losing positions
• You don't need many winners—a few big ones can drive your entire returns
• Most ten-baggers are found among small, fast-growing companies

Lynch's math: If you own 10 stocks and 1 goes up 10x while 5 are flat and 4 lose 50%, you still double your money.

PEG = P/E Ratio ÷ Earnings Growth Rate

• PEG < 1: Stock may be undervalued (attractive)
• PEG = 1: Fairly valued
• PEG > 1: Stock may be overvalued

Example: A company with P/E of 20 and growth rate of 25% has PEG of 0.8 (potentially undervalued).

Key insight: The PEG ratio adjusts valuation for growth—a high P/E can be justified by high growth.

1. Boring name/boring business – Less attention from Wall Street
2. Does something disagreeable – Unpopular industries are under-followed
3. Spinoff – Often undervalued and ignored
4. Institutions don't own it – Room for discovery
5. Insiders are buying – Management believes in the company
6. Company is buying back shares – Sign of confidence
7. Niche business – Dominates a small market
8. Recurring revenue – People keep buying (razors, not razor handles)

• Hot stock in a hot industry – Overvalued and over-followed
• "The next [something]" – Beware comparisons to successful companies
• Diworseification – Companies making foolish acquisitions outside their expertise
• Whisper stocks – Secretive companies with "revolutionary" products
• Single customer dependency – 25-50% of revenue from one source
• Middleman companies – Can be easily cut out

Key insight: Avoid complexity and hype. The best opportunities are often unglamorous.

Before buying, you should be able to explain in two minutes:

1. Why you're interested – What caught your attention?
2. What the company does – How does it make money?
3. What has to happen for success – Your investment thesis
4. What could go wrong – Key risks

Test: If you can't explain your investment to a 10-year-old, you don't understand it well enough.

Buy for 30-50% gain, then sell and repeat.

• Timing matters – Depending on when you buy, you can make sizeable profit
• Know when to exit – If it's gone up 50% in a year or two, consider selling
• Rotation strategy – Sell appreciated stalwarts and rotate into similar ones that haven't appreciated yet

Why always keep some stalwarts in your portfolio:

• They offer good protection during recessions and hard times
• They won't go bankrupt
• Their value will eventually be restored

Key insight: Stalwarts are not buy-and-hold-forever stocks. They're steady compounders you trade for moderate gains while keeping some for downside protection.

Timing is everything in cyclicals.

• Detect the turning points – You must recognize when the business is falling or picking up
• Circle of competence matters – Being from the same industry gives you an edge in spotting cycle shifts
• Industry insiders win – Auto workers, steel employees, and airline staff often see the upturn before Wall Street

Key insight: Unlike other categories where you can buy and hold, cyclicals require you to get in and out at the right time. Your everyday knowledge of an industry is your biggest advantage.

Sell when the story changes, not based on price alone:

• Slow Growers: Sell if they lose market share or stop raising dividends
• Stalwarts: Sell when P/E gets too high or growth slows; expect 30-50% gains
• Fast Growers: Sell when growth slows, expansion ends, or P/E exceeds growth rate
• Cyclicals: Sell near the end of the cycle when costs rise and inventories build
• Turnarounds: Sell after the turnaround is complete
• Asset Plays: Sell when raiders or the company unlocks the hidden value

Key insight: "Selling your winners and holding your losers is like cutting the flowers and watering the weeds."