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and published a series of books on investing and stocks, including some of the best books. Because Alpha Books' stock market book series meets the growing demand from readers for information about stocks, securities, and investment strategies , Alpha Books has chosen to acquire the translation and publishing rights to this series of investment and securities books, including the best and most famous books written by leading scholars and successful investors worldwide.
The book "On Top of Wall Street" that you are holding in your hands is part of a series of books that recounts the experiences and secrets of Peter Lynch, a leading financial manager in America, and is one of the classic books on stock market investing. We believe that " On Top of Wall Street" will provide Vietnamese stock investors today with extremely useful lessons and skills .
Selected from the most renowned books on investment, finance, and securities by many of the world's leading authors, this series is hoped to be a valuable and useful gift for all interested readers. We are pleased to introduce this series of books on investing and securities to our readers. May 2007.
Alpha Books presents Carolyn, my wife and best friend of over 20 years, with a tribute to the support and sacrifices that have been so important to me. Dedicated to my children, Mary, Annie, and Beth, their love for their parents and for each other truly means so much. Dedicated to my colleagues at Fidelity, who worked tirelessly to ensure Magellan's success, but whose quiet contributions went largely unnoticed by the public.
This gift is for the 1 million shareholders at Magellan who have trusted and entrusted their savings to me, who have sent thousands of letters and made thousands of phone calls over the years to comfort me during market downturns and remind me that the future will be brighter. I give thanks to the saints for all the blessings and protection they have bestowed upon me throughout my life.
An introduction to the Millennium Edition. This book was written to provide basic knowledge and encouragement to individual investors, who could have foreseen that it would be published 30 times and sell over 1 million copies. This latest edition comes 11 years after its first publication. Therefore, I truly believe that the principles that helped me succeed at Fidelity Magellan are still applicable to stock investing today.
It had been a long time since " Top Wall Street" first appeared in bookstores in 1989. I left Magellan in May 1990 and the experts there said, "This was truly a smart move." They congratulated me for leaving at the right time, just before the bull market collapsed at that moment. Pessimists seem to be more in tune with the times.
Major banks across the United States have been failing, with only a few managing to survive and thrive. In early autumn of that year, as preparations were underway for a war against Iraq, the stock market experienced its most severe crisis ever. But soon after, when the war with Iraq was won, the banking system revived and the stock market entered a period of resurgence, a true resurgence.
The Dow Jones index has more than quadrupled since January 1990, rising from 2,400 points to 11,000 points and continues to climb. This was the most glorious decade for stocks in the 20th century. The number of American households holding stocks or investment fund certificates increased dramatically from 32% in 1989 to nearly 50% of the entire market, creating $25 trillion in new wealth that manifested itself in every city and town.
Over $4 trillion in new wealth has been invested in investment funds, a many-fold increase from the $275 billion in 1989. Since I also manage a fund, I'm very pleased to see these funds prosper, but this also means that many amateur stock investors are operating inefficiently. If they had performed better in generating these bull markets, they wouldn't have had to shift their investments to funds of the size they did.
Perhaps the information contained in this book will help misguided investors find a new, more beneficial path for themselves. Since leaving Magellan, I have become a freelance private investor focused on philanthropy. I have been soliciting donations for scholarships to help children of all faiths in the city attend Catholic schools in Boston.
On the other hand, I also work part-time at Fidelity as a board member and mentor for young research analysts. Recently, my leisure time has increased at least 30 times because I spend more time with my family. Perhaps that's enough about me. So let's get back to the topic I'm interested in: stocks.
Since the bull market formed in August 1982, we have witnessed stock prices rise to record levels in American history, with the Dow Jones index increasing 15-fold, in Lynch's own words. This increase is known as the 15-bagger, which can be loosely translated as a 15-span bag or 15-bagger. A type of security whose value increased up to 15 times.
This term was coined by Peter Lynch, one of the greatest investors of all time. I'm not surprised to see 15-foot-long bags at some successful companies. However, a 15-span bag in the entire market is quite a valuable reward. Please consider this. From 1929 to 1982, the Dow Jones index only quadrupled, rising from 248 points to 1046 points in half a century.
Recently, the rate of increase in stock prices has outpaced the rise of the Dow Jones index. It took 8 years and 4 months for the Dow Jones index to double from 2500 points to 5000 points . But in just three and a half years, the index doubled from 5,000 points to 10,000 points, between 1995 and 1999.
