Peter Lynch
The true contrarian is not the investor who takes the opposite side of a popular (Location 1282)
hot issue (i.e., shorting a stock that everyone else is buying). The true contrarian waits for things to cool down and buys stocks that nobody cares about, and especially those that make Wall Street yawn. (Location 1282)
When it comes to predicting the market, the important skill here is not listening, it’s snoring. The trick is not to learn to trust your gut feelings, but rather to discipline yourself to ignore them. Stand by your stocks as long as the fundamental story of the company hasn’t changed. (Location 1285)
In stage four, once again they’re crowded around me—but this time it’s to tell me what stocks I should buy. Even the dentist has three or four tips, and in the next few days I look up his recommendations in the newspaper and they’ve all gone up. When the neighbors tell me what to buy and then I wish I had taken their advice, it’s a sure sign that the market has reached a top and is due for a tumble. (Location 1363)
“As far as I’m concerned,” Buffett has written, “the stock market doesn’t exist. It is there only as a reference to see if anybody is offering to do anything foolish.” (Location 1374)
What makes him the greatest investor of all time is that during a certain period when he thought stocks were grossly overpriced, he sold everything and returned all the money to his partners at a sizable profit to them. (Location 1378)
Look for opportunities that haven’t yet been discovered and certified by Wall Street—companies that are “off the radar scope.” (Location 1407)
I could go on for the rest of the book about the edge that being in a business gives the average stockpicker. (Location 1533)
I’ve been trying to give you all along: Invest in things you know about. (Location 1553)
Just because Dunkin’ Donuts is always crowded or Reynolds Metals has more aluminum orders than it can handle doesn’t mean you ought to own the stock. Not yet. What you’ve got so far is simply a lead to a story that has to be developed. (Location 1619)
For some reason the whole business of analyzing stocks has been made to seem so esoteric and technical that normally careful consumers invest their life savings on a whim. The same couple that spends the weekend searching for the best deal on airfares to London buys 500 shares of KLM without having spent five minutes learning about the company. (Location 1629)
All you have to do is put as much effort into picking your stocks as you do into buying your groceries. Even if you already own stocks, it’s useful to go through the exercise, because it’s possible that some of these stocks will not and cannot live up to your expectations for them. (Location 1638)
If you’re considering a stock on the strength of some specific product that a company makes, the first thing to find out is: What effect will the success of the product have on the company’s bottom line? (Location 1648)
Once I’ve established the size of the company relative to others in a particular industry, next I place it into one of six general categories: slow growers, stalwarts, fast growers, cyclicals, asset plays, and turnarounds. (Location 1687)
Three of my six categories have to do with growth stocks. I separate the growth stocks into slow growers (sluggards), medium growers (stalwarts), and then the fast growers—the superstocks that deserve the most attention. (Location 1699)
Electric utilities are today’s most popular slow growers, (Location 1705)
Alcoa once had the same kind of go-go reputation that Apple Computer has today, because aluminum was a fast-growth industry. (Location 1711)
Another sure sign of a slow grower is that it pays a generous and regular dividend. (Location 1718)
You won’t find a lot of two to four percent growers in my portfolio, because if companies aren’t going anywhere fast, neither will the price of their stocks. If growth in earnings is what enriches a company, then what’s the sense of wasting time on sluggards? (Location 1723)
Stalwarts are companies such as Coca-Cola, Bristol-Myers, Procter and Gamble, the Bell telephone sisters, Hershey’s, Ralston Purina, and Colgate-Palmolive. These multibillion-dollar hulks are not exactly agile climbers, but they’re faster than slow growers. (Location 1726)
you’re more or less in the foothills: 10 to 12 percent annual growth in earnings. Depending on when you buy them and at what price, you can make a sizable profit in stalwarts. (Location 1729)
Most of these are huge companies, and it’s unusual to get a tenbagger out of a Bristol-Myers or a Coca-Cola. So if you own a stalwart like Bristol-Myers and the stock’s gone up 50 percent in a year or two, you have to wonder if maybe that’s enough and begin to think about selling. (Location 1738)
Stalwarts are stocks that I generally buy for a 30 to 50 percent gain, then sell and repeat the process with similar issues that haven’t (Location 1744)
yet appreciated. (Location 1745)
In general, Bristol-Myers and Kellogg, Coca-Cola and MMM, Ralston Purina and Procter and Gamble, are good friends in a crisis. (Location 1748)
THE FAST GROWERS These are among my favorite investments: small, aggressive new enterprises that grow at 20 to 25 percent a year. (Location 1756)
