( 2 ) Strategies of Peter Lynch – Author of One Up On Wall Street

 

Strategies of Peter Lynch – Author of One Up On Wall Street

Part 02

Key takeaway 03: Stalwarts

Stalwarts are the companies that are in the middle of fast growers and slow growers. Peter lynch mentioned that they are recession-proof companies.

The fourth category of companies is cyclical. Cyclical companies that use profits move up and down in cycles. It could be companies in the cement or oil industry as oil raw materials (Clinker and Oil price) generally move up and down according to the supply and demand of the time. Automobile companies are another example of cyclical companies. When the economy is strong and demand for a new vehicle is high these companies can be very profitable. However that can flip very quickly, the economy can slow down new vehicle demand can reduce rapidly and all of sudden these companies lose a lot of money. In cyclical companies trick is to buy them during the downside and exit during the upcycle.

 5th category is turnarounds. Turnarounds are companies that are currently struggling but you think will turn themselves around. Wells Fargo is a current example of this category. For turnaround companies, the strength of the balance sheet is very important because they need to survive in tough times if there is any possibility of a turnaround. (Make sure to stay away from companies that have high levels of debt because they are the companies that can go bankrupt. Keep your eye on Debt: Equity ratio & Current ratio.

6th category is asset plays.  This is all about the assets of the company that is underappreciated by the market. The assets can be tangible or intangible. (ex: for tangible assets – Building, Vehicle, Factories | ex: for intangible assets – Goodwill, license, patents)

Key Takeaway 04: Don’t over-diversify your portfolio

Many investors have 25 to 30 stocks in their portfolios and know little about these companies. But they believe they need to have more companies in their portfolio to be diversified. Peter lynch refers to this as “diworsification”. This is where people buy companies that are not good and that they know less about just for the sake of portfolio diversification.

Key takeaway 05: Look for ten baggers

One of the key reasons peter lynch outperformed the market in his 13 years of a fund carrier was the fact that he was able to identify stocks with huge growth potential. Peter lynch called this type of company ten baggers. Meaning that the stock price has the potential to be 10X from its current price. It’s easier to find ten baggers when you are looking at smaller companies than when you are looking at larger companies. On average it’s much easier for a stock to go from a market cap of 1 billion dollars to 10 billion dollars than a company to go market cap from 1 trillion dollars to 10 trillion dollars. Large companies may great investments but they won’t be ten baggers due to the difficulty of growing if you are already a large company.