Rajat Negi

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One Up on Wall Street mainly focuses on How to use common sense in investing and in this book author talked about his journey of stock picking from its surrounding. he looks to the company not only from the consumer’s perspective but also from the investor’s perspective.

Now if you also want to pick stocks just like Peter Lynch, you have to be a good observer so that you can grab the opportunity. This doesn’t mean that you have to invest in every company whose products or services you use. In the article, I have also given my inputs and some investing principles. 

Summary of the Book One Up on Wall Street

About Author: 

Peter Lynch is the vice chairman of Fidelity Management & Research Company, the investment adviser arm of Fidelity Investments, and a member of the Fidelity Magellan fund, which was the highest performing fund in the world from 1977 to 1990 under his direction. He is the co-author of several best-selling books. A beginner’s tutorial on the fundamentals of investing and business, titled ” Learn to Earn” and “Beating the street“.  He is based in Boston.

John Rothchild has written for Time, Fortune, Worth, and a variety of other publications. The author of a new york times book review He is also the co-author, with Peter Lynch, of the book, Beat the Street and Learn to Earn. He was born and raised in Miami Beach, Florida.

Introduction to Millennium Edition

Here author talked about his life after stepping down from Magellan, now he has become an Individual Investor, just like Angel Investor. When he was associated with the fund he discovered most of the stocks through eating, shopping, and traveling. He suggested investing only in that company whose earnings are justifying the stock price. Don’t focus on the stock price, it is the least useful information that one can track. If you are focusing on stock price every day, it is a distraction and you are wasting your time. Focus on the company’s earnings. 

Never judge a stock by its stock price. 

He also suggested that a leader company will always acquire almost half of the market share in the corresponding sector. or industry. 

Example:- Britannia and Parle have acquired almost 60-70% market share in the biscuit market. 

Don’t compare the stock prices of two peers’ companies, instead of this compare their earnings. this will give a better picture. 

Market Cap is the best way to judge a stock. not the price. The mathematical expression of market cap is as follows:

Market Cap = No. of Shares (Outstanding) * Current Market Price

The question you need to ask yourself.

Q1. What is the target market cap of this company? ( It should be bounded by the time.)

Q2. are the company’s financial statements able to convince me?

Q3. Is the company’s earning justifying the company’s market cap?

While talking about investing in internet business. he talked about three strategies to get an extravagant market cap. 

  • Pick and Shovel Strategy:- Most would-be gold miners lost money during the gold rush, but those who sold them picks, shovels, tents, and blue jeans profited handsomely.

Example:- With more increase in the market cap of Indian street food, we could see a rise in the market cap of the paper plates industry too. 

  • Free Internet Play:- When an online firm is embedded in a non-internet corporation with actual earnings and a fair stock price, this is referred to as a hybrid model.

Example:- eCommerce business operates on the internet but its tangible inventory is kept in the non-internet world.  

  • Tangential Benefit:- This is where leveraging the Internet to decrease expenses, simplify processes, become more efficient, and therefore more lucrative helps businesses.

Example:- In most of the retail stores, scanners at the counters are helping the management of the business in the subject of inventory. 

Never invest in any company before you’ve done the homework on the company’s earnings prospects. financial condition, competitive position, expansion plans, and so forth. The stock can go to 0, but it has an upside of infinity scale. You don’t need to make money on every stock you pick. In the author’s experience, six out of ten winners in a portfolio can produce satisfying results. 

Day Trading is like CASINO with Tax and Legal documents. 

Stocks aren’t lottery tickets, so keep that in mind. Every share has a firm tied to it. Companies either improve or deteriorate. A company’s stock will decline if it performs worse than expected. A company’s stock will grow if it performs better. You will perform well if you hold solid firms that continue to grow their earnings. Since WWII, corporate earnings have increased by a factor of 55, and the stock market has increased by a factor of 60. That hasn’t changed through four wars, nine recessions, eight presidents, and one impeachment.

