- A bunch of seventh graders outperformed the market by more than 40% by simply picking the stocks they liked, e.g. Walt Disney, PepsiCo and Nike. In length, Peter recommends never investing in an idea you can’t illustrate with crayons.
- Peter achieved a 29% return by following simple principles and dividing his portfolio into two categories: 1) small growth and cyclical stocks, 2) and conservative stocks. When the market was near a top (measured on historical P/E levels), he would sell the former, and have the fond’s money seek refugee in the latter. When the market was depressed, Peter sold the conservative ones and stocked-up on smaller, depressed growth stocks.
- Peter presents 21 principles and 25 golden rules that’ll help the investor outperform the market.
The author of Beating the Street, Peter Lynch, is indeed a phenomenal investor. He managed the Fidelity Magellan fond, which achieve an annual return of 29% between 1977-1990, and never had a year with negative returns (even 1987!). This book dives into how these incredible results was achieved. Let’s get to it!
The Miracle of St. Agnes
The book is kicked off with a story. Back in 1990-1991 a competition took place. A bunch of seventh graders were asked to pick stocks from the S&P500 index. They primarily based their stock picks on what they liked. The St. Agnes Portfolio thus consisted of companies such as Walt Disney, PepsiCo, Nike and Gap. The index roared these years, since it increased 26% from 1990-1991. This return was looked upon with envy from the majority of investment fonds and portfolio managers. But what about the seventh graders? They beat the S&P to pieces with their 70% return.
Throughout the book, Peter presents 21 principles. This thought-provoking story illustrates principle 3 and 14: “Never investment in any idea you can’t illustrate with crayons” and “If you like the store, chances are you’ll love the stock.” In other words: Invest in businesses you understand and whose products you’re crazy about yourself.
Magellan’s 5 categories that became 2
In the fond’s early years, Magellan focused on 5 categories: 1) small and midsize growth companies; 2) companies whose future outlooks are anticipated to improving; 3) depressed cyclical stocks; 4) companies with a high and increasing dividend yield; 5) companies whose assets are undervalued by the market.
Through the 80s, however, Peter simplified his approach by dividing Magellan’s portfolio into two parts: 1) small growth and cyclical stocks, 2) and conservative stocks. When the market was near a top (measured on historical P/E levels), he would sell the former, and have the fond’s money seek refugee in the latter. When the market was depressed, Peter sold the conservative ones and stocked-up on smaller, depressed growth stocks. It sounds simpelt, and it is. That’s what characterises Peter’s strategies and overall approach. Remember, the best ideas are those that can be illustrated with crayons.
Beating the Street contains a lot of stories of Peter’s previous trades and strategies. These flash-backs seek to illustrate the points Peter wishes to promote with his 21 principles. I’ll try to highlight some of those I regard most valuable.
Peter’s fourth principle – You can’t see the future through a rearview mirror: Peter warns you against what he calls “weekend warriors”. Those persons who each Saturday and Sunday spread thousands of reasons (or rumors, if you will) about why the economy will tank and the world is bound to end. He recommends you disregard these top-down chicken littles that proclaim doomsday prophecies. Rather, you should focus on consistently finding good, undervalued businesses. He claims that those who disregard market swings and simply acquire stocks e.g. each quarter regardless of the state of the world, will perform much better than market timers.
Peters eleventh principle – The best stock to buy may be the one you already own: The never-ending hunt for that “perfect stock” is often unnecessary according to Peter. You may already own it! Hence, rather than searching, and immersing oneself to a bunch of new businesses, stick to the ones you already know and buy more!
Peters fifteenth principle – When insiders are buying, it’s a good sign: If persons in the management team are hoarding stocks for private funds, it’s a good sign that the people closest to the business’ operations believe the company is undervalued. This could very well be a sign that the analyst should bring forth the loop.
Peters sixteenth principle – In business, competition is never as healthy as total domination: Peter has flirted with a lot of good businesses in bad industries, or “flowers in the desert”, as he categorizes them. The problem with good industries are that they attract competition. These new market participants crave a piece of the action, which is why they undercut prices and create price pressure. Peter’s binoculars are thus directed at terrible industries. Next, he attempts to find the ‘winner’ in said industries – those with the highest margins and lowest costs, hence enabling them to ride-out cyclical waves while the competitors throw in the towel. Once the industry betters once gain, the surviving businesses are ready to gain the now dead companies’ market shares.
At the end of the book, Peter highlights the “25 Golden Rules of Investment” (even though there’s actually 26). I’ll let you explore these for yourselves, so you got something to look forward to.
Fine book with many neat stories. It’s tone is more entertaining than it is educational even though you’ll surely learn a bunch from it. The many anecdotes mixed with a healthy portion of self-reflection gives you some good insights. It’s not one of my favorites, but definitely worthwhile!