Newsletter
July 28, 2007
The Keys To Success
The Peter Lynch Way
Largest Changes In Raw Numbers (21 Days)
The Keys To Success
This Week By: Vic Johnson
"He conceives of, mentally builds up, an ideal condition of life; the vision of a wider liberty and a larger scope take possession of him; unrest urges him to action, and he utilizes all his spare time and means, small though they are, to the development of his latent powers and resources." James Allen's - As A Man Thinketh
Read carefully those 52 words and you will find the keys to success in any endeavor.
Allen is describing a young person who is unschooled, mired in poverty and working in unhealthy conditions. He goes on to write that the young person follows the formula above and becomes a person of "world-wide influence and almost unequaled power." He finishes the story noting that "He has realized the Vision of his youth. He has become one with his Ideal."
It's a formula for success that's so simple that most people might overlook or discount its effectiveness. And it's built around one guiding principle -- what Napoleon Hill called "a definiteness of purpose." That's what creates the unrest that moves us to action; that's what gives us the energy and drive to spend our spare time and means in developing ourselves to achieve at levels we've never reached before.
One prominent study found that 94% of the 3,000 people interviewed had no definite purpose for their lives. Is it any wonder then that so many people reach their twilight years feeling like life has passed them by.
We have the choice to live our life on purpose or without a purpose. Life doesn't make the distinction, it simply rewards our choice. And the rewards may not always be what we had hoped, as this old poem from Think and Grow Rich illustrates:
"I bargained with Life for a penny,
And Life would pay no more,
However I begged at evening
When I counted my scanty store.
For Life is a just employer,
He gives you what you ask,
But once you have set the wages,
Why, you must bear the task.
I worked for a menial's hire,
Only to learn, dismayed,
That any wage I had asked of Life,
Life would have willingly paid."
The Peter Lynch Way
For the few who may be unfamiliar; Peter Lynch is the legendary stock picker who from 1977-1990 managed the Fidelity Magellan Fund, the best performing mutual funds over that period. The fund outperformed the S & P 500 Index by a compound annual rate of 10.3%. A $1,000 invested in Magellan in 1977, when Peter Lynch became the fund manager, was worth nearly $21,000 at the time he retired after thirteen years.
Peter Lynch believes that amateur investors can outperform Wall Street experts since the best investing clues can be found at the mall, on the school playground, or at people's workplace. In fact he has often stated that the secret to his success is his ability to "think like an amateur." To utilize Peter's methodology you do not need a stock screening method, technical or fundamental analysis. His common-sense approach to stock picking: Know the "story," or everything about a company, before buying a stock; then follow the "story" after buying the stock. "Don't sell the stock if the 'story' is still good, whether the market is up or down." I think Apple (AAPL) is a classic example of this approach. Be honest with yourself now, how many of you knew and witnessed the enormous success of the iPod, in your own family and your circle of friends? How long ago did you first notice the trend? With the iPhone is the "story" still valid?
Start to gather information for your "story" every time you walk into a mall, go to a restaurant, or play with your friends. Utilize your powers of observation. Is the store or restaurant for example clean or messy. Are people lining up at the cash register or does the store look empty? Are the customers happy with the services or do they complain a lot? You are not likely to see an empty McDonalds or Wal-Mart. On the playground, golf course, or tennis court for example, what brand of drink are your friends drinking. Are most of them wearing Nike or Reebok shoes? Notice what new sports, such as roller hockey, have become popular. Then, look for companies that will benefit from the trend. Also check with your parents, relatives, and neighbors who are doctors, engineers, and bankers. Your neighborhood doctor knows which companies make excellent drugs or the best medical equipment. Your engineer dad knows which companies have a dominant position in computer software or hardware. Your uncle banker knows which banks are the most profitable. Simple enough!
The following is courtesy of Kaushal B. Majmudar, CFA, President and Chief Investment Officer of The Ridgewood Group a Short Hills, NJ based money management firm. These are notes taken from an investment conference in New York where Peter Lynch was one of the speakers.
1.) Know What You Own - Most people don't really know the reasons why they own a stock - you should.