 

Prologue: A Note From Ireland

The author was enjoying vacation with his wife and he got a call from his fund office. his associates told him about downsets of the market. 

Points to Learn: 

  • Ignore Ups & Downs in the market. Fall is temporary, Rise is permanent. 
  • Have Some good stocks in your watchlist which you can buy at every dip.
  • When you sell in separation, you always sell cheap.
  • Allowing annoyances to destroy a good portfolio is not a smart idea.
  • Don’t let annoyances spoil your vacation.
  • Never travel overseas if your bank account is not allowing you.

Introduction: The Advantages of Dumb Money

In this section, the author suggested not to listen to professionals while picking stocks. Don’t take tips from TV.

Never follow any celebrity investor. What he/she is buying or what he/she is selling. Everyone has their own source of information.

  • Your hairstylist’s hairs are red in color, so by seeing him only. You don’t decide to color your hair too.  

Dumb money is only when it listens to SMART MONEY. 

You are already a consumer of a product or services by a Company, now you just have to its investor. You should always be a good listener. People actually refer or promote those things which they actually love. They promote those things even for free.

Example:- An iPhone user always recommends to use iPhone to those who are using android mobiles. 

Ask a Teen-ager, he/she will deny to Pizza by Dominos(Jubilant Food works).

Ask a women, she will never to the Jewellery(Titan).

Now I have divided this whole book in three sections.

Section 1: Preparing to Invest

For your results and consequences, don’t play the blame game. Be responsible for your gains and losses. 

The Making of a Stock picker

No one has the god-gifted talent of stock picking. In this section, the author has talked about his early life and education. At the age of eleven, he was hired as a caddy(who takes and handles the golf clubs of golfers). It is the initial stage where peter learned about investing. at the job of a caddy, his clients were presidents and CEOs of major corporations. Peter gave them golf clubs and in return, he got five stocks tips. fourth-grade math is needed to be a successful investor. You need to put logic and common sense in Investing. Look for the sale, Whether you are buying stocks or clothes. Don’t gamble in the market. 

The Wall Street Oxymoron’s

In this chapter, the author suggested investing in foreign companies, to get global exposure & currency appreciation. Peter also talked about several fund managers and individual investors. he himself said that the fund manager has a lot of restrictions to buy or sell the stock, as he is not managing his own money, he is managing people’s money so the minimum risk should be there. A fund manager can’t invest in a small company, there is a specific allocation for a fund manager for a specific stock, so if the fund manager has excess money to invest he generally picks Blue-chip stocks. 

“You will never lose your job losing client’s money on IBM”

IBM has established a company and if it goes down then people will blame IBM not the fund manager, but If the fund manager invests in a small company and it goes down then people will blame to Fund Manager. 

Since you are an individual investor you can play on your moves.

Is This Gambling, or What?

In this chapter, the author talked about Debt Investing(CDs, money-markets, Bonds) & Equity Investing. Interest rates are the forces behind the bonds. Sometimes investors’ mood swings correspond to market swings. Debt instruments are less risky than Equity but in Equity, you can create wonders. At last, peter preferred stocks over bonds with the complete management of risk. The overvalued market is the pillar of risky stocks. It is gambling only when you buy stocks without doing homework. 

Passing the Mirror Test

Before investing in the market, one should ask these questions to himself/herself. 

Q1. Do I own a House?

Here the author is showing the difference between investing in stocks and investing in real estate. Everyone is a good investment when it comes to real estate because each one of us does research and analysis while buying the house. Both are profitable when held for the long term. Liquidity is low in the case of houses but high in the case of stocks, only a click is needed. If you are doing research (checking facilities, locality, nearest market, nearest hospital) while buying a house then also research while buying stocks. No wonders people make money in the real estate market and lose money in the stock market. People choose months and years in the research of houses, but this is not the same as an investment. In fact, they spend more time shopping for a good microwave than shopping for a good investment. 

