Peter Lynch's bestselling guide to stockpicking is a buy and hold investment...
Great books on picking shares are rarer than original similes in a Dan Brown blockbuster. Great investors with records stretching beyond a decade are equally unusual.
Combine the two and you get writing to last for generations.
Take Benjamin Graham's The Intelligent Investor -- but not my copy, because I still read it. Published in 1949, The Intelligent Investor remains the definitive work on Value Investing. It will be read in 2049. Philip A. Fisher's Common Stocks and Uncommon Profits is another pensionable classic still read today for its pioneering insights.
These books are the buy-and-hold equivalent for your investing bookshelf, that you will repeatedly turn to even as the stock market changes out of all recognition.
The amateurs' professional stockpicker
The first title I'd like to suggest though in this new series on building an enduring investment library is, comparatively speaking, a spotty teenager.
1989's One Up On Wall Street was written by Peter Lynch, a fund manager with a record to kill for. Between 1977 and 1990, the fund Lynch ran for Fidelity multiplied investors' money 28 times over (an average annual return of 29.2%).
Given his track record in his day job, Lynch's central thesis is therefore rather surprising -- that you and I can beat the professionals.
Lynch says our advantages over the institutions include:
- that we manage smaller sums of money;
- we can focus our portfolios;
- we can buy whatever we like;
- we are answerable only to ourselves; and
- we can invest in boring businesses with stupid names without looking silly.
What's the story?
But how do you find the companies to fuel your portfolio's success?
Unlike many investing books, One Up On Wall Street doesn't offer a single systematic method for evaluating stocks.
Instead Lynch introduces 'the story'. This is like a Hollywood elevator pitch for your investment, outlining in a few brief sentences why you've put money into a particular share.
You may be evaluating a growth share, a turnaround, an asset-rich value play or a cyclical company -- in each case your story explains why the stock is attractive, and how your investment should play out.
You can then evaluate the company's progress against the story. If you've invested in a fast-growing pizza chain, you'll want to see new openings arriving as predicted, and that expansion isn't being driven by debt. In a turnaround situation, your story will include key elements for an ongoing recovery.
The idea is to know why you bought the shares, and to stick to your guns. Lynch popularised the phrase 'ten-bagger' -- the share that multiplies in value ten times. Three, four and five baggers are valuable, too, and are easily sold before they deliver such returns by nervous investors who lose the plot.
Equally, investors should be alert to the story changing negatively, or a growth company maturing into what Lynch calls a stalwart. Another part of his strategy is rotate between shares as their relative attractiveness changes.
Where do you find your initial share ideas? Lynch says the greatest advantage of private investors is we can spot excellent prospective investments in everyday life, when they're still young and unnoticed.
If you can find the next Tesco (LSE: TSCO) or Sage (LSE: SGE) before the analysts and fund managers, you'll massively outperform those who pick up the story late.
Choice words
One Up On Wall Street isn't about hard numbers -- there's a chapter or two about P/E ratios and looking at balance sheets, but it's pretty clear Lynch sees little value in looking beyond the basics (or perhaps he thinks readers won't bother).
Instead, this wide-ranging book is one to cherish for the words.
It is one of the most entertaining books on investing you're ever likely to read. I suspect it's down to Lynch's co-author -- the veteran US financial writer John Rothchild -- although perhaps that's because I can't stand to believe that Lynch is a great wordsmith as well as a master stockpicker.
The book is peppered with laugh out loud asides, and it even coined a comedy phrase -- 'Diworsification', for diversification that goes awry – that has entered the savvy investors' lexicon.
Typical is Lynch's fictitious dream company -- 'Cajun Cleaners', a mildew removal specialist from the Louisiana bayous that can only be visited by truck.
As he ticks off Cajun Cleaners attractions (it's a spin-off, it doesn't advertise, he heard about it from a great aunt and its share price has fallen) Lynch reinforces his message that whiz-bang high-tech shares in hot sectors are the wrong place to look for great investments.
Get Lynched
Any niggles mainly relate to the book's age.
Often Lynch writes about the stock market in the present tense, but it passed two decades ago. Investors who have lived through two bear markets since 2000 might scoff at the 1987 crash, which now seems a hiccup. He writes about chatting to your broker, and the Internet doesn't exist.
Lynch also discusses individual companies with ancient stock charts -- and they're all American. Lynch thinks Ford is a 'great company' with lots of cash, which sums it up.
But arguably this all adds to the charm and even the utility of the book. Viewed over the years, the stocks are stripped of prejudices to become case studies. As more companies pass into history, they'll become like Cajun Cleaners -- pure illustrations of Lynch's ideas, but born of in-the-trenches experience.
Twenty years on and in an era where index investing has become the new orthodoxy, shares have been poor investments for a decade and the worst of the financial professionals have been revealed as crooks, One Up On Wall Street's DIY ethos born of bull market optimism is thoroughly reinvigorating and recommended.
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