Author Topic: Beating The Street By Peter Lynch  (Read 8252 times)

Worthcents

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Beating The Street By Peter Lynch
« on: April 01, 2014, 04:53:37 PM »
While I primarily invest in Vanguard stock indexes, such as VTSMX, I was at the library and saw Peter Lynch's "Beating The Street" and had to read it. It was published in 1993, but the content is easily readable and many of his investing principles are generally applicable.

Even though it's a "Stock Picking" related book, I thought others may be interested in reading it for the sake of seeing how the other half lives.

For more detail, check out my Beating The Street Book Review.

soccerluvof4

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Re: Beating The Street By Peter Lynch
« Reply #1 on: April 02, 2014, 11:11:31 AM »
Very good read. I have read it. And i stock pick everyday as well as have my Index funds. I feel one can do both.

grantmeaname

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Re: Beating The Street By Peter Lynch
« Reply #2 on: April 02, 2014, 02:37:22 PM »
I feel one can do both.
Either you feel that index funds have a higher risk-adjusted expected return than stock picking or you feel that stock picking has a higher risk-adjusted expected return than index funds. Both can't be true at once.

Worthcents

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Re: Beating The Street By Peter Lynch
« Reply #3 on: April 06, 2014, 08:09:38 AM »
@SoccerLuvOf4 I tend to agree with grantmeaname where either you feel index funds have a higher risk-adjusted expected return or stock picking does but not both. Could you elaborate on your thoughts about one can do both?

Currently, my portfolio is invested in index and mutual funds. I don't trade individual stocks. However, I've considered taking maybe a minor sum to invest in a few stocks in industries I know about and can dedicate time toward to see how it goes. Day trading is definitely not for me. However, occasional buying and selling might be.

Nords

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Re: Beating The Street By Peter Lynch
« Reply #4 on: April 06, 2014, 05:53:54 PM »
Very good read. I have read it. And i stock pick everyday as well as have my Index funds. I feel one can do both.
@SoccerLuvOf4 I tend to agree with grantmeaname where either you feel index funds have a higher risk-adjusted expected return or stock picking does but not both. Could you elaborate on your thoughts about one can do both?

Currently, my portfolio is invested in index and mutual funds. I don't trade individual stocks. However, I've considered taking maybe a minor sum to invest in a few stocks in industries I know about and can dedicate time toward to see how it goes. Day trading is definitely not for me. However, occasional buying and selling might be.
What you're describing is a testosterone-poisoned shoot-the-moon lottery-winning fund that will allow luck (and the remote possibility of "skill") to pay off those long-shot investments that you think are going to outperform the majority of your assets.

There's nothing wrong with setting aside 5%-10% of your money for this purpose, especially if you take it out of the "experiential learning" or entertainment budget.  If you're doing it right then you'll rigorously track its performance against the rest of your assets to confirm what Grantmeaname is already showing you.  In most cases, though, it's "diworseification" instead of diversification.

My bete noire is angel investing, and I mainly do it to inoculate myself with the experience now (at the peak of my cognition) instead of being attracted to it in my mid-70s.  Hawaii used to offer tax credits so it's not a total loss (yet) and the learning experience has far exceeded my expectations.  I've also learned that I'm done with stock-picking and generally just about out of the active-investor lifestyle.

By the way, I can't remember whether it's "Beating the Street" or "One Up On Wall Street", but Peter Lynch used to advocate a 7% SWR... because that's what you'd get from picking stocks (after inflation & taxes) for the rest of your life.

innerscorecard

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Re: Beating The Street By Peter Lynch
« Reply #5 on: April 06, 2014, 08:59:57 PM »
I like Peter Lynch's books. I think one danger that many readers (or skimmers) of his books have is that they take the "you can pick stocks too" message away, but forget the parts where Lynch explains how much fundamental research is needed to do so. After all, Lynch retired very early for a money manager, because he was tired of jetting across the country every weekend to kick tires and talk to management.

hodedofome

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Re: Beating The Street By Peter Lynch
« Reply #6 on: February 19, 2015, 09:57:03 AM »
Agree with innerscorecard here. This book was written before the proliferation of index funds where it's much easier to just get the market return. People were paying some big fees for mutual funds and a lot of folks still tried to invest on their own.