Q2. Do I need money?

If you need money incoming 2-4 years. Don’t invest that money in the stock market. Go for some others options but don’t invest them in the market. Only invest what you could afford to lose without that loss having any effect on your daily life in the foreseeable future. 

Q3. Do I have the personal qualities It takes to Succeed?

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 to mistakes, and the ability to ignore general panic are some qualities that are needed to become a successful investor. 

Is This a Good Market? Please Don’t Ask?

In this chapter, the author is saying that you should not do predictions for the market. To predict or forecast the earnings of the company. The author doesn’t believe in predicting markets. He believes in buying great companies- especially companies that are undervalued and/or underappreciated. whether the market index was down or up. Invest in companies, not in the market. Ignore short-term fluctuations. common stocks can give you uncommon profits or losses. 

Section 2: Picking Winners

The author discusses six types of stocks in this part, as well as the characteristics of corporations that should be avoided at all costs. How to keep track of corporations and some key metrics like cash, assets, debt, p/e ratio, profit margin, book value, dividends, and so on.

Stalking the Tenbagger

To get a Tenbagger, look around in your surroundings. Look for the company that develops reoccurring products and which can’t be neglected e.g. Pharma or Medicines. Having an edge gives you an extra advantage to find a ten-bagger.  Let’s say you work in Pharma Industry, so you’ll be among the first to realize the demand for a particular medicine. You already understand the industry and now you understand its economics. Sometimes companies may have incredible hidden assets that don’t show up on the balance sheet. You have to look for a situation where

Value of Assets/ No. of Share        >             Price of Stock in the open market. 

You have to figure out the stock before the market and analysts figure it out. 

I’ve Got It, I’ve Got It- What is It?

While analyzing stock do focus on Bottom Line (Profit/Net Income or PAT). If you found out stock from your surroundings, also check how their main product is impacting the bottom line of the company? You won’t hit jackpot in big companies, you are going to hit jackpot in small companies. try to categorize companies in these six categories. 

1. The Slow Growers

  • These types of stocks will grow just at the pace of the GDP of the country. This category will include mostly Bluechips Stocks. 
  • They come up with generous dividends and regular too. 

2. The Stalwarts

  • They grow faster than slow growers
  • You can expect 10-12% annual growth in earnings.
  • Here price at which you buy will depend on most. 

3. The Fast Growers

  • These are small aggressive new enterprises that grow at 20-25% annually. 
  • You can also get 10 to 40 baggers and even 200 baggers. 
  • While analyzing check healthy balance sheet who are making substantial profits. 

4. The Cyclicals

  • Sales rise and fall regularly.
  • Auto, airline, Steel, Tire, and Chemicals Companies are some examples.

5. The Turnarounds

  • These companies are less related to the general market. 
  • You have to be updated with the company to earn in this type of stock.

6. The Asset Plays

  • This type of company has something hidden in the form of assets.
  • To find the same you need to understand the section of reserves and surplus.
  • Go deep in Fixed Assets and Plant, machinery.

The Perfect Stock, What a Deal!

  • Look for the business that an idiot can run.
  • It sounds Dull, or even better, Ridiculous.
  • It does something Dull. (Pidilite Industries.) 
  • It does something disagreeable

Zydus Wellness is the only company that manufactures sugar-free. 

  • It’s a spinoff

It gets detached from its parent company. In the future, if Jio gets detached from Reliance Industries then Shareholders of Jio can hit jackpot. 

  • Look for that one which The Institutions Don’t own it and the analysts don’t follow it. 
  • The Rumors around: it’s involved with toxic waste and/ or the mafia.
  • Something is depressing about it.
  • It is no growing industry.
  • It’s Got a Niche. ( Royal Enfield ( Eicher Motors are in the specific business).
  • People have to keep buying it. The reoccurring product should be there. 
  • User of technology
  • Insiders are buying.
  • The company is buying backing its shares from the market. 

