One Up On Wall Street: How To Use What You Already Know To Make Money In The Market by Peter LynchOne Up On Wall Street: How To Use What You Already Know To Make Money In The Market by Peter Lynch

One Up On Wall Street: How To Use What You Already Know To Make Money In The Market

byPeter Lynch

Paperback | April 3, 2000

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More than one million copies have been sold of this seminal book on investing in which legendary mutual-fund manager Peter Lynch explains the advantages that average investors have over professionals and how they can use these advantages to achieve financial success.

America’s most successful money manager tells how average investors can beat the pros by using what they know. According to Lynch, investment opportunities are everywhere. From the supermarket to the workplace, we encounter products and services all day long. By paying attention to the best ones, we can find companies in which to invest before the professional analysts discover them. When investors get in early, they can find the “tenbaggers,” the stocks that appreciate tenfold from the initial investment. A few tenbaggers will turn an average stock portfolio into a star performer.

Lynch offers easy-to-follow advice for sorting out the long shots from the no-shots by reviewing a company’s financial statements and knowing which numbers really count. He offers guidelines for investing in cyclical, turnaround, and fast-growing companies.

As long as you invest for the long term, Lynch says, your portfolio can reward you. This timeless advice has made One Up on Wall Street a #1 bestseller and a classic book of investment know-how.
Peter Lynch is vice chairman of Fidelity Management & Research Company -- the investment advisor arm of Fidelity Investments -- and a member of the Board of Trustees of the Fidelity funds. Mr. Lynch was portfolio manager of Fidelity Magellan Fund, which was the best performing fund in the world under his leadership from May 1977 to Ma...
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Title:One Up On Wall Street: How To Use What You Already Know To Make Money In The MarketFormat:PaperbackProduct dimensions:304 pages, 8.44 X 5.5 X 1 inShipping dimensions:304 pages, 8.44 X 5.5 X 1 inPublished:April 3, 2000Publisher:Simon & SchusterLanguage:English

The following ISBNs are associated with this title:

