One Up On Wall Street by Peter Lynch

The Book in a Few Sentences

One of the all-time best investment guides and one of my favorites. A normal person can pick stock just as well, if not better, that the average Wall Street expert. Investing in stocks is an art, not a science, and success is determined not by the stock market or the companies you pick but the investor himself / herself.

One Up On Wall Street summary

This is my book summary of One Up On Wall Street by Peter Lynch. My summary and notes include the key lessons and most important insights from the book.

Introduction: The Advantages of Dumb Money

Twenty years in this business convinces me that any normal person using the customary three percent of the brain can pick stocks just as well, if not better, than the average Wall Street Expert.
During a lifetime of buying cars or cameras, you develop a sense of what’s good and what’s bad, what sells and what doesn’t.
If it’s not cars you know something about, you know something about something else, and the more important part is, you know it before Wall Street knows it.

Part I: Preparing to Invest

Ultimately, it is not the stock market nor even the companies themselves that determine an investor’s fate. It is the investor.

Chapter One: The Making of a Stockpicker

…it’s self-defeating to try to invest in good markets and get out of bad ones.
Investing in stocks is an art, not a science, and people who’ve been trained to rigidly quantify everything have a big disadvantage.

Chapter Two: The Wall Street Oxymorons

As I’ll explain in later chapters, if a stock is down but the fundamentals are positive, it’s best to hold on and even better to buy more.
In fact, between the chance of making an unusually large profit on an unknown company and the assurance of losing only a small amount on an established company, the normal mutual-fund manager, pension-fund manager, or corporate-portfolio manager would jump at the latter. Success is one thing, but it’s more important not to look bad if you fail.
The worst of the camp-following takes place in the bank pension-fund departments and in the insurance companies, where stocks are bought and sold from preapproved lists.
…maybe you shouldn’t have anything to do with the stock market, ever.
That’s an issue worth discussing in some detail, because the stock market demands conviction as surely as it victimizes the unconvinced.

Chapter Three: Is This Gambling, or What?

The Stocks Rebut

In fact, since 1927, common stocks have recorded gains of 9.8 percent a year on average, as compared to 5 percent for corporate bonds, 4.4 percent for government bonds, and 3.4 percent for Treasury bills.
In spite of crashes, depressions, wars, recessions, ten different presidential administrations, and numerous changes in skirt lengths, stocks in general have paid off fifteen times as well as corporate bonds, and well over thirty times better than Treasury bills!
Buy the right stocks at the wrong price at the wrong time and you’ll suffer great losses.
Buy the wrong stocks at the right time and you’ll suffer more of the same.
Stocks are most likely to be accepted as prudent at the moment they’re not.
Once the unsettling fact of the risk of money is accepted, we can begin to separate gambling from investing not by the type of activity (buying bonds, buying stocks, betting on the horses, etc) but by the skill, dedication, and enterprise of the participant.
To me, an investment is simply a gamble in which you’ve managed to tilt the odds in your favor.
Consistent winners raise their bet as their position strengthens, and they exit the game when the odds are against them, while consistent losers hang on to the bitter end of every expensive pot, hoping for miracles and enjoying the thrill of defeat.
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 records on Wall Street.

Chapter Four: Passing the Mirror Test

(1) Do I Own a House?

Before you buy a share of anything, there are three personal issues that ought to be addressed: (1) Do I own a house? (2) Do I need the money? And (3) Do I have the personal qualities that will bring me success in stocks?
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…in 99 cases out of 100, a house will be a money-maker.
A house is entirely rigged in the homeowner’s favor. The banks let you acquire it for 20 percent down and in some cases, less, giving you the remarkable power of leverage.
…the house if a perfect hedge against inflation.
Then at the end, if you decide to cash in your house, you can roll the proceeds into a fancier house to avoid paying taxes on your profit.
Houses, like stocks, are most likely to be profitable when they’re held for a long period of time.

(2) Do I Need the Money?

…stocks are relatively predictable over ten to twenty years. As to whether they’re going to be higher or lower in two or three years, you might as well flip a coin to decide.
Only invest what you can afford to lose without that loss having any effect on your daily life in the foreseeable future.

(3) Do I Have the Personal Qualities It Takes to Succeed?