Lynch was very successful, but his style of investing is anything but average or ordinary. He really ran a multi-strategy fund. He was a value investor, a growth investor and special-situations investor all in one, during a time where most managers were one-trick ponies. He did an incredible amount of research before he invested, and I doubt most people would be willing to work as hard as he did.

His advice to only invest in what you know, is the best and most universal principle in his books however. It's something we can all take away and apply to our investing.

As far as the comments about stock picking vs index funds, the 2 aren't always mutually exclusive. If the individual investor is running concentrated portfolios (usually needed to outperform), then they could be highly volatile. The investor may decide he doesn't want that much volatility in his retirement portfolios and put index funds in those. His stock picking portfolio could be used to fund his daily expenses.

Or, the investor's personality may be exactly the opposite. They don't like the volatility of their concentrated portfolio being needed for their daily expenses, so a balanced index fund portfolio may be used for that, while their retirement portfolio is used for stock-picking.

Or, they could stock pick for the equity part of the portfolio, and hold bond index funds for the bond portion (because they are better at stocks than bonds).

Or, the active investor's strategy could be uncorrelated to long-only, buy and hold stock and bond funds. Both strategies would pay off in the end, perhaps even having similar returns by themselves. But the active guy's strategy usually does well when stocks are doing poorly, or vice-versa. It would then make sense to combine the portfolios and have a higher risk-adjusted return in the end.

There are many reasons why someone would choose to be active and passive at the same time.

pac_NW

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Re: Beating The Street By Peter Lynch
« Reply #7 on: February 21, 2015, 12:07:04 PM »
I agree - a great read. I was fortunate enough to read it in the 90s. Like MMM but for an older generation. What would be the contemporary to Lynch's work in 2015?  MMM certainly. Whatbook would you recommend to a 20 year old who is getting started?

markbike528CBX

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Re: Beating The Street By Peter Lynch
« Reply #8 on: July 23, 2015, 10:17:32 PM »
This book was my introduction to equity  trading  ~2005.

My takeaway was "buy what you know" which is similar to
Warren Buffett's don't buy what you dont know

I looked around my apartment, and found four Unilever products, so I brought UL.

The effort to pick stocks looked too tough, so I've never been tempted by active trading/picking.

hodedofome

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Re: Beating The Street By Peter Lynch
« Reply #9 on: July 24, 2015, 08:48:32 AM »
Just as a thought experiment I went through my life and found all the products and services I use, here are the publicly traded companies for them:

Netflix
Microsoft
Apple
Google
Chipotle
Dr Pepper
Amazon
Verizon
Panera Bread
Starbucks
Paypal
Facebook
Sonic
Home Depot
Lowes
Michelin
Sherwin Williams
Zillow
Taco Cabana
Dominos
Ace Hardward
Chuys
Adidas
Under Armour
Nike
Priceline
Disney
Heinz
Johnson and Johnson
Wrigleys
Target
GE
Visa
Autozone
Bed Bath and Beyond
Campbell Soup
Capital One Financial
Clorox
CME Group
Coca Cola
Colgate Palmolive
CVS
Walgreens
Darden Restaurants
Dollar Tree
Dollar General
Fedex
General Mills
Kellogg
Kimberly Clark
Kraft
PepsiCo
Polo Ralph Lauren
Proctor & Gamble
Ross Stores
Smucker
Southwest Airlines
Hershey
TJX Companies
Twenty First Century Fox
Tyson Foods
UPS
WalMart
Yum Brands
McCormick
Morton Salt
JM Smucker Company
Interactive Brokers

Not saying I or someone else should go out and buy these stocks, but that's a pretty good list to start doing some research. It would be interesting to have enough play money that you could buy all these in equal weight and only adjust your holdings as you add new products in your life, or stop buying the old ones. I'd be willing to bet the performance would surprise some people.

grantmeaname

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Re: Beating The Street By Peter Lynch
« Reply #10 on: July 24, 2015, 08:54:25 AM »
I'd be willing to bet the performance would surprise some people.
I'd be willing to be the performance would be very nice when the economy does well. You're constructing an arbitrary small-cap consumer discretionary index. Look at how this one does for comparison.