ISBN - 10:0743200403

ISBN - 13:9780743200400

Appropriate for ages: All ages

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Read from the Book

Introduction to the Millennium EditionThis book was written to offer encouragement and basic information to the individual investor. Who knew it would go through thirty printings and sell more than one million copies? As this latest edition appears eleven years beyond the first, I''m convinced that the same principles that helped me perform well at the Fidelity Magellan Fund still apply to investing in stocks today.It''s been a remarkable stretch since One Up on Wall Street hit the bookstores in 1989. I left Magellan in May, 1990, and pundits said it was a brilliant move. They congratulated me for getting out at the right time -- just before the collapse of the great bull market. For the moment, the pessimists looked smart. The country''s major banks flirted with insolvency, and a few went belly up. By early fall, war was brewing in Iraq. Stocks suffered one of their worst declines in recent memory. But then the war was won, the banking system survived, and stocks rebounded.Some rebound! The Dow is up more than fourfold since October, 1990, from the 2,400 level to 11,000 and beyond -- the best decade for stocks in the twentieth century. Nearly 50 percent of U.S. households own stocks or mutual funds, up from 32 percent in 1989. The market at large has created $25 trillion in new wealth, which is on display in every city and town. If this keeps up, somebody will write a book called The Billionaire Next Door.More than $4 trillion of that new wealth is invested in mutual funds, up from $275 billion in 1989. The fund bonanza is okay by me, since I managed a fund. But it also must mean a lot of amateur stockpickers did poorly with their picks. If they''d done better on their own in this mother of all bull markets, they wouldn''t have migrated to funds to the extent they have. Perhaps the information contained in this book will set some errant stockpickers on a more profitable path.Since stepping down at Magellan, I''ve become an individual investor myself. On the charitable front, I raise scholarship money to send inner-city kids of all faiths to Boston Catholic schools. Otherwise, I work part-time at Fidelity as a fund trustee and as an adviser/trainer for young research analysts. Lately my leisure time is up at least thirtyfold, as I spend more time with my family at home and abroad.Enough about me. Let''s get back to my favorite subject: stocks. From the start of this bull market in August 1982, we''ve seen the greatest advance in stock prices in U.S. history, with the Dow up fifteenfold. In Lynch lingo that''s a "fifteenbagger." I''m accustomed to finding fifteenbaggers in a variety of successful companies, but a fifteenbagger in the market at large is a stunning reward. Consider this: From the top in 1929 through 1982, the Dow produced only a fourbagger: up from 248 to 1,046 in a half century! Lately stock prices have risen faster as they''ve moved higher. It took the Dow 8 1/3 years to double from 2,500 to 5,000, and only 3 1/2 years to double from 5,000 to 10,000. From 1995-99 we saw an unprecedented five straight years where stocks returned 20 percent plus. Never before has the market recorded more than two back-to-back 20 percent gains.Wall Street''s greatest bull market has rewarded the believers and confounded the skeptics to a degree neither side could have imagined in the doldrums of the early 1970s, when I first took the helm at Magellan. At that low point, demoralized investors had to remind themselves that bear markets don''t last forever, and those with patience held on to their stocks and mutual funds for the fifteen years it took the Dow and other averages to regain the prices reached in the mid-1960s. Today it''s worth reminding ourselves that bull markets don''t last forever and that patience is required in both directions.On page 280 of this book I say the breakup of ATT in 1984 may have been the most significant stock market development of that era. Today it''s the Internet, and so far the Internet has passed me by. All along I''ve been technophobic. My experience shows you don''t have to be trendy to succeed as an investor. In fact, most great investors I know (Warren Buffett, for starters) are technophobes. They don''t own what they don''t understand, and neither do I. I understand Dunkin'' Donuts and Chrysler, which is why both inhabited my portfolio, I understand banks, savings-and-loans, and their close relative, Fannie Mae. I don''t visit the Web. I''ve never surfed on it or chatted across it. Without expert help (from my wife or my children, for instance) I couldn''t find the Web.Over the Thanksgiving holidays in 1997, I shared eggnog with a Web-tolerant friend in New York. I mentioned that my wife, Carolyn, liked the mystery novelist Dorothy Sayers. The friend sat down at a nearby computer and in a couple of clicks pulled up the entire list of Sayers titles, plus customer reviews and the one-to five-star ratings (on the literary Web sites, authors are rated like fund managers). I bought four Sayers novels for Carolyn, picked the gift wrapping, typed in our home address, and crossed one Christmas gift off my list. This was my introduction to Amazon.com.Later on you''ll read how I discovered some of my best stocks through eating or shopping, sometimes long before other professional stock hounds came across them. Since Amazon existed in cyberspace, and not in suburban mall space, I ignored it. Amazon wasn''t beyond my comprehension -- the business was as understandable as a dry cleaner''s. Also, in 1997 it was reasonably priced relative to its prospects, and it was well-financed. But I wasn''t flexible enough to see opportunity in this new guise. Had I bothered to do the research, I would have seen the huge market for this sort of shopping and Amazon''s ability to capture it. Alas, I didn''t. Meanwhile, Amazon was up tenfold (a "tenbagger" in Lynch parlance) in 1998 alone.Amazon is one of at least five hundred "dot.com" stocks that have performed miraculous levitations. In high-tech and dot.com