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Without a doubt, he is one of the most successful investors in the history of the planet. Unfortunately, his career was short, about 13 years at the head of a fund at Fidelity. He obviously spoke about PT Leno, and today we are going to understand the qualitative and quantitative criteria he used. If you are new to the channel, take this moment to subscribe and also leave your like.
Lynch gave him a series of criteria for choosing the companies that will be part of the portfolio, and I will divide this video into qualitative and quantitative criteria. Let's start with the qualitative ones. The first, which he always made very clear in his interviews and even in his books, is that the company has to have a catchy name.
That's why he used the term "company can't attract attention; it has to have a calm name." Often, the repulsion is due to the name. Another thing he talked about, still on the subject of repulsion, is what the company does. So, for example, the United States has shares in cemetery companies, companies that collect garbage, and people don't want them.
I only know this because it does n't pass through a state, we say it is... It's precisely in these companies that you need to pay closer attention. The second point P20 mentioned is whether this company is a subsidiary of another company, or if it was acquired by another company and is now following its own path.
It didn't seem very important in this case to analyze whether the middle management, the important people within the company, are buying shares. Because when they believe in the business, they buy shares, and in the United States, it's mandatory to disclose what the directors and vice presidents are buying.
I used this information a lot to see if I really trusted their shares. The third point is that the company is growing in a low-growth sector. So you have to pay close attention to it because it could be a good thing. There are several sectors of the economy that grow very little, sometimes even stagnating.
So if you look at a company in one of these traditionally slow-growing sectors and it's growing, it means it has a competitive advantage. Let's move on to the next point: the company is in a market niche where it 's very difficult for new competitors to enter, whether due to capital issues or regulations.
The company is in a sector where it 's very difficult for new competitors to enter. It may indeed have its competitive advantages, and you have to analyze it a little more closely. Another point that Peter, as we discussed, is whether the company's products and services are consumed in times of joy and sadness, prosperity and scarcity.
An example we can give is beer, because when people want to celebrate, they want to have fun, so they drink beer. When things aren't good, they need to forget, so they also drink beer. And here, it doesn't matter if things are going well, people will consume beer. We really like companies whose products are sold to the market in good times and bad.
Another point here in Part 20: he really liked companies that weren't on the radar of the big players. The big financial institutions have many stocks, especially blue chips, large market capitalization stocks, which are on the radar of various companies and financial institutions that invest in them.
And there are several analysis firms covering that company. It's very difficult to find a bargain. Now, when you have those companies that, for example, aren't part of the index, the famous ones that analysts aren't discovering, the big ones... Financial matters don't matter much; that company will increase its chances of finding a company at a lower price.
I've talked a lot here about what Peter Lynch looked for in terms of quality, and it's also important to highlight what he disliked. The first thing he hated was fashion companies. You see, fashion is clothing, but every now and then some sector of the economy becomes fashionable. For example, some time ago in Brazil, around the time of the election, we had the fashion of arms companies, to be more specific, a company of tomorrow.
We didn't like the inertia in the stock market, and fashion doesn't combine very well with the subject of making good investments. Another point that Peter Lynch didn't like was companies whose capacity has n't yet been verified in the market, and they are being traded at very high prices. We have, some time ago, perhaps those who are younger don't remember, the companies of the X Group of Haiti Batista.
All of them, which was worse, raised a lot of money. It was even during this time that Haiti became one of the richest men in the world. These companies had never actually presented positive results; they had no history whatsoever. It was a project to obtain lenses, look, write about 20 years. It's been more than 20 years since the professional [Peter Lynch] started, and he didn't like that kind of thing because it usually goes wrong.
Coincidence or not, in Batista's case, it went very wrong. So much so that all his companies that were traded on the stock exchange have now disappeared. Finally, the PT [Workers' Party] didn't like companies with few consumers. This seems obvious, but it's not quite like that. For example, there are luxury goods companies that are extremely electric in relation to their consumer audience, so of course the ticket price of these sales is very high, but few consumers will be reached.
The PT prefers the opposite; they prefer companies that sell products and services to multitudes, where the chance of a catastrophic problem is reduced compared to when you depend on very few clients. We talked about the qualitative aspects in the first part of the video; now we're going to the quantitative ones, and the first point is the evolution of the company's profit.