That doesn't mean that overweighting your portfolio with companies that sell to consumers is a good idea, though.

forummm

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Re: Beating The Street By Peter Lynch
« Reply #11 on: July 24, 2015, 09:29:24 AM »
Just as a thought experiment I went through my life and found all the products and services I use, here are the publicly traded companies for them:


<long list>

I bet you could double this list if you spent more time on it. I didn't see any utilities on there. And you probably don't think about all the small companies that supply the big companies, or the small companies that don't have as much advertising going on so they didn't come to mind.

Another thought I had is that this is starting to look like an index fund. You'll miss out on the huge winner that you don't use yet, but is going to blow up soon. But if you kept adding to it, eventually you'd get close (maybe 1/3 or 1/2) to the S&P 500.

grantmeaname

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Re: Beating The Street By Peter Lynch
« Reply #12 on: July 24, 2015, 09:37:56 AM »
Another thought I had is that this is starting to look like an index fund. You'll miss out on the huge winner that you don't use yet, but is going to blow up soon. But if you kept adding to it, eventually you'd get close (maybe 1/3 or 1/2) to the S&P 500.
buy all these in equal weight
The big difference between this and a total stock market index right now is that it's equal weight. If you spend $3,000 at Wal-mart each year and $7 of it is on Morton salt, yet you hold 1% of your portfolio in each, you're overweighting small caps both relative to a cap-based total market index and to your consumption habits.

index

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Re: Beating The Street By Peter Lynch
« Reply #13 on: July 24, 2015, 09:55:09 AM »
I feel one can do both.
Either you feel that index funds have a higher risk-adjusted expected return than stock picking or you feel that stock picking has a higher risk-adjusted expected return than index funds. Both can't be true at once.

Quote
What you're describing is a testosterone-poisoned shoot-the-moon lottery-winning fund that will allow luck (and the remote possibility of "skill") to pay off those long-shot investments that you think are going to outperform the majority of your assets.

An index is nothing more than a group of companies chosen by committee meeting a set of criteria and weighted according to market float.

I own a portfolio of companies I am comfortable owning for the long term. I enjoy reading annual reports and approach my investments as a part owner. I do not trade often and since moving to Interactive brokers 6 years ago, I have been paid 1-2k year by their securities lending program which more than makes up for their minimum fee of $120/yr.

Through buying and selling options on my holdings (covered calls and cash covered puts) I have generated ~10k in extra income per year. I can use margin against my account for an emergency fund for <1% interest.

My 35-40 company portfolio has roughly matched VTI while holding 30% of the portfolio in cash, bonds, and preferred stock. IE the risk adjusted return is significantly greater than VTI.

This account makes up over half of my stache. The rest is in index funds.       


grantmeaname

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Re: Beating The Street By Peter Lynch
« Reply #14 on: July 24, 2015, 10:07:12 AM »
If you feel that your active trading provides a higher risk-adjusted return than stock picking, why do you hold any index funds?

Telecaster

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Re: Beating The Street By Peter Lynch
« Reply #15 on: July 24, 2015, 10:18:38 AM »
Not saying I or someone else should go out and buy these stocks, but that's a pretty good list to start doing some research. It would be interesting to have enough play money that you could buy all these in equal weight and only adjust your holdings as you add new products in your life, or stop buying the old ones. I'd be willing to bet the performance would surprise some people.

Without doing research, I'd take that bet.  I bet it would track the S&P 500 index closely, but lag a little bit.  Here's why:  You have 50-odd stocks (I didn't count, but close enough), so roughly 2% per position.  But several of those stocks, Microsoft, Apple, Johnson & Johnson, Wal-Mart are major components percentage-wise of the S&P (which is cap weighted) .   A number of others are also smaller components Home Depot, Capital One, Google, General Mills, FedEx, etc.   Probably a few others as well.  So already you look a lot like the S&P 500.  On top of that,  a couple of these like Sherwin-Williams and Coca Cola are partially owned by Berkshire Hathaway, which also a S&P component.   Over the last few years, BRK has tracked the index fairly closely itself. 