circles, it''s not unusual for a newly launched public offering to rise tenfold in less time than it takes Stephen King to pen another thriller. These investments don''t require much patience. Before the Internet came along, companies had to grow their way into the billion-dollar ranks. Now they can reach billion-dollar valuations before they''ve turned a profit or, in some cases, before they''ve collected any revenues. Mr. Market (a fictional proxy for stocks in general) doesn''t wait for a newborn Web site to prove itself in real life the way, say, Wal-Mart or Home Depot proved themselves in the last generation.With today''s hot Internet stocks, fundamentals are old hat. (The term old hat is old hat in itself, proving that I''m old hat for bringing it up.) The mere appearance of a dot and a com, and the exciting concept behind it, is enough to convince today''s optimists to pay for a decade''s worth of growth and prosperity in advance. Subsequent buyers pay escalating prices based on the futuristic "fundamentals," which improve with each uptick.Judging by the Maserati sales in Silicon Valley, dot.coms are highly rewarding to entrepreneurs who take them public and early buyers who make timely exits. But I''d like to pass along a word of caution to people who buy shares after they''ve levitated. Does it make sense to invest in a dot.com at prices that already reflect years of rapid earnings growth that may or may not occur? By the way I pose this, you''ve already figured out my answer is "no." With many of these new issues, the stock price doubles, triples, or even quadruples on the first day of trading. Unless your broker can stake your claim to a meaningful allotment of shares at the initial offering price -- an unlikely prospect since Internet offerings are more coveted, even, than Super Bowl tickets -- you''ll miss a big percent of the gain. Perhaps you''ll miss the entire gain, since some dot.coms hit high prices on the first few trading sessions that they never reach again.If you feel left out of the dot.com jubilee, remind yourself that very few dot.com investors benefit from the full ride. It''s misleading to measure the progress of these stocks from the offering price that most buyers can''t get. Those who are allotted shares are lucky to receive more than a handful.In spite of the instant gratification that surrounds me, I''ve continued to invest the old-fashioned way. I own stocks where results depend on ancient fundamentals: a successful company enters new markets, its earnings rise, and the share price follows along. Or a flawed company turns itself around. The typical big winner in the Lynch portfolio (I continue to pick my share of losers, too!) generally takes three to ten years or more to play out.Owing to the lack of earnings in dot.com land, most dot.coms can''t be rated using the standard price/earnings yardstick. In other words, there''s no "e" in the all-important "p/e" ratio. Without a "p/e" ratio to track, investors focus on the one bit of data that shows up everywhere: the stock price! To my mind, the stock price is the least useful information you can track, and it''s the most widely tracked. When One Up was written in 1989, a lone ticker tape ran across the bottom of the Financial News Network. Today you can find a ticker tape on a variety of channels, while others display little boxes that showcase the Dow, the S&P 500, and so forth. Channel surfers can''t avoid knowing where the market closed. On the popular Internet portals, you can click on your customized portfolio and get the latest gyrations for every holding. Or you can get stock prices on 800 lines, pagers, and voice mail.To me, this barrage of price tags sends the wrong message. If my favorite Internet company sells for $30 a share, and yours sells for $10, then people who focus on price would say that mine is the superior company. This is a dangerous delusion. What Mr. Market pays for a stock today or next week doesn''t tell you which company has the best chance to succeed two to three years down the information superhighway. If you can follow only one bit of data, follow the earnings -- assuming the company in question has earnings. As you''ll see in this text, I subscribe to the crusty notion that sooner or later earnings make or break an investment in equities. What the stock price does today, tomorrow, or next week is only a distraction.The Internet is far from the first innovation that changed the world. The railroad, telephone, the car, the airplane, and the TV can all lay claim to revolutionary effects on the average life, or at least on the prosperous top quarter of the global population. These new industries spawned new companies, only a few of which survived to dominate the field. The same thing likely will happen with the Internet. A big name or two will capture the territory, the way McDonald''s did with burgers or Schlumberger did with oil services. Shareholders in those triumphant companies will prosper, while shareholders in the laggards, the has-beens, and the should-have-beens will lose money. Perhaps you''ll be clever enough to pick the big winners that join the exclusive club of companies that earn $1 billion a year.Though the typical dot.com has no earnings as yet, you can do a thumbnail analysis that gives a general idea of what the company will need to earn in the future to justify the stock price today. Let''s take a hypothetical case: DotCom.com. First, you find the "market capitalization" ("market cap" for short) by multiplying the number of shares outstanding (let''s say 100 million) by the current stock price (let''s say $100 a share). One hundred million times $100 equals $10 billion, so that''s the market cap for DotCom.com.Whenever you invest in any company, you''re looking for its market cap to rise. This can''t happen unless buyers are paying higher prices for the shares, making your investment more valuable. With that in mind, before DotCom.com can turn into a tenbagger, its market cap must increase tenfold, from $10 billion to $100 billion. Once you''ve established this target market cap, you have to ask yourself: What will DotCom.com need to earn to