Look, Peter Lynch really liked to see an evolution in profit year after year; the company had to show improvement in its results. Of course, many people weren't extremely radical; they can't imagine a company growing forever. So what he says is that historically you have... Seeing an improvement in profit makes no sense if you're a shareholder in a company that's been stagnant for ten years, for example.
According to Peter Lynch's quantitative point, we used to say that it's pointless to find a wonderful, incredible company with a super high P&L ratio because you'd have to bet on almost astronomical growth to recoup that investment. So, of course, all the qualitative criteria we just saw must be present, or at least most of them.
But when we get to P&L, it's also important to consider that being a shareholder in a very good company with a very high P&L ratio does n't seem to make much sense. At least that's what Peter Lynch used to say. It's interesting to also consider P&L in our third and fourth point of quantitative aspects.
Because in P&L we liked to take the company's current P&L ratio and analyze if it was already competitive in the company's historical P&L ratio. Sometimes you borrow a P&L of 15 today, but its historical P&L ratio has always been 30. So perhaps that ceiling of 15 is so expensive for that company, considering its history, and not only the company's history but also the history of the sector in many sectors...
They have relatively low slender ratios, and there are sectors that historically have high slender ratios. It's not just about the slender ratio; we would take the company's slender ratio, see if it made sense according to the qualitative criteria, and then compare the historical slender ratio of that company and also the sector in which it was inserted.
Regarding the P&L (Profit and Net Worth), they had a way of analyzing it that is quite interesting and easy to understand: the evolution in profit has to be compatible with the P&L. You make a ratio. To explain it better here, let's say you have a company that has a slender ratio of 20, but the profit growth has a growth rate of 25%.
Peter Lynch liked to take an operation and divide it by the growth rate. If the result is less than 1, he thought it might be cheap because you have a growth rate higher than the projected P&L of that company. I know that at the beginning it may seem a little complicated, but it's not. So he always liked companies that had a very high growth rate, but not so high.
You have a company that has a growth rate of 350% and an slender ratio of 30%, you only lose. 30 might seem expensive, but if you have a growth rate of 50, it might not be so expensive after all. That's how we liked to think about it. The last two quantitative 10s are the debt-to- equity ratio and inventory.
So let's start with the debt issue. The client didn't like heavily indebted companies, and you see, disliking heavily indebted companies is a characteristic of every successful investor. It's the love of Buffy and having people like that, and so on. So he didn't like it much when a company was heavily indebted, even if they explained that the older company was being well used for this and that, whatever mattered.
I don't really like companies that are completely burdened with debt. Of course, I understood when a company had loans, when a company had debt, but it has to be a reasonable amount, not something so high that it ends up hindering the business itself and the distribution of dividends to shareholders, and so on.
Regarding inventory, look how interesting this is: few people notice it in neighborhoods, but the CEO has to like to analyze the inventory of his stock. The inventory is... Within the balance sheet, regarding assets, take a look at the company of your choice and see if it's increasing from one year to the next.
The prospect was always looking for a light on the panel. Peter, 20 of the best, tap a little because it's increasing so much. It's a sign that it's not managing to sell, or the company is producing too much and not keeping up with market demand. It doesn't produce a product, but sells a little quickly, so the company is making management errors or there's a real lack of market interest in that product.
Inventories are tied at 3D. He always liked to analyze inventories; he really liked to see when inventories were decreasing because when inventories decrease, the probability is that money is coming in, a cash flow. Remember that stagnant inventory is never good because it's money that you could, for example, put in cash earning interest, but it's become inventory, it's stagnant and has costs, it depreciates.
With that, folks, we've reached the end of today's video. I hope you enjoyed the qualitative and quantitative criteria used by the great legendary investor Peter Lenton, who unfortunately had a short career. I've been managing an equity fund within Fidelity for 13 years, and in those 13 years, it has achieved truly impressive returns.
If you enjoyed the content and haven't yet subscribed, take advantage now to do so. If you 're also a subscriber, click below to subscribe. If you also want to learn more about analyzing a company before buying its shares on the market, how to build an interesting, diversified, and resilient portfolio, and study more about real estate funds and fixed income, all of this is in my book, which is already available on Amazon.
If you're interested, the link is below. That's all for today. A big hug, I'll see you in our next video.
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