This is the most important question of all.
It seems to me this list of qualities ought to include patience, self-reliance, common sense, a tolerance for pain, open-mindedness, detachment, persistence, humility, flexibility, a willingness to do independent research, an equal willingness to admit mistakes, and the ability to ignore general panic.
It’s also important to be able to make decisions without complete or perfect information. Things are almost never clear on Wall Street, or when they are, then it’s too late to profit from them.
And finally, it’s crucial to be able to resist your human nature and your “gut feelings.”
It’s uncanny how often people feel most strongly that stocks are going to go up or the economy is going to improve just when the opposite occurs.
Things inside humans make them terrible stock market timers.
The unwary investor continually passes in and out of three emotional states: concern, complacency, and capitulation.
Recently I read that the price of an average stock fluctuates 50 percent in an average year.
The true contrarian is not the investor who takes the opposite side of a popular hot issue (i.e., shorting a stock when that everybody else is buying). The true contrarian waits for things to cool down and buys stocks that nobody cares about, and especially those that make Wall Street yawn.
When it comes to predicting the market, the important skill here is not listening, it’s snoring.
The trick is not to learn to trust your gut feelings, but rather to discipline yourself to ignore them. Stand by your stocks as long as the fundamental story of the company hasn’t changed.
I believe in buying great companies—especially companies that are undervalued and/or under appreciated.

What Stock Market?

The market out to be irrelevant. If I could convince you of this one thing, I’d feel this good had done its job.
And if you don’t believe me, believe Warren Buffett. “As far as I’m concerned,” Buffett has written, “the stock market doesn’t exist. It is there only as a reference to see if anybody is offering to do anything foolish.”
Several of my favorite teenagers made their biggest moves during bad markets.
Pick the right stocks and the market will take care of itself.
That’s not to say there isn’t such a thing as an overvalued market, but there’s no point worrying about it.
The way you’ll know when the market is overvalued is when you can’t find a single company that’s reasonably priced or that meets your other criteria for investment.

What I hope you’ll remember most from this section are the following points:

Don’t overestimate the skill and wisdom.
Take advantage of what you already know.
Look for opportunities that haven’t yet been discovered and certified by Wall Street—companies that are “off the radar scope.”
Invest in a house before you invest in a stock.
Invest in companies, not in the stock market.
Ignore short-term fluctuations.
Large profits can be made in common stocks.
Large losses can be made in common stocks.
Predicting the economy is futile.
Predicting the short-term direction of the stock market is futile.
The Long-term returns from stocks are both relatively predictable and also far superior to the long-term returns from bonds.
Keeping up with a company in which you own stock is like playing an endless stud-poker hand.
Common stocks aren’t for everyone, nor even for all phases of a person’s life.
The average person is exposed to interesting local companies and products years before the professionals.
Having an edge will help you make money in stocks.
In the stock market, one in the hand is worth ten in the bush.

Part II: Picking Winners

Chapter Six: Stalking the Tenbagger

The best place to begin looking for the tenbagger is close to home—if not the backyard then down at the shopping mall, and especially wherever you happen to work.
…users of technology are the biggest beneficiaries of high-tech.
As competition drives down the price of computers, a firm such as Automatic Data Processing can buy the cheaper equipment , so its costs are continually reduced. This only ads to profits.
The person with the edge is always in a position to outguess the person without an edge…

The Double Edge

You’re looking for a situation where the value of the assets per share exceeds the price per share of the stock.

My Wonderful Edge

Invest in things you know about.

Chapter Seven: I’ve Got It, I’ve Got It — What Is It?

It seems to me that this homework phase is just as important to your success in stocks as your previous vow to ignore the short-term gyrations of the market.
Investing without research is like playing stud poker and never looking at the cards.

What’s the Bottom Line?

If you’re considering a stock on the strength of some specific product that a company makes, the first thing to find out is: What effect will the success of the product have on the company’s bottom line?

The Six Categories

The Slow Growers

Usually these large and aging companies are expected to grow slightly faster than the gross national product.
Sooner or later every popular fast-growing industry becomes a slow-growing industry, and numerous analysts and prognosticators are fooled.
There’s always a tendency to think that things will never change, but inevitably they do.
…companies pay generous dividends when they can’t dream up new ways to use the money to expand the business.

