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  • Writer's pictureSatveer Gill

"One Up on Wall Street" by Peter Lynch – Highly Relevant for Any Investor

Beginning a summer internship, Satveer Gill reflects on Peter Lynch’s timeless investing classic, "One Up on Wall Street"


"One Up on Wall Street" remains a must-read with important lessons for investors.
Satveer Gill found the lessons and insights in Peter Lynch's "One Up on Wall Street" particularly valuable.

From a young age, sports were always an interest of mine. It was not until I discovered investing and opened my own stock portfolio in Grade 11 that I realized valuable skills are directly transferrable from athletics to this different domain. A few examples include discipline, patience, and adaptability.


My name is Satveer and I recently completed my first year as an economics student at Western University. This summer, I will be analyzing public equities while completing an internship at Greenfield Investment Management.


In Grade 11, I came across investing and started my own portfolio with stocks and exchange-traded-funds. Searching for the highest dividend yields and cheapest valuation ratios, I failed to see the big picture and lacked a clear strategy and conviction. Striving to become a better investor, I began following financial news, reading about investment strategies, and discussing investment opportunities with friends. Now, focused on business fundamentals and valuation, I remain passionate about public markets and continue to grow my knowledge as an investor.


Throughout my first year at Western, I continued to develop a passion for investing. I completed equity research reports and created presentations about companies and investment funds. Looking to continue developing my analytical skills and understanding the importance of collaboration and mentorship, I began looking for a summer position through which I could become a better investor.


Considering different investment management firms, I aligned with the value-oriented investing philosophy at Greenfield Investment Management. Understanding Greenfield’s approach focused on patience, long-term discipline, and business fundamentals, I reached out to the Portfolio Manager, Erin Greenfield, about working with the firm this summer. Erin was excited to bring on his second intern from Western. This summer, I look forward to gaining experience researching companies, attending various investor events, and receiving mentorship in the investment management industry.


Investing books have been a critical part of my development as a value-oriented investor. With historical and diverse perspectives, they provide practical insights and guidance. In a world of instant news, books continue to contain relevant themes, ideas, and insights. An example of a book that I found particularly valuable was Peter Lynch’s "One Up on Wall Street". Published in 1989, Lynch shares lessons and insights that align with Greenfield’s philosophy while transcending generations and market cycles.


35 years after first publication, Lynch’s book remains relevant.


The world’s best investors have been successful beating the market over long time periods using a variety of strategies. An example of a successful investor is Peter Lynch, the former manager of the Fidelity Magellan Fund from 1977-1990. During his tenure, Lynch beat the S&P 500 Index in 11 of 13 years, averaging an annual return of 29% while the fund grew from $20 million to $14 billion in assets under management. While there is not a single approach that can guarantee great returns, Peter Lynch shares strategies that were critical to his success in "One Up on Wall Street". Not fixated on interest rates, geopolitical concerns, or other macroeconomic factors out of his control, Lynch recognizes that “whether it’s a 508-point day or a 108-point day, in the end, superior companies will succeed and mediocre companies will fail, and investors in each will be rewarded accordingly” (p. 30). After 35 years, bestselling "One Up on Wall Street" remains a must read with important lessons for investors.


In this review, I will highlight four key ideas from Peter Lynch’s "One Up on Wall Street". First, I will emphasize the importance of focusing on business fundamentals and valuation rather than macroeconomic factors. Second, I will compare hot stocks in hot industries with boring companies in low to no growth industries. Third, I will compare companies in high growth industries with companies that benefit from high growth industries. Fourth, I will explain the importance of knowing the story behind your investments.


"In the end, superior companies will succeed and mediocre companies will fail, and investors in each will be rewarded accordingly"

Interest Rates and Inflation – Factors Beyond an Investor’s Control


In a world of continuous news flow, investors speculate about the direction of interest rates, inflation, and geopolitical events, while being concerned about their potential impacts on markets. Lynch argues that investors should avoid focusing on macroeconomic factors, while emphasizing business fundamentals and valuation. Investors often anticipate the direction in which markets are headed and focus on factors beyond their control. Interest rate changes, geopolitical conflicts, and global pandemics all impact the direction of economies, but great uncertainties exist about the timing of these events. Furthermore, experts have spent years studying central banks, money supply, and economic cycles, yet have repeatedly failed to correctly forecast the market’s largest declines and rises. As Lynch notes, “things are never clear until it’s too late” (p. 86). A recession may happen this year, next year, or five years from now. Economic forecasts rarely predict the timing accurately. Regardless, profitable businesses will exist, and investors can generate returns whether markets are lousy or strong. If market conditions could be predicted with absolute certainty, the investor remains in the same position looking for undervalued and underappreciated companies. Lynch did not have the ability to predict the next president or interest rate hike. Nonetheless, he was able to remain focused on the long-term, stay invested, and find fundamentally strong, undervalued businesses that deliver great returns.


Hot Stocks in Hot Industries, or Boring Stocks in Low to No Growth Industries?