support a $100 billion valuation? To get a ballpark answer, you can apply a generic price/earnings ratio for a fast-growing operation -- in today''s heady market, let''s say 40 times earnings.Permit me a digression here. On page 170 I mention how wonderful companies become risky investments when people overpay for them, using McDonald''s as exhibit A. In 1972 the stock was bid up to a precarious 50 times earnings. With no way to "live up to these expectations," the price fell from $75 to $25, a great buying opportunity at a "more realistic" 13 times earnings.On the following page I also mention the bloated 500 times earnings shareholders paid for Ross Perot''s Electronic Data Systems. At 500 times earnings, I noted, "it would take five centuries to make back your investment, if the EDS earnings stayed constant," Thanks to the Internet, 500 times earnings has lost its shock value, and so has 50 times earnings or, in our theoretical example, 40 times earnings for DotCom.com.In any event, to become a $100 billion enterprise, we can guess that DotCom.com eventually must earn $2.5 billion a year. Only thirty-three U.S. corporations earned more than $2.5 billion in 1999, so for this to happen to DotCom.com, it will have to join the exclusive club of big winners, along with the likes of Microsoft. A rare feat, indeed.I''d like to end this brief Internet discussion on a positive note. There are three ways to invest in this trend without having to buy into a hope and an extravagant market cap. The first is an offshoot of the old "picks and shovels" strategy: During the Gold Rush, most would-be miners lost money, but people who sold them picks, shovels, tents, and blue jeans (Levi Strauss) made a nice profit. Today, you can look for non-Internet companies that indirectly benefit from Internet traffic (package delivery is an obvious example); or you can invest in manufacturers of switches and related gizmos that keep the traffic moving.The second is the so-called "free Internet play." That''s where an Internet business is embedded in a non-Internet company with real earnings and a reasonable stock price. I''m not naming names -- you can do your own sleuthing -- but several intriguing free plays have come to my attention. In a typical situation, the company at large is valued, say, at $800 million in today''s market, while its fledgling Internet operation is estimated to be worth $1 billion, before it has proven itself. If the Internet operation lives up to its promise, it could prove very rewarding -- that part of the company may be "spun off" so it trades as its own stock. Or, if the Internet venture doesn''t do well, the fact that it''s an adjunct to the company''s regular line of work protects investors on the downside.The third is the tangential benefit, where an old-fashioned "brick and mortar" business benefits from using the Internet to cut costs, streamline operations, become more efficient, and therefore more profitable. A generation ago, scanners were installed in supermarkets. This reduced pilferage, brought inventories under better control, and was a huge boon to supermarket chains.Going forward, the Internet and its handmaidens will create some great success stories, but at this point we''ve mostly got great expectations and inefficient pricing. Companies valued at $500 million today may triumph, while companies valued at $10 billion may not be worth a dime. As expectations turn to reality, the winners will be more obvious than they are today. Investors who see this will have time to act on their "edge."Back to Microsoft, a 100-bagger I overlooked. Along with Cisco and Intel, that high-tech juggernaut posted explosive earnings almost from the start. Microsoft went public in 1986 at 15 cents a share. Three years later you could buy a share for under $1, and from there it advanced eightyfold. (The stock has "split" several times along the way, so original shares never actually sold for 15 cents -- for further explanation, see the footnote on page 34.) If you took the Missouri "show me" approach and waited to buy Microsoft until it triumphed with Windows 95, you still made seven times your money. You didn''t have to be a programmer to notice Microsoft everywhere you looked. Except in the Apple orchard, all new computers came equipped with the Microsoft operating system and Microsoft Windows. Apples were losing their appeal. The more computers that used Windows, the more the software guys wrote programs for Windows and not for Apple. Apple was squeezed into a corner, where it sold boxes to 7-10 percent of the market.Meanwhile the box makers that ran Microsoft programs (Dell, Hewlett-Packard, Compaq, IBM, and so on) waged fierce price wars to sell more boxes. This endless skirmish hurt the box makers'' earnings, but Microsoft was unaffected. Bill Gates''s company wasn''t in the box business; it sold the "gas" that ran the boxes.Cisco is another marquee performer. The stock price is up 480-fold since it went public in 1990. I overlooked this incredible winner for the usual reasons, but a lot of people must have noticed it. Businesses at large hired Cisco to help them link their computers into networks; then colleges hired Cisco to computerize the dorms, Students, teachers, and visiting parents could have noticed this development. Maybe some of them went home, did the research, and bought the stock.I mention Microsoft and Cisco to add contemporary examples to illustrate a major theme of this book. An amateur investor can pick tomorrow''s big winners by paying attention to new developments at the workplace, the mall, the auto showrooms, the restaurants, or anywhere a promising new enterprise makes its debut. While I''m on the subject, a clarification is in order.Charles Barkley, a basketball player noted for shooting from the lip, once claimed he was misquoted in his own autobiography. I don''t claim to be misquoted in this book, but I''ve been misinterpreted on one key point. Here''s my disclaimer.Peter Lynch doesn''t advise you to buy stock in your favorite store just because you like shopping in the store, nor should you buy stock in a manufacturer because it makes your