The Stalwarts

Stalwarts are companies such as Coca-Cola, Bristol-Meyers, Proctor and Gamble…Hershey’s, Ralston Purina, and Colgate-Palmolive.
When you traffic in stalwarts, you’re more or less in the foothills: 10 to 12 percent annual growth in earnings.
I always keep some stalwarts in my portfolio because they offer pretty good protection during recessions and hard times.

The Fast Growers

These are among my favorite investments: small, aggressive new enterprises that grow at 20 to 25 percent a year.
A fast-growing company doesn’t necessarily have to belong to a fast-growing industry.
As a matter of fact, I’d rather it didn’t, as you’ll see in Chapter 8. All it needs is the room to expand within a slow-growing industry.
I look for the ones that have good balance sheets and are making substantial profits.

The Cyclicals

The autos and the airlines, the tire companies, steel companies, and chemical companies are all cyclicals.
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Coming out of a recession and into a vigorous economy, the cyclicals flourish, and their stock prices tend to rise much faster than the prices of the stalwart.
Cyclicals are the most misunderstood of all types of stocks. It is here that the unwary stockpicker is most easily parted from his money, and in stocks that he considers safe.
Timing is everything in cyclicals…

Turnarounds

Turnaround candidates have been battered, depressed, and often can barely drag themselves into Chapter 11. These aren’t slow growers; these are no growers.
Turnaround stocks make up lost ground very quickly…
The best thing about investing in successful turnarounds is that of all the categories of stocks, their ups and downs are least related to the general market.

The Asset Plays

An asset play is any company that’s sitting on something valuable that you know about, but that the Wall Street crowd has overlooked.
The asset play is where the local edge can be used to greatest advantage.
Asset opportunities are everywhere.

Highfliers to Low Riders

Companies don’t stay in the same category forever.
Fast growers can lead exciting lives, and then they burn out, just as humans can.
Basing your strategy on general maxims, such as “Sell when you double your money,” “Sell after two years,” or “Cut your losses by selling when the prices falls ten percent,” is absolute folly.
It’s simply impossible to find a generic formula that sensibly applies to all the different kinds of stocks.

Chapter Eight: The Perfect Stock, What a Deal!

Getting the story on a company is a lot easier if you understand the basic business.
That’s why I’d rather invest in panty hose than in communications satellites, or in motel chains than in fiber optics. The simpler it is, the better I like it.
If it’s a choice between owning stock in a fine company with excellent management in a highly competitive and complex industry, or a humdrum company with mediocre management in a simpleminded industry with no competition, I’d take the latter.
“Any idiot can run this business” is one characteristic of the perfect company, the kind of stock I dream about.

(1) It Sounds Dull—or, Even Better, Ridiculous

…the perfect company has to be engaged in a perfectly simple business, and he perfectly simple business ought to have a perfectly boring name.

(2) It Does Something Dull

I get even ore excited when company with a boring name also does something boring.
A company that does boring things almost as good as a company that has a boring name, and both together is terrific.
If a company with terrific earnings and a strong balance sheet also does dull things, it gives you a lot of time to purchase the stock at a discount.

(3) It Does Something Disagreeable

Better than boring alone is a stock that’s boring and disgusting at the same time. Something that makes people shrug, retch, or turn away in disgust is ideal.

(4) It’s a Spinoff

Spinoffs of divisions or parts of companies into separate, freestanding entities…often result in outstandingly lucrative investments.
Large parent companies do not want to spin off divisions and then see those spinoffs get into trouble, because that would bring embarrassing publicity that would reflect back on the parents.
Spinoff companies are often misunderstood and get little attention from Wall Street.

(5) The Institutions Don’t Own It, and the Analysts Don’t Follow It

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.
I’m equally enthusiastic about once-popular stocks the professionals have abandoned…

(6) The Rumors Abound: It’s Involved with Toxic Waste and/or the Mafia

(7) There’s Something Depressing About It

In this category my favorite all-time pick is Service Corporation International (SCI), which also has a boring name.
Now, if there’s Wall Street would rather ignore besides toxic waste, it’s mortality. And SCI does burials.

(8) It’s a No-Growth Industry

I prefer to invest in a low-growth industry like plastic knives and forks, but only if I can’t find a no-growth industry like funerals. That’s where the biggest winners are developed.
That’s because for every single product in a hot industry, there are a thousand MIT graduates trying to figure out how to make it cheaper in Taiwan.
In a no-growth industry, especially one that’s boring and upsets people, there’s no problem with competition.

