I postponed reading One Up On Wall Street: How To Use What You Already Know To Make Money In The Market for quite a while, mostly because I thought that being published in 1989 (which is nearly twenty years ago) it would barely be of much relevance today. What a mistake. If not timeless, the book is indeed a classical introduction to understanding how the stock market works and it is as insightful today as it was back then, a must read for investing novices.
First of all, it indeed gives insights as to how to use the things that you already know to get to understand and pick stocks. Secondly, it dismisses a number of widely shared prejudices and tackles head on the mistakes that amateur investors make not only in discovering companies and buying stock, but also in the process of running a portfolio, so it certainly helps a lot with getting more confident in believing in yourself in picking ‘winners’ and his famous ‘tenbaggers‘. Lynch is sort of condescending on the importance of technical analysis and strictly prefers fundamentals.
The two most important features of his approach, however, are that he categorizes the companies (and insists to approach the respective categories of stock differently) and that he gives much attention to the way the company maintains a narrative about itself.
The typology of companies includes six categories: Slow Growers, Stalwarts, Fast Growers, Cyclicals, Turnarounds, and Asset Plays. If one manages to assess today’s companies according to his classification, one can learn a lot about making the right choices.
In analyzing the behavior of companies Lynch does not stop at discovering and picking the stock, as most other investment books, but also traces what happens afterwards. I found the part of the book which discusses when to sell and what signs to look for in different types of stock in making this decision, of most interest. Here is what he says, for example, on the issue of when to sell a Fast Grower.
You could have sold Holiday Inn when it hit 40 times earnings and been confident that the party was over there, and you were right. When you saw a Holiday Inn franchise every twenty miles along every major U.S. highway, and then you traveled to Gibraltar and saw a Holiday Inn at the base of the rock, it had to be time to worry. Where else could they expand? Mars?
I admit it was this discussion that opened my eyes about Starbucks (SBUX): I had wondered if it was about time to sell off, and it helped me decide.
As a humanitarian who likes stories, however, I found Lynch’s insistence on checking the company’s ‘story’ most compelling. Throughout the book he has reproduced copies of the performance charts of some of the 1400 stocks he has owned over the years, with his observation comments on the behavior of the stock written all over. He maintains that a company adjusts its story to suit the performance as reflected in the numbers. What he recommends is ‘checking the story’ — first of all comparing if the claims correspond to the figures (and he gives you tips of giveaway signs of discrepancies between story and numbers) and then keeping on checking on a regular basis, to see if the story remains consistent and if it still corresponds to what you see on the balance and asset sheets. I loved that.
© Dina Iordanova
17 May 2008