favorite product or a restaurant because you like the food. Liking a store, a product, or a restaurant is a good reason to get interested in a company and put it on your research list, but it''s not enough of a reason to own the stock! Never invest in any company before you''ve done the homework on the company''s earnings prospects, financial condition, competitive position, plans for expansion, and so forth.If you own a retail company, another key factor in the analysis is figuring out whether the company is nearing the end of its expansion phase -- what I call the "late innings" in its ball game. When a Radio Shack or a Toys "R" Us has established itself in 10 percent of the country, it''s a far different prospect than having stores in 90 percent of the country. You have to keep track of where the future growth is coming from and when it''s likely to slow down.Nothing has occurred to shake my conviction that the typical amateur has advantages over the typical professional fund jockey. In 1989 the pros enjoyed quicker access to better information, but the information gap has closed. A decade ago amateurs could get information on a company in three ways: from the company itself, from Value Line or Standard & Poor''s research sheets, or from reports written by in-house analysts at the brokerage firm where the amateurs kept an account. Often these reports were mailed from headquarters, and it took several days for the information to arrive.Today an array of analysts'' reports is available on-line, where any browser can call them up at will. News alerts on your favorite companies are delivered automatically to your e-mail address. You can find out if insiders are buying or selling or if a stock has been upgraded or downgraded by brokerage houses. You can use customized screens to search for stocks with certain characteristics. You can track mutual funds of all varieties, compare their records, find the names of their top ten holdings. You can click on to the "briefing book" heading that''s attached to the on-line version of The Wall Street Journal and Barron''s, and get a snapshot review of almost any publicly traded company. From there you can access "Zack''s" and get a summary of ratings from all the analysts who follow a particular stock.Again thanks to the Internet, the cost of buying and selling stocks has been drastically reduced for the small investor, the way it was reduced for institutional investors in 1975. On-line trading has pressured traditional brokerage houses to reduce commissions and transaction fees, continuing a trend that began with the birth of the discount broker two decades ago.You may be wondering what''s happened to my investing habits since I left Magellan. Instead of following thousands of companies, now I follow maybe fifty. (I continue to serve on investment committees at various foundations and charitable groups, but in all of these cases we hire portfolio managers and let them pick the stocks.) Trendy investors might think the Lynch family portfolio belongs in the New England Society of Antiquities. It contains some savings-and-loans that I bought at bargain-basement prices during a period when the S&Ls were unappreciated. These stocks have had a terrific run, and I''m still holding on to some of them. (Selling long-term winners subjects you to an IRS bear market -- a 20 percent tax on the proceeds.) I also own several growth companies that I''ve held since the 1980s, and a few since the 1970s. These businesses continue to prosper, yet the stocks still appear to be reasonably priced. Beyond that, I''m still harboring an ample supply of clunkers that sell for considerably less than the price I paid. I''m not keeping these disappointment companies because I''m stubborn or nostalgic. I''m keeping them because in each of these companies, the finances are in decent shape and there''s evidence of better times ahead.My clunkers remind me of an important point: You don''t need to make money on every stock you pick. In my experience, six out of ten winners in a portfolio can produce a satisfying result. Why is this? Your losses are limited to the amount you invest in each stock (it can''t go lower than zero), while your gains have no absolute limit. Invest $1,000 in a clunker and in the worst case, maybe you lose $1,000. Invest $1,000 in a high achiever, and you could make $10,000, $15,000, $20,000, and beyond over several years. All you need for a lifetime of successful investing is a few big winners, and the pluses from those will overwhelm the minuses from the stocks that don''t work out.Let me give you an update on two companies I don''t own but that I wrote about in this book: Bethlehem Steel and General Electric. Both teach a useful lesson. I mentioned that shares of Bethlehem, an aging blue chip, had been in decline since 1960. A famous old company, it seems, can be just as unrewarding to investors as a shaky start-up. Bethlehem, once a symbol of American global clout, has continued to disappoint. It sold for $60 in 1958 and by 1989 had dropped to $17, punishing loyal shareholders as well as bargain hunters who thought they''d found a deal. Since 1989 the price has taken another fall, from $17 to the low single digits, proving that a cheap stock can always get cheaper. Someday, Bethlehem Steel may rise again. But assuming that will happen is wishing, not investing.I recommended General Electric on a national TV show (it''s been a tenbagger since), but in the book I mention that GE''s size (market value $39 billion; annual profits $3 billion) would make it difficult for the company to increase those profits at a rapid rate. In fact, the company that brings good things to life has brought more upside to its shareholders than I''d anticipated. Against the odds and under the savvy leadership of Jack Welch, this corporate hulk has broken into a profitable trot. Welch, who recently announced his retirement, prodded GE''s numerous divisions into peak performance, using excess cash to buy new businesses and to buy back shares. GE''s triumph in the 1990s shows the importance of keeping up with a company''s story.Buying back shares brings up another import