(9) It’s Got a Niche

What makes a rock pit valuable is that nobody else can compete with it. The nearest rival owner from two towns over isn’t going to haul his rocks into your territory because the trucking bills would eat up all his profit.
There’s no way to overstate the value of exclusive franchises to a company or its shareholders.
Once you’ve got an exclusive franchise in anything, you can raise prices.
I always look for niches. The perfect company would have to have one.
Drug companies and chemical companies have niches—products that no one else is allowed to make.
Brand names such as Robitussin or Tylenol, Coca-Cola or Marlboro, are almost as good as niches.

(10) People Have to Keep Buying It

I’d rather invest in a company that makes drugs, soft drinks, razor blades, or cigarettes than in a company that makes toys.

(11) It’s a User of Technology

Instead of investing in technology companies that struggle to survive in an endless price war, why not invest in a company that benefits from the price war—such as Automatic Data Processing?

(12) The Insiders Are Buyers

There’s no better tip-off to the probable success of a stock than that people in the company are putting their own money into it.
But there’s only one reason that insiders buy: They think the stock price is undervalued and will eventually go up.

(13) The Company Is Buying Back Shares

Buying back shares is the simplest and best way a company can reward its investors.
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The common alternatives to buying back shares are (1) raising the dividend, (2) developing new products, (3) starting new operations, and (4) making acquisitions.,

Chapter Nine: Stocks I’d Avoid

If I could avoid a single stock, it would be the hottest stock in the hottest industry, the one that gets the most favorable publicity, the one that every investor hears about in the car pool or on the commuter train—and succumbing to the social pressure, often buys.
High growth and hot industries attract a very smart crowd that wants to get into the business. Entrepreneurs and venture capitalists stay awake nights trying to figure out how to get into the act as quickly as possible.
In business, imitation is the sincerest form of battery.
Negative-growth industries do not attract flocks of competitors.

Beware the Next Something

Another stock I’d avoid is a stock in a company that’s been touted as the next IBM, the next McDonald’s, the next Intel, or the next Disney, etc.

Beware the Whisper Stock

Whisper stocks have a hypnotic effect, and usually the stories have emotional appeal.
This is where the sizzle is so delectable that you forget to notice there’s no steak.
I’ve lost money on every single one I’ve ever bought.
When in doubt, tune in later.
IPOs of brand-new enterprises are very risky because there’s so little to go on.

Beware the Stock With the Exciting Name

As often as a dull name in a good company keeps early buyers away, a flashy name in a mediocre company attracts investors and gives them a false sense of security.

Chapter Ten: Earnings, Earnings, Earnings

Although it’s easy to forget sometimes, a share of stock is not a lottery ticket. It’s part ownership of a business.
When you buy a stock in a fast-growing company, you’re really betting on its chances to earn more money in the future.
A quick way to tell if a stock is overpriced is to compare the price line to the earnings line.

Future Earnings

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.

Chapter Eleven: The Two-Minute Drill

Before buying a stock, I like to be able to give a two-minute monologue that covers the reasons I’m interested in it, what has to happen for the company to succeed, and the pitfalls that stand in its path.

Checking Out La Quinta

Asking about the competition is one of my favorite techniques for finding promising new stocks.
Nothing could be more bullish than begrudging admiration from a rival.
I always try to learn something new from every investment conversation. From Mr. Biegler I learned that hotel and motel customers routinely pay one one-thousandth of the value of a room for each night’s lodging.

Bildner’s Alas

Successful cloning is what turns a local taco joint into a Taco Bell or a local clothing store into The Limited, but there’s not point buying the stock until the company has proven that the cloning works.
If the prototype’s in Texas, you’re smart to hold off buying until the company shows it can make money in Illinois or in Maine.
It’s never too late not to invest in an unproven enterprise.

Chapter Twelve: Getting the Facts

…I can’t imagine anything that’s useful to know that the amateur investor can’t find out.
What you can’t get from the annual report you can get by asking your broker, by calling the company, by visiting the company, or by doing some grassroots research, also known as kicking the tires.

