Summary of Beating the Street | national best seller

Beating the Street

About Author:

Peter Lynch (born January 19, 1944)[1] is an American investor, mutual fund manager, and philanthropist. As the manager of the Magellan Fund at Fidelity Investments between 1977 and 1990, Lynch averaged a 29.2% annual return, consistently more than doubling the S&P 500 stock market index and making it the best-performing mutual fund in the world. During his 13 year tenure, assets under management increased from $18 million to $14 billion.

Summary of Book:

So the fifth most important takeaway from Beating the Street, is that you should "Focus on the even bigger picture". Imagine that you are living in Sweden, or some other country with seasonal weather conditions. One day in the winter, the temperature suddenly drops below zero degrees Celsius. People start to panic It was 30 degrees just a couple of months ago, what is happening? Is it the beginning of the next Ice Age? 

The media starts to produce daily headlines about how polar bears could die from the cold; how electricity will stop working and how even hell may eventually freeze if this drop in temperature continues. A silly scenario, you say? Absolutely, but it's not much different from this one, which has happened on multiple occasions Imagine that you are living in a country with a stock market, which price is determined by a group of emotional human beings. 

One day after a bull market, stocks suddenly drop ten percent from their previous high. People start to panic. The media starts to produce daily headlines about how stocks may eventually become worthless pieces of paper and how investors should switch to money in the bank and bonds if they don't want to risk personal bankruptcy. 

Equally silly, yet, this is a reoccurring thing, from which we don't seem to learn very fast Just like with the weather, stocks go through numerous cycles. This is a natural thing, as the price of the market is determined by you, me and a bunch of other emotional characters that swing from optimistic to pessimistic and then back again. 

Peter Lynch says that the key to making money in stocks is not to get scared out of them. The stomach determines the fate of the stock picker, not the head. Whenever Peter Lynch himself feels the itch to sell all his stocks and prepare for the worst he likes to remind himself of "The even bigger picture". The even bigger picture is that during the last 60 years stocks have outperformed bonds by almost 3.5:1 per year and let's not even discuss money in bank accounts here despite the thousands of reasons that we've seen that the financial world may come to an end, stocks have been returning, on average 7.1% per year versus 2.1% per year for bonds, after inflation. 

Besides, if total disaster actually does strike, money in the bank will be just as useless as stock certificates but if disaster doesn't strike (which is a much more likely scenario) the stock picker will be the richer man in the long run. At number four we have that "Making money in stocks is a combination of science, art and legwork" So it's no secret that Peter Lynch became such a successful fund manager at Fidelity Magellan by investing in stocks But how did he do it? 

He attributes his success to a combination of science, art and legwork Stock picking is partly a science, as great opportunities can be found by investigating the numbers that are presented in a company's financial statements Peter Lynch has many such quantitative factors that he likes to see, and he presents some of them in Beating the street - Growing sales and earnings - A reasonable price - Low debt - Share buybacks etc. 

But if this was the only ingredients in picking great stocks, mathematicians and accountants would be the richest people on the planet (which they aren't) Successful investing is also partly an art In the long run, a stock will be priced fairly relative to how its earnings are developing. 

The investor must understand what has been able to drive earnings in the past, and triggers that can cause them to grow in the future too A good way to make sure that you have a correct hunch is this: "If you are prepared to invest in a company, then you ought to be able to explain why in simple language that a fifth grade could understand, and quickly enough, so the fifth-grader won't get bored". 

The last factor is legwork: stay busy. Peter Lynch himself visited hundreds of companies per year and read even more annual reports. He assessed that for every ten companies you investigate you'll find one where the story is better than the market is currently expressing. 

He also emphasizes that when investigating an opportunity, you typically stumble across another one Peter Lynch's favorite question when interviewing CEOs was this: "Are there any other companies that you were impressed with?" When the CEO of one company talks fondly of a competitor in the same industry, you've probably found yourself a good deal.

Number three: Use the earnings line to identify buying opportunities

First: sales and earnings must be moving Second: buy at a reasonable price In Beating the street Peter Lynch gives an interesting tip on how to quickly evaluate if the price of a stock is fair or not. He says that one can identify an opportunity by looking at the "earnings line" of a company. 

In the long-run, the development of a stock will resemble the development of its earnings Whenever we have reason to believe that the price of a stock is lower than what is fair compared to its earnings and expected growth rate, we have a buying opportunity. And if the reverse is true, we should probably sell. Let's take Google as an example here. During the years 2008 to 2013, Google's earnings increase from $4.2 billion to $12.7 billion , which is equal to a yearly growth of 25%. 

Let's say that we had reason to believe that Google could continue this strong growth. As a rule of thumb: Peter Lynch thinks that a stock should sell at a P/E below its yearly growth rate. So whenever the stock of Google drops below a P/E of 25, we consider it a buy. The earnings line represents what the value of the company should be if the stock was priced at 25 times its earnings. 

As you can see, Google could have been considered a buy in mid 2015 when the price of the stock dropped below the line. In mid 2018 on the other hand, the stock was a sell, as the gap between the price and the earnings line had become very large and interestingly enough, with these assumptions, Google should be a buy today. There's more science art and legwork to be added before we can decide weather Google is worthy of our money or not!

Number 2: Search for overlooked stocks with strong owners

It pays to be a contrarian when it comes to investing It can be very profitable to go to places where other fund managers and investors are afraid to invest. Look for companies that aren't followed by many analysts. In Beating the street Peter Lynch lists many of his investing principles and Peter's principle number 18 is: "When even the analysts are bored, it's time to start buying" 

This typically results in a lower price than warranted Moreover, an overlooked company is usually favorable from other perspectives as well. For one thing, the largest share owners are usually still the founders of the company and the top management. 

This type of "skin in the game" is great for the investor You can rest assured that your interest and that of the management are aligned. Furthermore, the owners of the business are typically more well educated about the industry with overlooked companies. What you want to see are owners that have succeeded with similar businesses before, What you don't want to see is that the largest five owners of the business are insurance companies or other large institutional players. 

These people rarely know much about the industry and they probably don't care much about the company either, as it most likely will represent only a small fraction of their total capital on the management. So, look for companies that Wall Street has missed and where the owners are well invested and capable of running such a business. 

And ranking in as the most important takeaway of Beating the street, we have: Buy Swedish Okay, not really, but Peter Lynch speaks fondly about Sweden in Beating the street so of course, I had to bring this up Actually, among Fidelity Magellan's top five performers under Peter Lynch's management, the only stock that wasn't from the US was Swedish...

Number one: Look for great companies in lousy industries

Where would you rather invest your money today? One: Internet and direct marketing retail Two: Software, Three: Life science, Four: Energy equipment and services, Five: Metals and mining, Six: Oil gas and consumable fuels. Which ones did you pick? According to research from fidelity.com, 1-3 are the top three performing industries of the last five years while 4-6 are the worst performing ones. 

Peter Lynch would probably shy away from the first group and instead focus his legwork on the second one. Why? Because strong performance attracts competition. Everyone and his cousin would like to start a business in the first of the three industries, while companies are dying like flies in the second three. Peter Lynch recommends, that you should buy the strongest company or companies in industries, where the general opinion is that things have gone from bad to worse. As competitors fall the market share of these companies will increase as will their profitability. It won't take long before the stock price follows too.