Artifex - Block Notes - One up on Wall Street

Note: I assume you already know who Mr. Lynch is (a former fund manager), and what Mr. Lynch did (he consistently beat the market - "he has a proven track record" - for almost twenty years).

The book has a witty, easygoing style; it's entertaining and informative, and you'll pretty soon find the urge to read it all as soon as possible. Beware, it's not an easy book! To read this book is not a substitute for hard work. There are no magic formulae to apply. There are no shortcuts to riches, you have to do your homeworks anyway!

"One Up" is divided in three sections. The first deals with how to assess yourself as a stockpicker; the second deals with how to find the most promising opportunities, what to look for in a company and what to avoid, and what to make of the various numbers (p/e ratio, book value, cash flow, etc - explanations are clear, this is a book for everyone) that are often mentioned in technical evaluations of stocks. The third part basically is about everything else, including when to buy and when to sell.

Mr. Lynch opens the book with his rule number one, devoted to those believing that professionals will do better than individuals because professionals know more and have more skills (I'll extensively quote him): "Stop listening to professionals! Twenty years in this business convinces me that any normal person (...) can pick stocks just as well, if not better, than the average Wall Street expert". No wonder here and there we find 1-star, angry reviews of this book!

Here are, in my opinion, the basics of this book:

The Street Lag
"Under the current system, a stock isn't truly attractive until a number of large institutions have recognized its suitability and an equal number of respected Wall Street analysts (the researchers who track the various industries and companies) have put it o the recommended list. With so many people waiting for others to make the first move, it's amazing that anything gets bought."

A Good Market or a Bad Market
"Thousand of experts study overbought indicators, oversold indicators, head-and-shoulder patterns, put-call ratios, the Fed's policy on money supply, foreign investment, the movement of the constellations through the heavens, and the moss on oak trees, and they can't predict markets with any useful consistency." Is the current a good market? Please don't ask. Don't try to time the market.

The Perfect Stock
"Getting the story on a company is a lot easier if you understand the basic business. That's why I'd rather invest in panty hose than in communications satellites, or in motel chains than in fiber optics. The simpler it is, the better I like it. When somebody says, "Any idiot could run this joint," that's a plus as far as I'm concerned, because sooner or later any idiot probably is going to be running it."

How to find the tenbaggers
("In Wall Street parlance a "tenbagger" is a stock in which you've made ten times your money".)
Among other "qualities" to look for, explained by Mr. Lynch, the following are my favourites:
- Its name sounds dull - or, even better, ridiculous;
- It does something dull;
- The institutions don't own it, and the analysts don't follow it;
- It's got a niche;
- The insiders are buyers;
- The company is buying back shares.
Of course, Mr. Lynch describes in detail why he thinks you have to look for these aforementioned (and others) qualities in a stock to qualify it as a "buy"

The flaw in Book Value
"Book value gets a lot of attention these days - perhaps because it's such an easy number to find. You see it reported everywhere (...). People invest in these on the theory that if the book value is $20 a share and the stock sells for $10, they're getting something for half price. The flaw is that the stated book value often bears little relationship to the actual worth of the company. It often understates or overstates reality by a large margin. Penn Central had a book value of more than $60 a share when it went bankrupt!".

I can summarize the only weakness I found in this book after the following quotation:
"At one point I'd decided the motel industry was due for a cyclical turnaround. I'd already invested in United Inns, the largest franchiser of Holiday Inns, and I was keeping my ears open for other opportunities. During a telephone interview with a vice president at United Inns, I asked which company was Holiday Inn's most successful competitor.
"Asking about the competition is one of my favorite techniques for finding promising new stocks. Muckamucks speak negatively about the competition ninety-five percent of the time, and it doesn't mean much. But when an executive of one company admits he's impressed by another company, you can bet that company is doing something right. Nothing could be more bullish than a begrudging admiration from a rival.
"La Quinta Motors Inns", the vice president of United Inns enthused. They're doing a great job. They're killing us in Houston and in Dallas."
"He sounded very impressed, and so was I."

Well, I guess everybody out there can pick up the telephone and have a nice, revealing conversation about the competition with a big company's vice president, uh? Don't you believe this to likely happen to you as well, do you?
And just in case, SEC's Regulation Full Disclosure made it almost impossible anyway (God bless Arthur Levitt, former SEC chairman, who gave us the Reg FD - after Mr. Lynch wrote this book).

That aside, what a great book! I definitely recommend this timeless classic.

(Giancarlo Nicoli)

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