Beating the Street (Peter Lynch)

• Normal humans can pick stocks to beat the market and the hedge funds (over long term, statistically speaking):
  • Diversification: reduces risk, but there's a cost of keeping track of all the companies you have invested in. Follow 8-12 companies and hold like 5 depending on the conditions.
  • Emotional control is harder than picking the stocks.
  • Other investment:
    • Funds: team is important, past performance (especially last year) can be deceiving, active funds that are big are harder to manage.
    • Non-US stocks are mostly not better, but they might be less crowded, or have worse analyst coverage. You can use this to your advantage but do research.
    • Bonds: generally less profitable but if long term bond yields are 6% higher than S&P yield, it makes sense.
  • Losses: If the fundamentals are getting worse, take the loss and exit. A small loss is better than a big loss.
  • Most people overestimate the usefulness of stock picking consulting services and underestimate the usefulness of doing actual research into the company and the product.
    • Go to the mall instead of reading consultant's advice.
  • Don't invest in startups before they are profitable.
  • Types of companies:
    • Great companies in lousy industries,
    • Savings & Loans: boring, good finances, less high risk loans, defaulted loans and real estate (from foreclosures),
      • S&L IPO are particularly nice because the directors are also buying shares with the same conditions are you.
    • Master limited partnerships.
    • Cyclicals: buy during a downturn when they are cheaper. Beware that P/E can be lower during the boom and higher during the downturn.
    • Fanny Mae,
  • Don't worry too much about macro (also it's unpredictable). It's much more important to follow closely how your companies are doing.
  • Six-month check up: you need to follow your stocks.