September 25, 2012

Quotes from the book Beating the Street by Peter Lynch

One problem when trying to learn to become a better investor is that most books on these topics have not been written by professional investors themselves. Most of these books are based on interviews and facts found across the Internet and from different newspapers and annual reports. The result is that some books will contain errors, and you as a reader will learn the wrong things. One example here is the book The Warren Buffett Way. I read that book a couple of years ago when I was trying to learn everything on how Warren Buffett thought when he invested in stocks. The book has not been written by Warren Buffett himself - the author has used different writings about Warren Buffet, such as annual reports from Berkshire Hathaway. Fast forward a couple of years, and the book The Snowball was released. The Snowball has not been written by Warren Buffett himself, but he has been involved when the author Alice Schroeder wrote the book. After I've read The Snowball, I realized that some facts in the book The Warren Buffett Way wasn't completely correct. This is exactly why you should read books about investors written by the investors themselves, or in closely collaboration with the investors.

One famous investor who has written several books about himself and how he thought when he analyzed stocks is Peter Lynch. He has written several books, and I've read two of them: One Up On Wall Street, and Beating the Street. If you are going to read one book about Peter Lynch, you should read One Up On Wall Street - the book is on my top-5 list on books to read about stocks. The book Beating the Street was a great book as well, but not as good. However, you may find some interesting quotes from the latter book:

Why it is easier for an amateur to make money from stocks - compared with professionals:
The individual is free of a lot of the rules that make life difficult for the professionals. As an average investor, you don´t have to own more than a handful of stocks and you can do the research in your spare time. If no company appeals to you at the moment, you can stay in cash and wait for a better opportunity. You don't have to compete with the neighbors, the way professionals do, by publishing your quarterly results in the local shopper.
Always invest in companies you can easily understand:
Never invest in any idea you can't illustrate with a crayon.
Professionals are sometimes wrong. If I recall correctly, one can hear the same old thoughts from Jim Rogers in 2012:
The lone panelist to sound an alarm in 1987 was Jim Rogers, who in 1998 rang the alarm bell once again, warning of an impending collapse of stock prices around the world. But nothing happened in 1988. Jim Rogers also thought that we were going to get a worldwide depression like we saw in the early thirties. Friends of mine, sophisticated people and not easily frightened, were talking about taking the money out of banks and hiding it at home, because they thought the money-center banks might fail and collapse the banking system.
When choosing a fund, don't try to chase the latest hottest fund out there, pick one with a consistent track record:
This is another national pastime, reviewing the past performance of funds. Yet with few exceptions, this turns out to be a waste of time. The lesson here is: don't spend a lot of time poring over the past performance charts. That's not to say you shouldn't pick a fund with a good long-term record. But it's better to stick with a steady and consistent performer than to move in and out of funds, trying to catch the waves.
You don't have find new stocks to invest in:
The best stock to buy may be the one you already own.
Professionals are losing money on stocks, the key here is to sell the losers and not add more to the position. The famous trader Paul Tudor Jones always said: "Losers Average Losers" - or losers are buying more when the stock is moving down:
There's no shame in losing money on a stock. Everybody does it. What is shameful is to hold on to a stock, or, worse, to buy more of it, when the fundamentals are deteriorating. That's what I tried to avoid doing. Although I had more stocks that lost money than I had 10- baggers, I didn't keep adding to the losers as they headed for Chapter 11.