Table of Contents


Contents

Introduction to the Millennium Edition

PROLOGUE: A Note from Ireland

INTRODUCTION: The Advantages of Dumb Money

PART I Preparing to Invest

1 The Making of a Stockpicker

2 The Wall Street Oxymorons

3 Is This Gambling, or What?

4 Passing the Mirror Test

5 Is This a Good Market? Please Don''t Ask

PART II Picking Winners

6 Stalking the Tenbagger

7 I''ve Got It, I''ve Got It -- What Is It?

8 The Perfect Stock, What a Deal!

9 Stocks I''d Avoid

10 Earnings, Earnings, Earnings

11 The Two-Minute Drill

12 Getting the Facts

13 Some Famous Numbers

14 Rechecking the Story

15 The Final Checklist

PART III The Long-term View

16 Designing a Portfolio

17 The Best Time to Buy and Sell

18 The Twelve Silliest (and Most Dangerous) Things People Say About Stock Prices

19 Options, Futures, and Shorts

20 50,000 Frenchmen Can Be Wrong

EPILOGUE: Caught with My Pants Up

ACKNOWLEDGMENTS

INDEX

From Our Editors

  Peter Lynch, the money-manager the Wall Street Journal branded "an investment prodigy," is the author of this classic guide for the novice investor. Learn from Lynch how to get the jump on Wall Street types by using information you already know about potentially successful companies and your place of employment to create a "tenbeggar" – stocks that appreciate tenfold or more and turn an average portfolio into a king's ransom. Besides One Up On Wall Street How to Use What You Already Know To Make Money on The Market, Lynch is also the author of Beating the Street.

Editorial Reviews

Anise C. Wallace The New York Times Mr. Lynch''s investment record puts him in a league by himself.