2.) It is Futile to Predict the Economy, Interest Rates and the Stock Market (So Don't Waste Time Trying) - "If You Spend 13 minutes per year trying to predict the economy, you have wasted 10 minutes" Focus on the "facts" now at hand rather than predictions about the future
3.) You Have Plenty of Time - to identify and recognize exceptional companies. If you bought WalMart AFTER it rose 10x in its first 10 years, you got another 60x return over the next 30 years. Bottom line: Don't be in a rush - look at plenty of stocks, but be patient.
4.) Avoid Long Shots - his record was ZERO out of 25 investing in companies with no revenues but a "bright future" to sell. If you run across a company that falls into this category but still excites you - do nothing but write down the name. Look at it again in 6 to 12 months and see if you still think it is good. If it is one of the good ones and went from 5 to 15 while you waited, per point #3 above, you probably still have plenty of time.
5.) Good Management is Very Important and Buy Great Businesses - good management is very important - maybe even the most important consideration. It may also be the most difficult item on this list to get right. His advice: look for good companies because a good management in a bad business will probably fail. "Buy a business any fool can manage because eventually one will".
6.) Be Flexible - lots of unexpected things happen, some good and some bad. Many of his best investments happened for the "wrong" reasons, i.e. his original thesis was off, but the investment still worked out. Sometimes he was absolutely right about the growth but the investment was still lousy and he did not make any money. So be flexible and humble
7.) Knowing When to Sell is Hard - before you make a purchase, you should be able to explain why you are buying/owning it in terms that an 11 year old could understand - three sentences at most. Remember this reason and sell the holding when the reason no longer continues to hold. Investing well does not take a genius - only need 5th grade math - so math has nothing to do with being a great investor
8.) There is Always Something to Worry About - and this makes things interesting. The 1950s were one of the best decades to own stocks, but from a geopolitical basis everyone was scared of nuclear war. In the early 1990s, everyone was scared about the Japanese taking over the world and beating America. Not coincidentally, more all-time worst market days occur on Mondays because people have the whole weekend to WORRY. His advice is to forget about all the global bad stuff because the key to good investing is not the brain/intellect, its having the stomach.
In addition to the above points, Peter also shared his Ten Most Dangerous Things People Say About Stock Prices. Even more than the points above, Peter's good sense of humor came through when he discussed these old saws:
1.) "If it's gone down this much already, how much lower can it go?" (answer: Zero)
2.) "If it's gone this high already, how can it possibly go higher?" (some of the best companies grow for decades)
3.) "Eventually they always come back." (no they don't - there are lots of counterexamples)
4.) "It's only $3 a share, what can I lose?" ($3 for every share you buy)
5.) "It's always darkest before the dawn." (It's also always darkest before it goes absolutely pitch black. Don't buy a business just because price dropped and it is cheaper now)
6.) "When it rebounds to my cost, I'll sell." (The stock does not know you own it! Don't take it so personally)
7.) "What me worry? Conservative stocks don't fluctuate much." (There is no such thing as a conservative stock - the average stock fluctuates between 50% and 70% from its high to its low price every year). There is a graveyard where all the "conservative" stocks get buried. Companies and businesses change!)
8.) "Look at all the money I lost - I didn't buy it!" (Don't beat yourself up about the missed opportunities because it is not productive - when he managed the Magellan Fund, he almost never owned one of the 10 best performing stocks in a given year, but he did fine anyway).
9.) "I missed that one. I'll catch the next one." (Doesn't work that way)
10.) "The stock has gone up - so I must be right" or "The stock has done down - so I must be wrong." (So many people like something at 20 and hate it at 12 - never made much sense to him).
Largest Changes In Raw Numbers (21 Days)
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Have A Great Week!
Bill
Prudent Trader.com
Disclaimer: Trading in securities, of any type, may not be suitable for all individuals. The contents of this newsletter are not a solicitation to buy or sell securities. The opinions expressed are solely that of the author. You must do your own research, contact your own financial advisor for suitability of any investments. Data gathered is from sources believed to be reliable, but NO guarantee as to their accuracy is made.
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