I learnt a while ago, when reading non-fiction books, it’s important to mentally separate the content into what’s interesting because it’s entertaining and what’s interesting because it has underlying principles that help me understand the world better. Great books tend to combine entertainment and providing tools/frameworks but most books lean one way or the other.
For books on investing and business in particular, I learnt to become wary of eloquent stories replete with hindsight bias that end with convenient and short takeaways as a guide to successful anything (outthinking competition / managing world-class teams / investing…). For investing books, unless the content is gripping and entertaining, I like to step back to ask myself if each chapter is offering me a new or improved toolset to identify stocks in the real world. Of course, that doesn’t mean the book is written poorly, just that I’m still limited in my ability to apply that it offers.
I recently reread Peter Lynch’s Beating the Street. The objective of this post is to summarise key takeaways for investors in short easy-to-read mind maps like this one on How to get Lucky by Max Gunther.
What Beating the Street is about
Beating the Street is an autobiographical telling of Lynch’s career managing Fidelity’s Magellan Capital Appreciation Fund. The first half goes through a timeline of his career with milestones for the fund as it goes from a tiny fund with AUM under $15 Million to over $14 Billion. The second half goes into 21 stocks Lynch recommended in Barron’s in 1992 and how they did from the time he recommended them ending with his golden rules. The book is also interspersed with “Peter’s Principles” that cover just about everything from attending football games with the kids to spotting great investments.
His willingness to stand apart from other fund managers in his style and stock picks probably worked well for Lynch in his early years managing Magellan. As the fund grew, the breadth of stocks and sectors he dove into to find winners was mind-boggling. That his fund held over 400 stocks at various points in time indicated something of a “spray and pray” method, which he owns up to as having worked well for him.
Central themes from Beating the Street
Why I wouldn’t copy Lynch’s approach to investing
While the central themes and principles he talks of are universal, I would not follow an investor like Lynch into stocks he was buying.
- The size of the fund he managed enabled him to take hundreds of small “pilot” positions he could afford to be wrong about before deciding to sell or increase positions. That kind of ready-fire-aim approach would be a costly distraction in time and transaction fees for small investors
- Applying such a vast variety of frameworks to pick stocks would make it
difficultimpossible to differentiate between skill and dumb luck
Peter Lynch’s 25 Golden Rules of Investing
- Investing is fun, exciting, and dangerous if you don’t do any work
- You can outperform the experts if you use your edge by investing in companies or industries you already understand
- You can beat the market by ignoring the herd of professionals
- Behind every stock is a company. Find out what it’s doing
- In the long term, there is 100% correlation between the success of the company and the success of its stock. This disparity is the key to making money
- You have to know what you own, and why you own it
- Long shots almost always miss the mark
- Owning stocks is like having children. Don’t get involved with more than you can handle
- If you can’t find any companies that you think are attractive, put your money in the bank until you discover some
- Never invest in a company without understanding its finances. The biggest losses come from companies with poor balance sheets
- Avoid hot stocks in hot industries
- With small companies, you’re better off to wait until they turn a profit before you invest
- If you’re thinking about investing in a troubled industry, buy the companies with staying power. Also, wait for the industry to show signs of revival
- It only takes a handful of big winners to make a lifetime of investing worthwhile
- The observant amateur can find great growth companies long before the professionals
- A stock market decline is a great opportunity to pick up the bargains left behind by investors fleeing the panic
- Everyone has the brain power to make money in stocks. Not everyone has the stomach
- There is always something to worry about. Sell a stock because the company’s fundamentals deteriorate, not because the sky is falling
- Dismiss all forecasts and focus on the companies you’re invested in
- For every 10 companies, you’ll find one with a great story
- If you don’t study companies, you have the same success as you do in a poker game if you bet without looking at your cards
- Time is on your side when you own shares of superior companies
- If you have the stomach for stocks, but not the time or the inclination to do the homework, invest in equity mutual funds
- You can take advantage of faster-growing economies by investing abroad
- In the long run, a portfolio of well-chosen stocks and/or equity mutual funds will always outperform a portfolio of bonds and money market funds. A portfolio of poorly chosen stocks won’t outperform money left under the mattress