14 Stock Picking Secrets From One Of The Most Read Books On …

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14 Stock Picking Secrets From One Of The Most Read Books On Investing

Peter Lynch, a Wall Street legend and one of the best fund managers in the world needs no introduction. From 1977 to 1990 he steered Fidelity's Magellan mutual fund and gained a handsome 29.2% annualized return.

He explains in his books how most commonly used day to day products, can provide multi-bagger and value stock opportunities. The book provides a lot of insights on US stocks but some of the principles mentioned are universal.

Following are his 14 stock picking Secrets:

SECRET #1:

"It is difficult to time the markets. Small investors tend to be pessimistic and optimistic precisely at the wrong times. Predicting the short-term direction of the stock market is futile. The long-term returns from stocks are relatively predictable."

NEVER TRY TO TIME THE MARKETS. RELY ON FUNDAMENTALS.

SECRET #2:

"As I look back on it now, it's obvious that studying history and philosophy was much better preparation for the stock market than, say, studying statistics."

ADOPT A MULTI-DISCIPLINARY APPROACH.

SECRET #3:

"If seven out of ten of my stocks perform as expected, then I'm delighted. If six out of ten of my stocks perform as expected, then I'm thankful. Six out of ten is all it takes to produce an enviable record on Wall Street."

SUPERIOR POSITION DOES NOT ALWAYS WIN. UNDERSTAND THAT STOCK MARKET IS NOT PURE SCIENCE OR A GAME OF CHESS.

SECRET #4:

"He's concerned after the market has dropped or the economy has seemed to falter, which keeps him from buying good companies at bargain prices. Then after he buys at higher prices, he gets complacent because his stocks are going up. This is precisely the time he ought to be concerned enough to check the fundamentals, but he isn't. Then finally, when his stocks fall on hard times and the prices fall to below what he paid; he capitulates and sells in a snit."

PLEASE BE AWRE OF THREE EMOTIONAL STATES OF UNWARY INVESTORS: CONCERN, COMPLACENCY AND CAPITULATION.

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SECRET #5:

"The price of an average stock fluctuates 50 percent in an average year."

IGNORE SHORT TERM FLUCTUATIONS.

SECRET #6:

"This all reminds me of the Mayan conception of the universe. In Mayan mythology the universe was destroyed four times, and every time the Mayans learned a sad lesson and vowed to be better protected--but it was always for the previous menace. First there was a flood, and the survivors remembered it and moved to higher ground into the woods, built dikes and retaining walls, and put their houses in the trees. Their efforts went for naught because the next time around the world was destroyed by fire. After that, the survivors of the fire came down out of the trees and ran as far away from woods as possible. They built new houses out of stone, particularly along a craggy fissure. Soon enough, the world was destroyed by an earthquake. I don't remember the fourth bad thing that happened--maybe a recession--but whatever it was, the Mayans were going to miss it. They were too busy building shelters for the next earthquake."

THE NEXT TIME IS NEVER LIKE A LAST TIME (PENULTIMAE PREPAREDNESS)

SECRET #7:

"You will know industries inside out in which you are working. Why it is that stock certificates, like grasses, are always greener in somebody else's pasture I'm not sure. In general, if you polled all the doctors, I'd bet only a small percentage would turn out to be invested in medical stocks, and more would be invested in oil."

TAKE ADVANTAGE OF WHAT YOU ALREADY KNOW AND LEVERAGE ON THAT.

SECRET #8:

"If you find a stock with little or no institutional ownership, you've found a potential winner. Find a company that no analyst has ever visited, or that no analyst would admit to knowing about, and you've got a double winner. Don't wait until brokerage firms and analysts enter. Enter right away when you feel fundamentals are strong."

GIVE SPECIAL ATTENTION TO STOCKS WHICH INSTITUTIONS DON'T OWN AND ANALYSTS DON'T FOLLOW.

SECRET #9:

"When stock is bought in by the company, it is taken out of circulation, therefore shrinking the number of outstanding shares. This can have a magical effect on earnings per share, which in turn has a magical effect on the stock price. If a company buys back half its shares and its overall earnings stay the same, the earnings per share have just doubled. Few companies could get that kind of result by cutting costs or selling more widgets."

BUYBACK OF SHARES IS A GOOD SIGN.

SECRET #10:

"DON'T CONCENTRATE MUCH ON HIGH GROWTH AND HOT INDUSTRIES since they attract imitators."

HYPED STOCKS SHOULD BE AVOIDED.

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SECRET #11:

"Instead of buying back shares or raising dividends, profitable companies often prefer to blow the money on foolish acquisitions. The dedicated diworseifier seeks out merchandise that is (1) overpriced, and (2) completely beyond his or her realm of understanding. This ensures that losses will be maximized."

AVOID COMPANIES WITH UNRELATED DIWORSEIFICATION.

SECRET #12:

"Predicting the future earnings is most difficult task. The word most frequently seen with "earnings" is "surprise"). I'm not about to suggest that you can begin to predict earnings, or growth in earnings, successfully on your own. There are five basic ways a company can increase earnings*: reduce costs; raise prices; expand into new markets; sell more of its product in the old markets; or revitalize, close, or otherwise dispose of a losing operation. These are the factors to investigate as you develop the story. If you have an edge, this is where it's going to be most helpful."

SEARCH FOR THE FACTORS WHICH WOULD HELP IN PREDICTING FUTURE EARNINGS.

SECRET #13:

"By successfully rotating in and out of several stalwarts for modest gains, you can get the same result as you would with a single big winner: six 30-percent moves compounded equals a four-bagger plus, and six 25-percent moves compounded is nearly a four-bagger."

SECRET #14:

"If business sounds dull or even ridiculous,

It does something dull

It does something disagreeable

It is a spinoff

Institutions don't own it and analysts don't follow it

Stock with rumors abound

There is something depressing about it

It is a no ?growth industry

It has got a niche

People have to keep buying the products.

It is a user of technology

The insiders are buyers

Buyback of shares."

INTERESTING STOCKS COULD HAVE ABOVE FEATURES.

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The key takeaways:

Peter Lynch has mentioned in the book to create a monologue of every stock, which is being tracked: This can be achieved by maintaining an investment journal. The reasons stated in the journal prove out to be good pointers to refer to in future. In addition to that, they act as inputs in devising exit strategy as well.

Peter Lynch Says: Understand the nature of the companies you own and the specific reasons for holding the stock.

Peter Lynch has emphasized a lot on Grassroots level research: What one cannot get from annual reports/financials can be sourced by discussing with company's suppliers, shopkeepers, employees, calling or visiting the company.

Glassdoor (Employee reviews), Credit rating agencies reports, Actual meet with the suppliers or the sellers of the goods of the company, LinkedIn (For doing promoters background check) are few of the sources we can track before making an investment decision.

Peter Lynch says ? Stick to what you know (Investing in what one knows & understands was at the core of the Peter Lynch's stock picking approach)

CONCLUSION:

In general, Peter Lynch emphasized on fundamentals of the companies and not market as a whole. For stock-picking, he followed `bottom-up' approach rather than `top-down' approach.

His approach is very practical and can be adopted by different investors in stock picking across various types of companies (From fast growers to more stable dividend paying companies).

NOTE: In his book, Peter Lynch has developed strategies based on six different types of companies.

The summary is attached below:

1. Slow Growers / Sluggards:

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2. Stalwarts:

3. Fast Growers:

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4. Cyclicals:

5. Turnarounds:

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