Stocks I’d Avoid 

  • Avoid that stock, which is hot in the market.
  • Beware the Next Something: Future Retail could be the next Walmart. and we know how Future Retail is suffering.
  • Avoid Diworseification: If a company is investing in another business, which is not related to its core business. then don’t invest in that.
  • Beware of Chinese Whisper Stocks. 
  • Beware the middleman
  • Beware the stock with the Exciting Name. 

Earnings, Earnings, Earnings

P/E Ratio: It can be thought of as the number of years it will take the company to mean back the initial amount. If P/E is high don’t think it is costly or something, try to check its earnings maybe the stock price is justifying the earnings. Also, compare it with Market P/E. Do focus on future earnings. 

The Two-Minute Drill

  • For Slow Growing Company: Check Dividends, Regular Earnings.
  • For Cyclical Company: Check Business Conditions, Inventories, Prices.
  •  In the game of Asset Play, you have to check the hidden assets of a company

Some Famous Numbers

  • Percentage of Sales:- Revenue, Sales, Top Line all are the same things but you have to look at how many portions of this have been extracted to profit. 
  • P/E Ratio: High or Low P/E both can be good if it is justifying the stock price and earnings.
  • Net Cash Position: to check net cash position you can do simple math. 

Net Cash = Cash + Share Capital – Debt 

  • The Debt Factor = You have to focus on this as it is going to each much part of sales in the form of interest. 
  • Dividends: Look for the relationship between dividends and regular dividends. 
  • Book Value: It will help you to find the hidden assets which are written in the book.
  • Cashflow: Stay away from that company that is generating negative cash flow.
  • Inventories: It is the most important factor in that business that is highly capital intensive. E.g Steel, automobiles, etc.
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Section 3: The Long-Term View

In this section, the author talks about the long-term view for maximum gains and most important when to sell and when to buy? How to Design a portfolio? 

Designing a Portfolio

25 or 30% annual returns are phenomenal, though it is difficult. In some years you will make only +10% or -20% but you have to accept this. While doing investment you should calculate all the costs. The objective is not to rely on a certain number of stocks, but to look into each one individually to see how excellent it is. Own as many stocks as there are situations in which you have got an edge. there is no magical number. In small-size portfolios, you can own between 3-10 stocks. If you’re hunting for a ten-bagger, the more stocks you have, the more probable one of them will turn into one. The more stocks you hold, the greater your ability to rotate and adjust them. To decrease risk, try to diversify your categories.

  • Slow Growers are low-risk, but low gain.
  • Stalwarts are low-risk, moderate gain.
  • Asset Plays are low risk and high-gain if you are sure of the value of the assets. you probably won’t lose much in this category of stocks. and if you are right you can hit jackpot. 
  • Cyclicals may be low-risk and high-gain or high-risk and low-gain, depending on how you enter the cycle? If you are right you can also get a ten-bagger in this category and if you are wrong you can lose 80-90%.
  • Turnarounds and Fast Growers include high-risk and high-gain categories, you could also lose all. 

Younger investors have more years to experiment and make errors before discovering the excellent stocks that launch careers in investing. Because conditions differ so much from person to person, any more examination of this topic will have to come from you. I plan to stay in the market indefinitely and rotate equities based on market conditions. I believe that once you decide to invest a specific amount in the stock market, you will always invest in the stock market. A better strategy, according to the author, is to rotate in and out of companies based on how the price has changed about the story. 

  • Exit in Stalwart after booking 40%. and replace it with another stalwart. 
  • Keep fast-growers if earnings are growing and the expansion is continuing, and no impediments have come up. Between two fast-growers you could sell some part of one and buy more of another one. 
  • Same rule for Cyclicals and Turnarounds. 

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. 