Calling the Company

If you have specific questions, the investor relations office is a good place to get the answers.
In the unlikely event that the investor relations office gives you the cold shoulder, you can tell them that you own 20,000 shares and are trying to decide whether to double your position. Then casually mention that your shares are held in “street name.”
Before you call the company, it’s advisable to prepare your questions…
Even if you have no script, you can learn something by asking two general questions: “What are the positives this year?” And “What are the negatives?”
In the course of my research I find something out of the ordinary in about one out of every ten calls.
When looking at the same sky, people in mature industries see clouds where people in immature industries see pie.
You can almost assume that the more tenuous the enterprise, the more optimistic the rhetoric is going to be.

Visiting Headquarters

When I visit a headquarters, what I’m really after is a feel for the place.
Rich earnings and a cheap headquarters is a great combination.

Kicking the Tires

I’ve continued to believe that wandering through the stores and tasting things is a fundamental investment strategy.
The more homogeneous the country is, the more likely that what’s popular in one shopping center will also be popular in all the other shopping centers.

Chapter Thirteen: Some Famous Numbers

Percent of Sales

When I’m interested in a company because of a particular product—such as L’eggs, Pampers, Bufferin, or Lexan plastic—the first thing I want to know is what that product means to the company in question.

The Price/Earnings Ratio

In general, a p/e ratio that’s half the growth rate is very positive, and one that’s twice the growth rate is very negative.

The Cash Position

Nevertheless, it’s always advisable to check the cash position (and the value of related businesses) as part of your research.

The Debt Factor

If there’s enough cash…to cover short-term debt, then you don’t have to worry about short-term debt.
A normal corporate balance sheet has 75 percent equity and 25 percent debt.
More than anything else, it’s debt that determines which companies will survive and which will go bankrupt in a crisis.
Bank debt (the worst kind…) is due on demand. It doesn’t have to come from a bank. It can take the form of commercial paper, which is loaned from one company to another for short periods of time.
Funded debt (the best kind, from the shareholder’s point of view) can never be called in no matter how bleak the situation, as long as the borrower continues to pay interest.
Funded debt usually takes the form of regular corporate bonds with long maturities.

Book Value

…stated book value often bears little relationship to actual worth of the company.
There’s another unwritten rule here: The closer you get to a finished product, the less predictable the resale value.

More Hidden Assets

Companies that own natural resources—such as land, timber, oil, or precious metals—carry those assets on their book at a fraction of the true value.
So do patented drugs, cable franchises, TV and radio stations—all are carried at original cost, then depreciated until they, too, disappear from the asset side of the balance sheet.
If you pay $450 million for a TV station worth $2.5 million on the books, the accounts call the extra $475.5 million “goodwill.”
Goodwill is carried on the new books as an asset, and eventually it, too, will be written off.
Finally, tax breaks turn out to be a wonderful hidden asset in turnaround companies.

Cash Flow

…I prefer to invest in companies that don’t depend on capital spending. The cash that comes in doesn’t have to struggle against the cash that goes out.
…a $20 stock with $2 per share in annual cash flow has a 10-to-1 ratio, which is standard. A ten percent return on cash corresponds nicely with the ten percent that one expects as a minimum reward for owning stocks long term.
A $20 stock with a $4-per-share cash flow gives you a 20 percent return on cash, which is terrific.
And if you find a $20 stock with a sustainable $10-per-share cash flow, mortgage your house and buy all the shares you can find.
But if cash flow is ever mentioned as a reason you’re supposed to buy a stock, make sure that it’s free cash flow that they’re talking about.
Free cash flow is what’s left over after the normal capital spending is taken out.
Dedicated asset buyers look for this situation: a mundane company going nowhere, a lot of free cash flow, and owners who aren’t trying to build up the business.

Inventories

With a manufacturer or a retailer, an inventory buildup is usually a bad sign. When inventories grow faster than sales, it’s a bad red flag.

Pension Plans

These plans are absolute obligations to pay—like bonds.

Growth Rate

If you can find a business that can get away with raising prices year after year without losing customers (an addictive product such as cigarettes fills the bill), you’ve got a terrific investment.
One more thing about growth rate: all else being equal, a 20-percent grower selling at 20 times earnings (a p/e of 20) is a much better buy than a 10-percent grower selling at 10 times earnings (a p/e of 10).

The Bottom Line

…the average profit margin on the corporate dollar..has been closer to 5 percent.
…on the upswing, as business improves, the companies with the lowest profit margins are the biggest beneficiaries.
What you want, then, is a relatively high profit-margin in a long-term stock that you plan to hold through good times and bad, and a relatively low profit margin in a successful turnaround.

