Wednesday, April 27, 2011

Best Passages from Peter Lynch's Beating the Street: Part 1

I just finished Peter Lynch's Beating the Street. While the stock picks are dated and not useful anymore, the insights into Lynch's stock thought process were invaluable. I'd like to share some of them with you by recording some of the passages I underlined:
  • [On retirement] there comes a point at which you have to decide wheter to become a slave to your net worth by devoting the rest of your life to increasing it or let what you've accumulated begin to serve you.
  • Unfortunately, buying stocks on ignorance is still a popular American pastime...When people discover they are no good at baseball or hockey, they put away their bats and their skates and they take up amateur golf or stamp collecting or gardening. But when people discover they are no good at picking stocks, they are likely to continue to do it anyway.
  • The stock market is the one place where the high achiever is routinely shown up.
  • A retired fund manager is qualified to give only investment advice, not spiritual advice.
  • Peter's Principle #3: Never invest in any idea you can't illustrate with a crayon.
  • IBM is an approved stock that everybody knows and a fund manager can't get into trouble for losing money on.
  • The key to making money in stocks is not to get scared out of them.
  • In dieting and in stocks, it is the gut and not the head that determines the results.
  • A successful investor does not let weekend worrying dictate his or her strategy.
  • Peter's Principle #4: You can't see the future through a rearview mirror.
  • [Successful investors] somehow manage to develop a disciplined approach to investing that enables us to block out our own distress signals.
  • If you don't buy stocks with the discipline of adding so much money a month to your holdings, you've got to find some other way to keep the faith.
  • Whenever I am confronted with doubts and despair about the current Big Picture, I try to concentrate on the Even Bigger Picture.
  • The Even Bigger Picture tells us that over the last 70 years, stocks have provided their owners with gains of 11 percent a year, on average, whereas Treasury bills, bonds, and CDs have returned less than half that amounts.
  • A successful stockpicker has the same relationship with a drop in the market as a Minnesotan has with freezing weather. You know it's coming, and you're ready to ride it out, and when your favorite stocks go down with the rest, you jump at the chance to buy more.
  • Whereas companies routinely reward their shareholders with higher dividends, no company in the history of finance, going back as far as the Medicis, has rewarded its bondholders by raising the interest rate on a bond. Bondholders aren't invited to annual meetings to see the slide shows, eat hors d'oeuvres, and get their questions answered, and they don't get bonuses when the issuers of the bonds have a good year. The most a bondholder can expect to get is his or her principal back, after its value has been shrunk by inflation.
  • People who sleep better at night because they own bonds and not stocks are susceptible to rude awakenings.
  • Here's a good strategy for convertible investing: buy into convertible funds when the spread between convertible and corporate bonds is narrow (say, 2 percent or less) and cut back when that spread widens.
  • Fund managers and athletes have this in common: they may do better in the long run if they're brough along slowly.
  • Peter's Principle #7: The extravagance of any corporate office is directly proportional to management's reluctance to reward the shareholders.
  • Flexibility is the key. There are always undervalued companies to be found somewhere.
  • I always ended these discussions [with company's management or investor relations] by asking: which of your competitors do you respect the most?
  • Small [caps] is not only beautiful, it also can be lucrative.
I think that's long enough for one post.