In short if you want to do better than the S&P, you have to do something different than the S&P and you look very much like it.  So I doubt you would get much, if any out performance.   But it gets worse.   Your 50 stocks will cost about $400 in commissions one way, and that's not counting the spreads.   Rebalance annually or even bi-annually and you are looking at significant portfolio drag just from expenses.  Add those in and you probably won't be see much, if any, out performance. 




forummm

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Re: Beating The Street By Peter Lynch
« Reply #16 on: July 24, 2015, 10:27:10 AM »
Just as a thought experiment I went through my life and found all the products and services I use, here are the publicly traded companies for them:


<long list>

Another thought: some of the more mustachian of us use a much smaller number of companies. So we'd be pretty undiversified.

And if I fly United for my one plane trip one year and then fly Southwest the next year, and then Delta the year after, do I only hold the stock for that year, or do I end up with all 3 airlines? What if I don't even pay for the flight because it's a card rewards flight?

The market cap weighting lets me get the sum total of everyone's business preferences without all the transaction costs.

hodedofome

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Re: Beating The Street By Peter Lynch
« Reply #17 on: July 24, 2015, 10:41:08 AM »
I'd be willing to be the performance would be very nice when the economy does well. You're constructing an arbitrary small-cap consumer discretionary index. Look at how this one does for comparison.

That doesn't mean that overweighting your portfolio with companies that sell to consumers is a good idea, though.

I don't think my list would necessarily classify as a small cap anything. There's only 1 stock in there (Chuys) that's smaller than the smallest stock in the S&P 500. 25% of the stocks are over $100 billion market cap. If anything, it's an all-cap.

edit: here's the list showing the market caps https://docs.google.com/spreadsheets/d/1x5DnujD_ebgAXe6jAao1Br6DEznAnhD4i6_aAx52wIk/edit?usp=sharing

-------------------------------------------------------------------------------------------------------------------------

The equal weight holding is there because I'd have no idea which stock is going to perform better than another. Equal weight is the best I can do as someone that can't predict the future yet.

-------------------------------------------------------------------------------------------------------------------------

Agree that my list looks like an index fund. But a much more concentrated index fund with all different size and types of companies. Don't think you could classify it as any type of style, as it's pretty diverse. You've got consumer staples, consumer discretionary, tech, financial and telecom. Obviously some sectors are more represented than others.
« Last Edit: July 24, 2015, 10:54:15 AM by hodedofome »

hodedofome

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Re: Beating The Street By Peter Lynch
« Reply #18 on: July 24, 2015, 10:50:33 AM »
Another thought: some of the more mustachian of us use a much smaller number of companies. So we'd be pretty undiversified.

And if I fly United for my one plane trip one year and then fly Southwest the next year, and then Delta the year after, do I only hold the stock for that year, or do I end up with all 3 airlines? What if I don't even pay for the flight because it's a card rewards flight?

The market cap weighting lets me get the sum total of everyone's business preferences without all the transaction costs.

You could keep it simple and own them all (and end up with basically an index fund) or you could take some more discretion and ask yourself things like:

- Did I like this product/service?
- Will I buy from them again?
- Are other people around me buying from them?
- Have they saturated the market already? Where is future earnings growth going to come from? If it's a growth stock and they've now opened up a store in every city in America, perhaps it's time to take some $$ off the table and rebalance. Future growth may only be in line with the general market
- Is my taste for this product changing?

You could get pretty in-depth if you wanted. I'd still maintain that even the simple systems' lack of trading costs (as I probably wouldn't rebalance this hardly ever, and stocks would not be added or subtracted very frequently), a more concentrated portfolio , equal weighting and the fact that a lot of the companies on my list are market leaders might give me 1-2% outperformance over an index fund. But I'm not putting my money where my mouth is either.

index

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Re: Beating The Street By Peter Lynch
« Reply #19 on: July 24, 2015, 12:08:46 PM »
If you feel that your active trading provides a higher risk-adjusted return than stock picking, why do you hold any index funds?

401Ks, HSA, after tax cash accounts. You cannot just combine these accounts and you need six figures before a brokerage account becomes cheaper than vanguard funds.

There is also tax treatment to consider- In the case of my after tax cash account, I want to buy and hold securities that do not pay dividends.  I would prefer to hold for decades or sell when I have losses to offset capital gains.

grantmeaname

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Re: Beating The Street By Peter Lynch
« Reply #20 on: July 24, 2015, 12:19:05 PM »
So you actively manage all your taxable investments in one brokerage account, then hold the best available index funds in your smaller pots? I suppose that makes sense.