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

Peter Lynch was the manager of the Magellan fund at Fidelity Investment. As the manager of the Magellan fund between 1977 to 1990 lynch averaged 29.2% annual return. More than double S&P 500 index and making it the best-performing mutual fund in the world. His book, one up on Wall Street is must read for anyone who loves to invest in the stock market.

Key Takeaway 01:

A stock represents part ownership of a business. It's not just pieces of paper that float around in price. one of the keys to successful investing focuses on the companies. Not on the stocks. Don’t worry about the short-term price movement of the stock. You have to accept the short-term price volatility of a stock to get benefits in the long term. Instead of a focus on the short-term price changes of stock, try to focus on the underline performance of the business because in the long run stock price follows the earnings of a company

If you invest in Walmart focus on how much percentage they grow their revenue over the past ten years. And their gross profit margin, net profit margin, earning per share, dividend per share, the net asset value of a share, return on equity, return in invested capital, cash flow per share, growth or decline of market share of a particular industry, and whether they have honest and skillful management to operate the business. To understand the company you need to research the company.

 

Key Takeaway 02:

Types of companies. Number one fast growers. These types of companies have proven to be growing their earnings per share by about 25% or more. The key to investing in these types of companies varies and exits when the revenue growth rate slows down. Fast growers are not usually owned by big money institutions and they are rarely heard of. Because of that, these kinds of companies are underappreciated and maybe sell at discount. 

Number two: Slow growers. Slow growers are companies that pay a dividend. The best kind of dividend-paying companies is those that grow their dividends consistently every year. With these kinds of companies, we should look at their dividend payout ratio and dividend growth rate. The dividend payout ratio is how much they pay as dividends from their profits.

More than 100% is a warning signal because dividend needs to be paid from profits that they make. Companies manipulate dividend payments by selling their assets to attract and steal retail investors' money. Stay away from those companies when you find one. You can identify General motors as slow growth company because they do not have any more market share to catch. Now they are in a matured stage in their industry and they maybe distribute 50% or 60% of their profits to shareholders as dividend payments of share buybacks. 

As you already know, to maximize profits, a business has to either increase revenue or minimize expenses. A business in the matured stage often tries to reduce costs. But as there is a limit to that, after this time the profits of the business may start to decrease. Then you can observe that the amount of dividend entitled to the shareholders is gradually decreasing.

 

Stay tuned for the next chapter of this article..