Monday, 21 July 2014

Review: One Up on Wall Street by Peter Lynch

One Up on Wall Street is an investing classic and a book that every small investor should read.  I first read this book when I was starting out on my investment journey and I re-read it again before writing this review.   If anything I liked this book more the second time around as I more information, more context and I was more used to investing in stocks.

Who is Peter Lynch?

When it comes to books on investing I think the author is incredibly important.  I like authors to have  track record in the real world of investments.  I would rather take advice from someone who has been there and done than in a very public and scrutinised way rather than those who say that they have earned significant returns using some strategy or another.

Peter Lynch has everything that I look for in an author even before I start reading his book.  His investments were incredibly public (he headed up the Magellan fund at Fidelity Investments) and his returns were spectacular over a long period of time (he averaged a return in excess of 25% between 1977 and 1990).

This book is all about teaching you how to beat Wall Street

I know that there are a hundred books which all claim to do this same thing but Peter Lynch's approach is both practical and insightful while at the same time not being overly simplistic.  Basically his formula for success for small investors is as follows:

  1. Know the weaknesses of Wall Street (or of large institutions generally)
  2. Don't try and beat them at their own game
  3. Use the information you personally have to give you an edge 
  4. Don't forget the fundamentals of the stock you are investing in
  5. Know the type of company you are investing in (fast growing, turnaround etc.) and tailor your investment in that company to suit (i.e. know when you should both buy and sell these companies
Obviously the book is much more detailed than what I've outlined above but it is incredibly insightful.  Although all the points above are important I really think that points 1 - 3 three are what set this book apart.  Most investment books will
teach you about analysing stocks and fundamental investment as well as how to think about buying and selling (although his explanations are particularly good) however most books do not teach you about how to find actual investment ideas.

Finding investment ideas is one of the hardest things about investing...

It is worth buying One Up on Wall Street just to have read Lynch's approach to finding investments.  He truly advocates the theory of 'investing in what you know'.  For example, if you get excited about a product (as a customer) and find that the product is sold out for a huge amount of time and that product contributes a significant amount of profit to the bottom line of it's parent and institutions have not noticed these trends because the sales results haven't been released yet...perhaps you have  story that is worth researching further.

This is in contrast to those investments where we have no special insight - for example I know nothing about health and biotechnology stocks but these are often the "hot stocks" that we are told to think about or invest in.  I am never going to be able to beat, or see trends, or spot issues in these stocks before other people and am always going to be behind the institutions on stocks like why would I invest in them.

One of the best things about the book is that is accepts complexity as part of investing

Far too many authors focus entirely on their success stories and do not write about the inherent complexity and uncertainty that comes with investing.  Peter Lynch not only talks about the complexity of investing he also talks about specific investments where he did not invest even though the signs were clear or where he invested on a specific theory which then went bad.

For example, Lynch does not just advocate finding a stock where you have an 'edge' or where you have noticed a trend.  That is just the first step.  He then walks you through working out whether
  1. The company is actually good value
  2. Whether the trend you notice is going to make a difference to the company at all
  3. When you should think about selling
However the complexity that he brings to his investing approach does not make it inaccessible.  I think the approach he takes to investing is one that even relatively new investors can use. 

This is one book that every investor should own

I really think that One Up on Wall Street is a book that every investor should own.  It is timeless - the principals that he wrote about in the early 90s still apply 20 years later and if anything it is easier to apply some of these principals today given the resources and information that is available to investors today for free (which were not available when he wrote the book).

Looking for something else?  Consider looking at my suggested (and my do not read) list of reading materials.

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