There’s plenty of risk in fast growers, especially in the younger companies that tend to be overzealous and underfinanced. (Location 1765)
But for as long as they can keep it up, fast growers are the big winners in the stock market. I look for the ones that have good balance sheets and are making substantial profits. The trick is figuring out when they’ll stop growing, and how much to pay for the growth. (Location 1776)
You can lose more than fifty percent of your investment very quickly if you buy cyclicals in the wrong part of the cycle, and it may be years before you’ll see another upswing. (Location 1788)
There’s the restructuring-to-maximize-shareholder-values kind of turnaround, such as Penn Central. Wall Street seems to favor restructuring these days, (Location 1835)
Are you looking for slow growth, fast growth, recession protection, a turnaround, a cyclical bounce, or assets? Basing a strategy on general maxims, such as “Sell when you double your money,” “Sell after two years,” or “Cut your losses by selling when the price falls ten percent,” is absolute folly. It’s simply impossible to find a generic formula that sensibly applies to all the different kinds of stocks. (Location 1922)
Shaky companies in cyclical industries are not the ones you sleep on through recessions. Putting stocks in categories is the first step in developing the story. (Location 1931)
If I could avoid a single stock, it would be the hottest stock in the hottest industry, the one that gets the most favorable publicity, the one that every investor hears about in the car pool or on the commuter train—and succumbing to the social pressure, often buys. (Location 2365)
Another stock I’d avoid is a stock in a company that’s been touted as the next IBM, the next McDonald’s, the next Intel, or the next Disney, etc. In my experience the next of something almost never is—on (Location 2414)
Let’s review some of the sell signs, category by category. (Location 4557)
There’s no point expecting a quick tenbagger in a stalwart, and if the stock price gets above the earnings line, or if the p/e strays too far beyond the normal range, you might think about selling it and waiting to buy it back later at a lower price—or buying something else, as I do. (Location 4569)
Other than at the end of the cycle, the best time to sell a cyclical is when something has actually started to go wrong. Costs have started to rise. Existing plants are operating at full capacity, and the company begins to spend money to add to capacity. (Location 4583)
One obvious sell signal is that inventories are building up and the company can’t get rid of them, which means lower prices and lower profits down the road. (Location 4585)
Falling commodity prices is another harbinger. Usually prices of oil, steel, etc., will turn down several months before the troubles show up in the earnings. (Location 4588)
WHEN TO SELL A FAST GROWER (Location 4597)
If The Gap has stopped building new stores, and the old stores are beginning to look shabby, and your children complain that The Gap doesn’t carry acid-washed denim apparel, which is the current rage, then it’s probably time to think about selling. If forty Wall Street analysts are giving the stock their highest recommendation, 60 percent of the shares are held by institutions, and three national magazines have fawned over the CEO, then it’s definitely time to think about selling. (Location 4601)
Other signs: • Same store sales are down 3 percent in the last quarter. • New store results are disappointing. • Two top executives and several key employees leave to join a rival firm. • The company recently returned from a “dog and pony” show, telling an extremely positive story to institutional (Location 4612)
investors in twelve cities in two weeks. • The stock is selling at a p/e of 30, while the most optimistic projections of earnings growth are 15–20 percent for the next two years. (Location 4614)
It’s normally a good idea to wait until the knife hits the ground and sticks, then vibrates for a while and settles down before you try to grab it. (Location 4702)
What usually happens is that a stock sort of vibrates itself out before it starts up again. (Location 4706)
In 1981 there were 4,520 active oil-drilling rigs in the U.S., and by 1984 the number had fallen to 2,200. At that point many people bought oil-service stocks, believing that the worst was over. But two years after that, there were only 686 active rigs, and today there are still fewer than 1,000. (Location 4756)
Most of the money I make is in the third or fourth year that I’ve owned something—only with Merck it took a little longer. If all’s right with the company, and whatever attracted me in the first place (Location 4792)
hasn’t changed, then I’m confident that sooner or later my patience will be rewarded. (Location 4793)
In most cases it’s better to buy the original good company at a high price than it is to jump on the “next one” at a bargain price. (Location 4822)
A stock’s going up or down after you buy it only tells you that there was somebody who was willing to pay more—or less—for the identical merchandise. (Location 4842)