Chapter Fourteen: Rechecking the Story

Every few months it’s worthwhile to recheck the company story.
With fast growers, especially, you have to ask yourself what will keep them growing.
There are three phases to a growth company’s life: the start-up phase, during which it works out the kind in the basic business; the rapid expansion phase, during which it moves into new markets; and the mature phase, also known as the saturation phase…
The first phase is the riskiest for the investor…The second phase is he safest, and also where the most money is made…The third phase is the most problematic…

Chapter Fifteen: The Final Checklist

Stocks in General

—The p/e ratio. Is it high or low for this particular company and for similar companies in the same industry.
—The percentage of institutional ownership. The lower the better.
—Whether insiders are buying and whether the company itself is buying back its own shares. Both are positive signs. (The only category where earnings may not be important is in the asset play.)
—The record of earnings growth to date and whether the earnings are sporadic or consistent.
—Whether the company has a strong balance sheet or a weak balance sheet (debt-to-equity ratio) and how it’s rated for financial strength.
—The cash position. With $16 in net cash [per share], I know Ford is unlikely to drop below $16 a share. That’s the floor on the stock.

Cyclicals

The worse the slump in the auto industry, the better the recovery.

Fast Growers

—What the growth rate in earnings has been in recent years. (My favorites are the ones in the 20 to 25 percent range. I’m wary of companies that seem to be growing faster than 25 percent).
—That the company has duplicated its successes in more than one city or town, to prove that expansion will work.
—That the company still has room to grow.
—Whether the stock is selling at a p/e ratio at or near the growth rate.
—Whether the expansion is speeding up…or slowing down.
—The few institutions own the stock and only a handful of analysts have ever heard of it. With fast growers on the rise this is a big plus.

Here are some pointers from this section:

Understand the nature of the companies you own and the specific reasons for holding the stock. (“It is really going up!” Doesn’t count.)
By putting your stocks into categories you’ll have a better idea of what to expect from them.
Big companies have small moves, small companies have big moves.
Consider the size of a company if you expect it to profit from a specific product.
Look for small companies that are already profitable and have proven that their concept can be replicated.
Be suspicious of companies with growth rates of 50 to 100 percent a year.
Avoid hot stocks and hot industries.
Just trust diversifications, which usually turn out to be diworseifications.
Long shots almost never pay off.
It's better to miss the first move in in stock and wait to see if a company’s plans are working out.
People get incredibly valuable fundamental information from their jobs that mean reach the professionals for months even years.
Separate all stock tips from the tipper, even if the tipper is very smart, very rich, and his or her last tip went up.
Some stock tips, especially from an expert in the field, may turn out to be quite valuable. However, people in the paper industry normally give out tips on drugs stocks, and people in the healthcare field never run out of tips on the takeovers in the paper industry.
Invest in simple companies that appear dull, mundane, out of favor, and haven't caught the fancy of Wall Street.
Moderately fast growers (20 to 25 percent) in nongrowth industries are ideal investments.
Look for companies with niches.
When purchasing depressed stocks in trouble companies, seek out the ones with the superior financial positions and avoid the ones with loads of bank debt.
Companies that have no debt can't go bankrupt.
Managerial ability may be important, but it's quite difficult to assess. Base your purchases on the company’s prospects, not on the president’s résumé or speaking ability.
A lot of money can be made when a troubled company turns around.
Carefully consider the price-earnings ratio. If the stock is grossly over priced, even if thing else goes right, you won't make any money.
Find a storyline to follow as a way of monitoring a company’s progress.
Look for companies that consistently buy back their own shares.
Study the dividend record of a company over the years and also how its earnings have fared in past recessions.
Look for companies with little or no institutional ownership.
All else being equal, favor companies in which management has a significant personal investment over companies run by people that benefit only from their salaries.
Insider buying is a positive sign, especially when several individuals are buying at once.
Devote at least an hour a week to investment be research. Adding up your dividends and figuring out your gains and losses doesn't count.
Buying stocks based on stated book value alone is dangerous and illusory. It's real value that counts.
When in doubt, tune in later.
Invest at least as much time and effort in choosing a new stock as you would in choosing a new refrigerator.

