- If you are lucky enough to get rich, don’t become a slave to your net worth by devoting your life to increasing it, but let it serve your life.
- Barron’s annual investment expert panel, including Ron Baron, Mario Gabelli, Paul Tudor Jones, Peter Lynch, John Neff, Michael Price, and Jim Rogers, are unable to market-time or predict market turns. Investors should ignore all economic, market, and interest rate forecasts; instead stick with a disciplined investment plan and buy stocks methodically.
- Small caps: buy when P/E is close to 1 relative to large caps (cheap), sell when P/E close to double that of large caps (overvalued).
- Invest regularly in stock funds as much as possible, and diversify among fund types. Over the long term, invest in smaller companies and growth stocks selling at a reasonable price and be patient. “Don’t pull out the flowers and nurture the weeds”. In the short-term, often there is no correlation between a stock’s price and its earnings; in the long-term, there is a 100% correlation.
- Following the news is dangerous: historically, Mondays are the biggest down days and December are often losing months because investors act on news over the weekend and holidays.
- European markets: [at the time of writing] are less efficient: “In the U.S., what makes stock picking difficult is that 1,000 people smarter than you are studying the same stocks you are. [In Europe], all the smart people are studying Virgil and Nietzsche, instead of Volvo or Nestlé.”
- Japanese markets: manipulated by the government and have fantastically high P/E’s. Large Japanese investors had money-back guarantees from banks; bank made loans without financial discipline; Japanese companies make huge real estate purchases that generate a lot of depreciation and cash flow but little earnings.
- Magellan, though known as a growth fund, was really a go-anywhere fund. As a closed fund with a small asset base, it nurtured Lynch’s stock picking. He invested heavily in small and mid-sized companies with P/E’s between 3 and 6, when the stock market was being ignored by investors. The constant redemptions forced Lynch to sell his less-favorite picks, generating ~300% annual turnover.
- Lynch would conduct many company visits and meals with company representatives, where he would occasionally find good ideas. The contacts he made there he kept, and leaned on them for teaching him the in’s and out’s of an industry. His favorite last question: which of your competitors do you most respect?
- Historically, stocks return 11%: 3% dividends and 8% growth. Bonds (held to maturity) have no potential for growth. Lynch advocates a growth portfolio 100% in stocks—even if you invest right before a major (25%) decline or have to occasionally dip into principal to generate income, over the long run (20 years) simulations show that you will still be better off with stocks than bonds. The only exception is when the yield on long-term government bonds exceeds the dividends on stocks by more than 6%.
- Rule of Five: of every five growth stocks you pick, one will be great, one will be bad, and three will be okay. The advantage of an individual small investor is that he only needs to come up with no more than five good ideas.
- Fund managers should do their own research rather than relying on analysts. Analysts will not want to stick their neck out for imaginative ideas—they will rather recommend stocks (that fail) conventionally than risk succeeding unconventionally.
- Illiquidity: in stocks as in romance, if you choose wisely, you will not want a divorce; if you don’t, all the liquidity will not save you.
- The bond market is a good tip off for the quality of a company. The pricing of bonds, typically held by conservative and wary investors, is a good reflection of a company’s solvency.
- Valuation rule of thumb: a stock should sell (P/E) below its earnings growth rate. Even the fastest growing companies will rarely realize more than a 25% growth rate.
- In analyzing retail and restaurant stocks, growth is primarily driven by chain expansion. Look for capable management, stable same-store sales, reasonable debt levels, and adherence to a measured expansion plan.
- Avoid hot stocks in hot industries. A strong company that can capture market share in a lousy industry is much better than a new company struggling to protect dwindling share in an exciting industry.
- Buying on good news is safer than buying on bad news. Wait until a good rumor is confirmed. By waiting you may miss a little of the upside, but you protect yourself from a lot of the downside.
- Cyclicals: unlike other stocks, cyclicals should be avoided on low P/E’s coming off of several seasons of strong earnings—may be beginning of cyclical downturn.
- Government privatizations can be good deals for investors because they don’t want to upset investors, who are also voters.
Finished: Oct-2007