Choosing between hot companies in fast growing industries or boring companies in industries with little to no growth, Lynch prefers the latter. He explains, “if I could avoid a single stock, it would be the hottest stock in the hottest industry” (p. 149). High growth industries attract large and intelligent crowds looking to get into new business. Furthermore, ideas that cannot be protected by a patent or niche are quickly copied by imitators. While industry growth may reach expectations, intense competition between new companies often leads high-growth industries to become unprofitable. Ultimately, industry growth is not the key to a successful business. As Lynch notes, “people may bet on the hourly wiggles in the market, but it’s the earnings that waggle the wiggles long-term" (p.164). Earnings drive stocks to succeed or fail in the long-run, and companies can increase earnings in any industry through actions such as stealing market share, raising prices or lowering costs. No growth and low growth industries are often too slow and boring to get the attention of large, intelligent crowds. Slow and boring companies in these industries often do not attract intense competition and can grow reliable customer bases. Moreover, companies can develop competitive advantages which can further help grow earnings. Through recessions, pandemics, and wars, earnings have remained correlated with stock prices in the long-term. Companies in low to no growth industries provide compelling opportunities in the form of undervalued businesses that can grow earnings and deliver shareholder value.


"People may bet on the hourly wiggles in the market, but it’s the earnings that waggle the wiggles long-term"

Companies in High Growth Industries vs. Companies that Benefit from High Growth Industries


High growth industries attract large amounts of competition. As Lynch notes, “for every single product in a hot industry, there are a thousand MIT graduates trying to figure out how to make it cheaper in Taiwan” (p. 139). In booming industries, large, intelligent crowds rush to take their share of revenues that are growing quickly. A relevant example is the gold rush of the 1800’s, in which many people went digging for gold, yet few came back successful. People that sold picks, shovels and blue jeans to those digging for gold were more likely to be successful and benefit from the gold rush. Similarly, in the dot com boom of the 1990’s, few internet-based companies were successful over the long-term, while the customers and businesses that utilized their products saw increases in earnings from improved efficiencies and reduced costs. Lynch offers a compelling case to invest in companies that are the beneficiaries of new technology rather than those providing it. Lynch wrote of computer companies at the time, “instead of investing in computer companies that struggle to survive in an endless price war, why not invest in a company that benefits from the price war?” (p. 142). While competition flocks to hot industries in a rush to create better products and engage in pricing wars, beneficiaries of new products can integrate this technology and reduce their costs, leading to greater earnings without engaging in competitive price wars. Lynch’s argument remains compelling today. As the stocks of AI companies continue to become more expensive with higher valuations, potentially undervalued opportunities exist in businesses that can increase their earnings with the efficiency and cost savings afforded by AI.


Know Your Story!


"Once you’re able to tell the story of a stock to your family, your friends, or the dog, and so that even a child could understand it, then you have a proper grasp of a situation" (p. 175)

In investing, it is impossible to create generic formulas that apply to all stocks. To make it easier to understand expected returns from a stock, Lynch breaks down companies into six categories: slow growers, stalwarts (medium growers), fast growers, asset plays, cyclicals and turnarounds. Understanding the category in which a company fits is key to understanding the return you expect from it.


Moreover, the investor must avoid thinking that the current movement of a stock price is always tied to a company’s fundamental value. The idea that current stock prices provide information about a company’s future prospects leads some investors to believe in generic formulas, such as to always sell winners and hold on to losers. As Peter Lynch notes, to always “sell the winners and hold on to the losers is as sensible as pulling out the flowers and watering the weeds” (p. 243). The investor needs to set a clear and reasonable expectation for returns from the stock, and then monitor the fundamental story of the company.


Instead of relying on rules of thumb, the investor should make buy and sell decisions depending on the movement of the stock price as it relates to the fundamental story and valuation. For example, if a stalwart has gone up 40% and reached its expected return, the investor should evaluate whether the company’s fundamentals have changed. Depending on the situation, they can sell the stock and replace it with a more attractive opportunity. Fast growers can be held as long as earnings continue to grow and business fundamentals remain strong. In cyclicals and turnarounds, invest in companies with strong fundamentals and low valuations, and monitor the situation as the company’s fundamentals and valuation change.


Lynch explains that “a price drop is an opportunity to load up on bargains from among your worst performers and laggards that show promise” (p. 243). Investors must avoid setting arbitrary price objectives such as “sell when a stock doubles”, or artificially protecting themselves by setting stop-loss orders. Instead, they should remain disciplined and hold fundamentally strong companies to see their story begin to play out (or get better) and reap the rewards. Whether it takes a few months or several years, ultimately, “value always wins out – or at least in enough cases that it’s worthwhile to believe it” (p. 161).


Conclusion


Peter Lynch experienced great success as manager of the Fidelity Magellan Fund. After 35 years, "One Up on Wall Street" continues to offer relevant lessons for investors. Regardless of interest rates, inflation, and geopolitical concerns, Lynch recognizes that “ultimately it is not the stock market nor even the companies themselves that determine an investor’s fate. It is the investor” (p. 45). The investor must be disciplined and avoid emotional decisions led by “concern, complacency, and capitulation” (p. 82). It is critical to avoid market timing, gut instincts, and herd mentality. The investor does not need to maintain a perfect record predicting the next interest rate hike or oil prices tomorrow. Instead, they need to remain focused on the long-term and have the humility to endure periodic losses and setbacks. Ultimately, as Peter Lynch notes:


"If seven out of ten of my stocks perform as expected, then I’m delighted. If six out of ten of my stocks perform as expected then I’m thankful. Six out of ten is all it takes to produce an enviable record on Wall Street" (p. 75).

Across the market cycle, "One Up on Wall Street" continues to be a must-read and offers valuable lessons for investors. Employing similar strategies to those outlined by Peter Lynch, Greenfield Investment Management remains focused on business fundamentals, staying disciplined over the long-term and approaching investing with an entrepreneurial mindset. Greenfield maintains the same investing philosophy across the market cycle, while always open to investing in companies of any size in any location.


Satveer Gill


 

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