Book Review: One Up On Wall Street by Peter Lynch

If Peter Lynch’s One Up On Wall Street : How To Use What You Already Know To Make Money In The Market doesn’t get you excited about stock picking, nothing will. Lynch has a penchant for making the mundane task of researching companies glamorous and exciting, which is ironic because his investment thesis comes through loud and clear: boring, easy-to-understand companies generally make the best investments. Lynch takes issue with the popular wisdom that the small individual investor can’t possibly compete with the pros. Au contraire, claims Lynch. The small investor has a huge advantage over the Wall Street analyst because he is also a consumer and able to pick up on popular trends long before they show up in the earnings numbers Wall Street obsesses over. Lynch gets especially excited when talking about the various 10, 20, or 30 baggers he’s bought throughout his career, which is Wall Street parlance for a stock that returns 10, 20, or 30 times your initial investment. Just one or two of these over an investing career can make a small investor very wealthy.

Ignore Hot Tips

Lynch fills an entire chapter on which stocks to avoid, but it can be summed up in one sentence: ignore hot stocks. Hot stocks in hot industries are generally well-followed by the street and so hyped that they have little chance of living up to their expectations (and lofty valuations). Boring companies, on the other hand, aren’t very popular on Wall Street because boring, old-economy stocks don’t generate excitement and don’t bring in hefty brokerage commissions. Investors are looking for the next big thing and Wall Street gives investors what they want. What motivation does your broker have to promote boring stocks that won’t generate commissions? None.

13 Attributes Of A Perfect Stock

Peter Lynch lays out 13 attributes the best potential investments tend to have in common. If you can check most of these off, you just might have uncovered a potential 10 bagger.

1. It Sounds Dull - The best investments have boring, non-descript, ugly names like Waste Management.
2. It Does Something Dull - A bottle cap manufacturer, on average, has better investment potential than a hot biotech company because expectations tend to be much lower.
3. It Does Something Disagreeable - Nobody wants to think about operating a landfill or picking up dumpsters, which is too bad because taking out the trash is very, very profitable. If it’s something nobody wants to do, chances are you can make a pretty penny having people pay YOU to do it.
4. It’s a Spin-off - Spin-offs often make very profitable investments. For more on why spin-offs consistently make good investments, I highly recommend Joel Greenblatt’s horribly-titled yet excellent book on special-situation investing, You Can Be a Stock Market Genius: Uncover the Secret Hiding Places of Stock Market Profits .
5. Institutions Don’t Own It Yet - It’s much easier to find a bargain in a stock not widely owned by large institutions because that means not many analysts are following it.
6. It’s In A Depressing Industry - This goes along with number 3: nobody likes to think about handling toxic waste of manufacturing coffins for babies. But just because a company does something depressing doesn’t mean it’s not highly profitable.
7. Bad Rumors Abound - Waste Management allegedly had ties to the mafia which scared off investors. Fortunately, the mafia story faded away but the profits didn’t.
8. It’s Not In A Growth Industry - Stocks in growth industries tend to be over-valued. The domestic cigarette industry is shrinking by about 1% per year, on the other hand, and Phillip Morris has been one of the top-performing stocks over the past 40 years.
9. It’s In A Niche - Niche players usually have less competition than companies in more general industries.
10. People Have To Keep Buying It - Stop shaving for a week. What happens? You look horrible, lose your job, and your wife runs off with the pool boy. To keep from losing your job and having your wife run off with the pool boy, you have to keep buying razor blades so you can keep shaving. Brilliant.
11. It’s A User Of Technology - Personal computer companies like Dell, IBM, and HP compete endlessly as computer prices spiral downward and depress profit margins. Why not invest in a company that benefits from the price war instead of the company involved in it? Companies in industries heavily-invested in technology are also much more resistant to cheap foreign competition.
12. Insiders Are Buying - This one is a no-brainer. The CEO is in as good a position as anybody to know the direction of future profits. If he’s buying like there’s no tomorrow, you have to stop and ask yourself what he knows that you don’t. Ditto if he’s selling.
13. The Company Is Buying Back Shares - Buying back shares is a simple, shareholder friendly way to reward investors. You want to invest in a company that treats its owners with respect and is a good steward of shareholder capital.

I can’t recommend this book enough. One Up On Wall Street is one of the finest books on buying individual stocks I’ve ever come across. It gives just enough info on fundamental stock analysis to get you started but doesn’t bog you down in details. Even if you never plan on venturing beyond the comfort of your favorite mutual fund, it’s still an entertaining and worthwhile read. Chances are you’ll want to try your hand at individual securities after reading this book, however, because Lynch really succeeds in inspiring you and making you believe it’s possible. Don’t let the fact that this book was first published in 1989 deter you: the information here is timeless.

Buy One Up On Wall Street by Peter Lynch from Amazon.