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"One Up on Wall Street" by Peter Lynch Book Review: Profile Traders

If you are an amateur, this is the right book for investing. Peter says if you are an amateur, then you capitalize on your advantage and stop listening to professionals.


Sounds odd, right?


You will realize this as you read through the book.



Expectations from the Book.


This book attempts to show amateur investors they can match the funds if not beat them in a whiff. A sharper eye for detail and the zeal to go it your own.


“Wall street’s greatest bull market has rewarded the believers and confounded the skeptics to a degree neither side could have imagined in the doldrums.”


This book is dissected into 3 parts that make sense and make reading easy. Some might ignore these lines as a passé, but you will eventually catch up and give it a second thought. Peter says he has picked up some of his best investments through dining or shopping.

  1. Preparing to invest.

  2. Picking winners.

  3. The long-term view.


Foundations in Investment

Peter categorically says it’s difficult to predict markets. Small investors tend to be pessimistic and optimistic at precisely the wrong times. Trying to invest in good markets and get out of the bad ones is self-defeating.


He says people who have been trained or advised to rigidly quantify everything have a big disadvantage. Markets are over-valued only when an Investor cannot find a single stock that matches his criteria. That’s a rare event you would not want to be waiting for the market to change course and land you your pick.


Peter advises amateurs to view the profession with a properly skeptical eye. The least you’ll realize whom you are up against, as around 70 percent of shares in major companies are held by institutions.


He explains the concept of the “Street Lag” with simple logic that forms obstacles for institutions to ride ten baggers. As an Amateur, you can simply not avoid such opportunities in front of you.


He shares an example of the funeral services company (SCI), which only caught the attention of investors in 1982. It was already a five-bagger from 1969 it was first listed and was already a forty-bagger by 1987. There are several such examples shared by Peter that were multi-baggers for the taking if you had an eye for them.


In a witting manner, Peter describes indiscriminate selling of current losers is called “burying the evidence” in the fund managers' circle.



Picking Winners


Peter says the best stock picking or creating that initial list happens close to home, if not in your backyard. You then go on to look for future growth not only in terms of expansions but of earnings potential as well.


He says you are better off if you can identify what kind of stock you are dealing with, whether it’s a fast or slow grower, a turn-around story, a staunch one, or one of those cyclical stocks.


There is a multi-bagger in every walk of life, but it’s just as far away from you if you are not looking at them from an investment perspective. He shares examples of how various people who came into contact with Smith Kline and Glaxo products could have benefitted from investing in them.


Build your Own Story


“An Amateur Investor can pick tomorrow’s big winners by paying attention to new developments at the workplace, the mall, the auto showrooms, or the restaurants, or anywhere a promising new enterprise is making its debut.”


Picking the right ones, big ones do not stop in your backyard or close to your home. It’s just a lead you have to build your story on. Peter makes it clear that the homework phase is just as important as your success in stocks.


The P/E ratio of a company relative to its peers in the segment gives you a rough idea if a stock is under-valued or over-valued. You work from here to find reasons why you should be invested in this stock. Peter talks about several other parameters when picking your stocks in the simplest form.

  1. Percent of sales.

  2. P/E ratio.

  3. The cash position.

  4. The debt factor.

  5. Book value.

  6. Hidden assets.

  7. Cash flow.

  8. Inventories.

  9. Future earnings.

  10. Growth rate.


“Investing without research is like playing stud poker and never looking at the cards.”


Long Term View


Peter illustrates that the point is not to rely on any fixed number of stocks but rather to investigate how good they are on a case-to-case basis. He says you can own as many companies as there are situations in which (a) you’ve got an edge, and (b) you’ve uncovered an exciting prospect that passes all the tests of research.


Diversification among several categories of stocks is another way to minimize downside risk. He bifurcates on risk factors/gains in each category you might want to be invested in.

  1. Slow growers are low-risk and low-gain.

  2. Stalwarts are low-risk and moderate gain.

  3. Asset plays are low-risk and high-gain.

  4. Cyclical may be low-risk and high-gain or high-risk and low-gain, depending on cycles.

  5. Fast growers & Turnarounds are high-risk and high-gain.


Peter does tag himself as those that going into cash as that would be getting out of the market. His idea was to stay in the market forever and to rotate stocks depending on the fundamental situations.


He feels if you place stop orders for your investments, then you are admitting you’re going to sell the stock for less than it's worth today.