The Best Time to Buy and Sell

The greatest time to purchase stocks is when you’re confident you’ve found good products at a decent price. However, there are two periods when exceptional deals are more likely to be found. It’s no coincidence that the worst dips have occurred from October through December. The Second is during the collapse, drops, burps, hiccups, and freefalls that occur in the market for very few years. Sell before the interest rates go up or sell before the next recession. Don’t follow any celebrity investor. 

  • Slow Grower: you can sell a grower after booking 30-50% profit. The company has lost market share. No new products are developed. Recent acquisitions are there which are not related to their core business. Paid too much for acquisitions. 
  • Stalwart: Don’t expect ten-bagger from this category. Stock is at 15 p/e while industry p/e is 12-13. The growth rate is slowing down and they are maintaining profits by cutting costs. No insider buying happened in the last two years. 
  • Cyclical: competition businesses are also a bad sign for cyclical. The demand for products is slowing down. The company has doubled its capital spending. 
  • Fast Growers: Earnings Shrink, Company has stopped building new stores. old stores are looking shabby, people are not complaining about their stores. Top Executives are leaving the company. Sales are declining. 
  • Turnaround: Debt, which has declined for straight five years. Inventories are rising, also check Inventory turnover ratio. 
  • Asset Play: When the company has not performed with expected results. Although the share sells a discount to real market value, management has announced it will issue 10% more shares to help finances. 

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

  • It’s Gone Down This much already, It can’t go much lower. 

No rule tells you how low a stock can go in principle. always remember 0 is the last point.

  • You Can Always Tell When A Stock’s Hit Bottom

Trying to catch the bottom on a falling stock is like trying to catch a falling knife. 

  • If it’s gone this high already, how can it possibly go higher?

Listen to the market, the upside is infinity.

  • It’s only $3 a share: What Can I lose?

If it reaches 0. you will lose everything. 

  • Eventually, They Always Come Back

We all have a great example of Vodafone-Idea in the Indian Stock Market. Only Buses, Trains, and Girls will come back not the stocks.

  • It’s always darkest before the Dawn. 

sometimes it’s always darkest before the dawn, but then again, other times it’s always darkest before pitch black. 

  • When It Rebounds to $10, I’ll Sell

Stock will not move according to you, You have to decide according to stock. 

  • What do I worry about? Conservative Stocks Don’t fluctuate Much. 

We are in this world where you can’t predict another second. Forget about the stocks

  • It’s Taking Too Long for anything to ever happen. 

Don’t wait for something blindly. If you have done your homework then definitely when fundamentals are promising, your patience will be rewarded. 

  • Look at all the money I have lost: I didn’t buy it!
  • I missed that one, I’ll catch the next one. 

Everyone was saying this when they missed the covid correction. Do you think virus-like covid will come again?

  • The Stock’s Gone up, So I must be Right or The Stock’s Gone Down, So I must be wrong. 

You do not decide to decide whether you are right or wrong your analysis will decide whether you are right or wrong. The market is the Judge and You are the lawyer of your analysis. 

Options, Futures, and Shorts

In the future, you can lock a price for yourself on which you want to buy, and Options work on the principle if your stocks go down then you will get the difference amount. I believe it is the more complicated part of the market. 

Shorting is the same thing as borrowing something from the neighbor ( in this case, you don’t know names) and then selling the item and pocketing the money. Sooner or later you go out and buy the identical item and return it to the neighbors, and nobody is wiser. 

50,000 Frenchmen can be wrong.

A group of large people can be wrong, stick to your fundamentals and keep an open mind to new ideas. You don’t have to “kiss all girls.” I have missed my share of ten baggers and it hasn’t kept me beating the market. 

So If I have to summarize this book in just one or two lines. the following tweet would be my answer. 

Final Words

I hope, I gave you some insights into this book. You can also order this book and read it on your own. DO SHARE this article with your friends.

You can also read my previous articles

Till then 

Rajat Negi, Signing Off 

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Rajat Negi

Compound Investor (Who loves to talk to stock)
Digital Marketer (Who loves to make brands)

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