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One Up On Wall Street

One Up On Wall Street. Peter Lynch With John Rothchild Presented by: Kevin Clark. Facts About Lynch. Graduated from Wharton School of Business Managed Fidelity Magellan Fund (1977-1990) Most successful fund in the world Owns over 1400 stocks Believes in Fundamental, Bottom-Up Approach.

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One Up On Wall Street

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  1. One Up On Wall Street Peter Lynch With John Rothchild Presented by: Kevin Clark

  2. Facts About Lynch • Graduated from Wharton School of Business • Managed Fidelity Magellan Fund (1977-1990) • Most successful fund in the world • Owns over 1400 stocks • Believes in Fundamental, Bottom-Up Approach

  3. Lynch’s Initial Advice • Lynch’s mantra: Average investors can become experts in their own field and can pick winning stocks as effectively as Wall Street professionals by doing just a little research. • Don’t listen to the pros – “Oxymorons” • Observe your environment for potential winners

  4. Lynch’s Initial Advice • “Kick the tires” • Don’t worry about the market—it’s the stock! (bottom-up) • Pass the “mirror test” • Do I own a house? • Do I need the money? • Do I have the personal qualities it takes to succeed?

  5. Picking Winners • Look for “tenbaggers” • Stock that goes up ten-fold or 900% • When looking at the strength of a company’s product, judge the effects on the bottom line • Is the company too big? • Categorize

  6. Six Categories of Stocks • Slow Growers • Large companies growing around rate of GNP • Expect dividends • Stalwarts • Annual growth around 10 to 12% • Fast Growers • Small and aggressive with 20 to 25% annual growth • Plenty of risk • Expect stock appreciation, not dividends

  7. Six Categories of Stocks • Cyclicals • Profits and sales rise and fall in regular fashion • Timing is everything; detect the early signs • Turnarounds • No growers usually in Chapter 11 or on verge • Upside: Bargain stock with huge accounting loss carry- forward – Be careful here! • Asset Plays • Company sits on valuable asset that you know about but Wall Street doesn’t

  8. Picking Winners • One characteristic of the perfect company • “Any idiot can run this business.” • Look for companies with these characteristics: • It sounds dull—or, even better, ridiculous. • It does something dull. • It does something disagreeable.

  9. Picking Winners • It’s a spin-off. • The institutions don’t own it and the analysts don’t follow it. • There’s something depressing about it. • It’s a no-growth industry. • It’s got a niche. • People have to keep buying it.

  10. Picking Winners • It’s a user of technology. • The insiders are buyers. • The company is buying back shares. • What is the one single stock to avoid? • The hottest stock in the hottest industry

  11. Earnings, Earnings, Earnings • The number one factor when analyzing a company • P/E ratio • Use it to get hints about whether a stock is overvalued or undervalued. (relative to others in the same industry) • Think of it as the number of years it will take to earn back your initial investment. • Future earnings can’t be predicted • Find out how a company plans to increase earnings, then periodically check to see if plans are working.

  12. Assets, Assets, Debt • Important in determining the “health” of the company • Companies with a strong cash position versus relatively low debt will not go bankrupt in downturns

  13. Picking Winners: Conclusion • Understand the nature of the companies whose stock you own • Putting stocks into categories gives you a better idea of what to expect from them • Big companies have small moves, small companies have big moves • Avoid hot stocks in hot industries

  14. Picking Winners: Conclusion • Invest in companies that appear dull and haven’t caught the eye of Wall Street • Look for companies with good earnings growth • Moderately fast growers (20 to 25%) in non-growth industries ideal • Look for companies that buy back their own stock

  15. Picking Winners: Conclusion • Companies that have no debt can’t go bankrupt • Be patient—watched stocks never bolt • Invest at least as much time in choosing a new stock as you would in choosing a new refrigerator • Don’t take the “pros’” advice—YOU CAN DO IT ON YOUR OWN!

  16. Interesting “Lynchisms” Pertaining to FI635 • Lynch says Value Line is good for research, but he doesn’t pay attention to timeliness rankings • Lynch has never bought a future or an option in his investing career • Says he doesn’t understand them • 80 to 95% of all amateurs lose money

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