Part III: The Long-Term View

Chapter Sixteen: Designing a Portfolio

It's only by sticking to a strategy through good years and bad that you'll maximize your long-term gains.
… to be able to save up picking your own stocks is worth the effort, you are to be getting a 12-15 percent return, compound do over time. That's after all the costs in commissions have been subtracted, and all dividends and other bonuses have been added.
… the more he trades, the harder it's going to be to outperform the index funds or any other funds.
In my view it's best to own any stocks as there are situations in which: (a) you’ve got an edge; and (b) you uncovered and exciting prospect that passes all the tests research. Maybe that's a single stock, or maybe it's a dozen stocks.
There is no use diversifying into unknown companies just for the sake of diversity. A foolish diversity is the hobgoblin of small investors.
In small portfolios I'd be comfortable owning between three and ten stocks.

(1) If you are looking for tenbaggers, the more stocks your own the more likely that one of them will become a tenbagger.

(2) I never put more than 30-40 percent of my fund’s assets into growth stocks.

I normally keep 10-20 percent or so in the stalwarts, another 10-20 percent or so in the cyclicals, and the rest in turnarounds.

Spreading It Around

You are right [about cyclicals], you can get your tenbaggers here, and if you are wrong, you can lose 80-90 percent.

Watering the Weeds

My idea is to stay in the market forever, and to rotate stocks depending on the fundamental situations.
I think if you decide that a certain amount you've invested in the stock market will always be invested in the stock market, you'll save yourself a lot of mistimed moves and general agony.
Some people automatically sell the “winners”—stocks that go up—and hold on to their “losers”—stocks that go down—which is about as sensible as pulling out the flowers and watering the weeds.
Others automatically so their losers and hold onto their winners, which doesn't work out much better. Both strategies fail because they’re tied to the current movement of the stock price as an indicator of the company’s fundamental value.
And if you can't convince yourself “When I'm down 25 percent, I’m a buyer” and banish forever the fatal thought “when I’m down 25 percent, I'm a seller,” then you'll never make a decent profit in stocks.
Stick around to see what happens—as long as the original story continues to make sense, or gets better—and you'll be amazed at the results in several years.

Chapter Seventeen: The Best Time to Buy and Sell

The best time to buy stocks will always be the day you've convinced yourself you’ve found solid merchandise at a good price—the same as at the department store.
The second [time to buy bargains] is during the collapses, drops, burps, hiccups, and freefalls that occur in the stock market every few years. If you can summon the courage and presence of mind to buy during these scary episodes when your stomach says “sell,” you'll find opportunities that you wouldn't have thought you’d ever see again.
One of the biggest troubles with stock market advice is that good or bad it sticks in your brain. You can't get it out of there, and someday, sometime, you may find yourself reacting to it.
It's normally harder to stick with a winning stock after the price goes up then it is to believe in it after the price goes down. These days if I feel there’s a danger of being faked out, I try to review the reasons why I bought in the first place.

When to Really Sell

As it turns out, if you know why you bought a stock in the first place, you'll automatically have a better idea of when to say good-bye to it.

Chapter Eighteen: The Twelve Silliest (and Most Dangerous) Things People Say About Stock Prices

If It’s Gone Down This Much Already, It Can’t Go Much Lower

There's simply no rule that tells you how low a stock can go in principle.

You Can Always Tell When a Stock’s Hit Bottom

It's normally good idea to wait until the knife hits the ground and sticks, then vibrates for a while and settles down before you try to grab it.

If It’s Got This High Already, How Can It Possibly Go Higher?

The point is, there's no arbitrary limit to how high the stock can go, and if the story is still good, the earnings continue to improve, and the fundamentals haven't changed, “can’t go much higher” is a terrible reason to snub a stock.

It’s Only $3 a Share: What Can I Lose?

I put in 20 years in the business before it finally dawned on me that whether a stock costs $50 a share or $1 a share, if it goes to zero you still lose everything.

Eventually They Always Come Back

It’s Always Darkest before the Dawn

There's a very human tendency to believe that things that have gotten a little bad can't get any worse.

When It Rebounds to $10, I’ll sell

Whenever I’m tempted to fall for this one, I remind myself that unless I am confident enough in the company to buy more shares, I ought to be selling immediately.

What Me Worry? Conservative Stocks Don’t Fluctuate Much

Companies are dynamic, and prospects change. There simply isn't a stock you can own that you can afford to ignore.

