One Up on Wall Street (Peter Lynch)

• Retail investors have multiple important advantages compared to professionals:
  • Common knowledge (this product/serivce is very good, this company is expanding a lot) can go surprisingly a long way.
  • The pros are relying on quantitative information too much and not enough on the qualitative.
  • Professional investors avoid risk and overanalyse.
  • Prof. incentives are often pointing to covering your ass rather than creative thinking. Nobody gets fired for buying IBM. They are compared to the index and other funds, so the incentive is to avoid being worse than that.
  • Fund managers have to explain their decisions in a lot of detail. However, it's much easier to explain buying a well known blue chip.
    • Not well known companies with poor analyst coverage are probably underpriced.
  • Institutions have lots of rules. They are mostly well-intentioned, but limiting, so there are things institutions just can't do (but you can).
    • Institutions often have to diversify into bonds and other less profitable assets.
• How to pick stocks:
  • Invest in the areas where you have uncommon knowledge. Use your edge.
  • Do some research: financials, people, product, valuation. Build your bull case (aim for a 2 minute elevator pitch) and see whether it makes sense and you're not missing something (checklists help here).
    • Talking to investor relations might work.
    • Talk to customers, etc...
    • Read the reports.
  • Big companies are less volatile, but they are also less profitable.
  • Categories: slow growers, stalwarts, fast growers, cyclicals, asset plays (they have something that market hasn't recognized), turnarounds (stocks can be in several categories and can move).
  • Contrarianism:
    • Name sounds dull or ridiculous,
    • Company does something dull,
    • Does something disagreeable,
    • It's s spin-off,
    • Institutions don't own it and analysts don't follow it,
    • There are shady rumors around it,
    • There's something depressing about it,
    • No growth industry,
    • Company has a niche (or a moat),
    • It's a user of technology (because technology always gets cheaper),
    • Insider buying,
    • Buybacks.
  • Avoid:
    • Hot stocks, especially in hot industries,
    • Companies that buy other companies, especially when it's just to park their cash (diworsification),
    • Companies that do most business with just one customer.
• Portfolio design:
  • Don't own too many stocks,
  • Don't put too much % in one company or one category.
  • Follow the companies that you own. Verify if the bull case is still valid or if it changed.
• Timing:
  • End of year can be good because institutions sell losing stocks.
  • Recessions are good for buying.
  • Sell when your bull case no longer works.
• Don't do options and shorting.