It’s Taking Too Long for Anything to Ever Happen

If you give up on a stock because you're tired of waiting for something wonderful to happen, then something wonderful will begin to happen the day after you get rid of it.
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… I am accustomed two hanging around with the stock when the price is going nowhere. Most of the money I make is in the third or fourth year that I've owned something…
It takes remarkable patients to hold on to a stock in the company that excites you, but which everybody else seems to ignore. You begin to think everybody else is right and you are wrong. But where the fundamentals are promising, patience is often rewarded…

Look at All the Money I’ve Lost: I Didn’t Buy it!

The worst part about this kind of thinking is that it leads people to try to play catch up by buying stocks they shouldn’t buy, if only to protect themselves from losing more than they've already “lost.” This usually results in real losses.

I Missed That One, I’ll Catch the Next One

In most cases it's better to buy the original good company at a high price than it is to jump on the “next one” add a bargain price.

The Stock’s Gone Up, So I Must Be Right, or…The Stock’s Gone Down So I Must Be Wrong

If I had to choose a great single fallacy of investing, it's believing that when a stock’s price goes up, then you've made a good investment.
A stock’s going up or down after you buy it only tells you that there was somebody who was willing to pay more—or less—for the identical merchandise.

Chapter Nineteen: Options, Futures, and Shorts

I've never bought a future nor an option in my entire career, and I can’t imagine buying one now.
Warren Buffet thinks that stock futures and options ought to be outlawed, and I agree with him.

Shorting A Stock

Yes you've shorted something that's going up, you begin to realize that there's nothing to stop it from going to infinity.
Before you shortly stock, you have to have more than a conviction that the company is falling apart. You have to have the patients, the courage, and the resources to hold on if the stock price doesn't go down—or worse, goes up.

Chapter Twenty: 50,000 Frenchmen Can Be Wrong

…the market, like individual stocks, can move in the opposite direction of the fundamentals over the short term…
You can wait for out-of-favor stocks to hit the crazy low prices, then buy them.
Will you invest in stocks, do you have a basic faith in human nature, in capitalism, in the country at large, and in future prosperity in general.

If you take anything with you at all from this last section, I hope you remember the following:

Sometime in the next, year, or three years, the market will decline sharply.
Market decline's are great opportuniti I don't have TV had enough TVes to buy stocks in companies you like. Corrections—Wall Street's definition of going down a lot—push outstanding companies to bargain prices.
Trying to predict the direction of the market over one year, or even two years, is impossible.
To come out ahead you don't have to be right all the time, or even a majority of the time.
The biggest winners are surprises to me, and takeovers are even more surprising. It takes years, months, to produce big results.
Different categories of stocks have different risks that rewards.
You can make serious money by compounding a series of 20-30 percent gains in stalwarts.
Stock prices often move in opposite directions from the fundamentals but long-term, the direction and sustainability of profits will prevail.
Just because the company is doing poorly doesn't mean it can't do worse.
Just because the price goes up doesn't mean you're right.
Just because the price goes down doesn't mean you're wrong.
Stalwarts with heavy institutional ownership and lots of Wall Street coverage that have outperform the market and are overpriced are due for a rest for a decline.
Buying a company with mediocre prospects just because the stock is cheap is a losing technique.
Selling an outstanding fast grower because its stock seems slightly overpriced is a losing technique.
Companies don't grow for no reason, nor do fast growers stay that way forever.
You don't lose anything by not owning a successful stock, even if it's a tenbagger.
A star does not know that you own it.
Don't become so attached to a winner that complacency sets in and you stop monitoring the story.
If a stock goes to zero, you lose just as much money where do you bought it at $50, $25, Five dollars, or $2—everything you invested.
By careful pruning and rotation based on fundamentals, you can improve your results. When stocks are out of line with reality and better alternatives exist, sell them and switching to something else.
When favorable cards turn up, add to your bet, and vice versa.
You won't improve results by pulling out the flowers and watering the weeds.
If you don't think you can beat the market, then buy a mutual fund and save yourself a lot of extra work and money.
There is always something to worry about.
Keep an open mind to new ideas.
You don't have to “kiss all the girls.” I've missed my share of tenbaggers and it hasn't kept me from beating the market.

Epilogue: Caught with My Pants Up

I am always fully invested. It's a great feeling to be caught with your pants up.