For the first time, stock returns reached 20% for five consecutive years. Never before has the stock market achieved returns of 20% or more, doubling stock prices like it has during this period. Wall Street's biggest bull market has rewarded its believers and astonished its skeptics to an extent no one could have imagined.
During the stagnation of the early 1970s, when I first took over leadership at Magellan, discouraged investors had to remind themselves that a bear market couldn't last forever, and those with patience tried to hold onto their stocks and mutual funds. For 15 years, the Dow Jones and other average indices rebounded to mid-1960s levels.
Now, we also need to remind ourselves that bull markets don't last forever and that patience is a necessary virtue not only for believers but also for skeptics. Later in this book, I argue that the collapse of AT&T in 1984 was perhaps a pivotal development for the stock market during that period. Today, it is the Internet, and so far, only the Internet has ignored me.
Just because I've always been averse to technology, my experience shows that to be a successful investor you don't necessarily have to be a trendsetter. In fact, most of the biggest investors I know who top this list are Warren Buffett. They were all people who disliked technology. They don't own what they don't understand, and neither do I.
I am very familiar with Dunkin' Donuts and Chrysler. That's why both of these stocks are included in my investment portfolio. I understand that the bank, savings, and related debt are related to Fannie Mae, an American housing credit bank . I never visit those websites. I've never accessed or chatted on that site either.
Without the expert assistance of my wife or children, for example, I probably wouldn't have been able to find those websites. During Thanksgiving in 1997, I was having eggnog cocktails with a web-savvy friend in New York. I mentioned that my wife, Carolyn, loved the mystical novelist Dorothy Sayers.
My friend sat down at a nearby computer, and with just a few clicks, he pulled up a complete list of Sayers' works, along with reader reviews and a one-to-five-star rating system for authors on literary websites. Authors were ranked just like fund managers. I bought four Sayers novels for Carolyn to choose the gift wrapping style, entered my family's address, and then removed one item from my Christmas gift list.
This was my first time buying anything on amazon.com. You'll read about how I discovered some of my best-performing stocks while eating or shopping – sometimes much earlier than professional stock hunters. Because Amazon existed in the digital space, not the suburban retail space, I ignored it. Amazon was beyond my comprehension; to me, it was as incomprehensible as a dry cleaning shop.
However, by 1997, Amazon was valued appropriately for its prospects and had received adequate funding. I wasn't flexible enough to immediately see the opportunity this sector offered. If I hadn't been afraid to research the company, I would have seen the enormous market for this type of business and Amazon's ability to seize the opportunity.
Alas, I didn't, and as a result, Amazon's stock increased tenfold—a ten-span bag, as Lynch put it—in just one year, 1998. Amazon was one of at least 500 dot-com stocks that experienced an extremely spectacular price increase. In the tech and dot-com world, it's not uncommon for a stock to surge tenfold in value during its initial public offering in less time than it takes Stephen King to write a horror story.
These investments don't require much patience. Before the internet, companies had to strive for growth to rank highly in the search results. Companies with billions of dollars in assets can now reach a valuation of $1 billion before they become profitable, and in many cases even before they generate any revenue .
Mr. Market, a fictional representation of stocks in general, doesn't wait for the advent of a new website to prove himself in real life in the same way that Walmart and Home Depot proved themselves to previous generations. For the currently hot internet stocks , fundamental factors seem to be out of fashion.
The simple appearance of a dot next to a com and the intriguing [clears throat] concept behind it was enough to convince optimists to pay upfront for the growth and prosperity of a decade to come, and subsequent buyers to pay even higher prices based on future fundamentals, a price that increases every moment.
Judging by Maserati's sales figures in Silicon Valley, Kiki, dot-com stocks deliver well-deserved rewards to the companies that brought them to market or to early buyers who knew when to sell. However, I also want to offer a reminder to those who buy stocks after their prices have skyrocketed. What's the point of investing in a diot.com stock at prices that correspond to years of rapid income growth when that growth is not at all certain?
When I present this issue, readers will easily see that my answer is no. With all these new issues, the stock price doubled, tripled, or even quadrupled on its first day of trading. If your broker can't pinpoint you to a reasonable group of stocks at the initial offering price—a highly unlikely scenario given that online offers are more attractive than Super Bowl tickets—you'll miss out on a significant percentage of your potential profit .
You could even lose all your profits because some diot.com stocks hit record highs in the first few trading sessions and never return to those levels. If you feel left out of the diot.com game, console yourself with the fact that very few diot.com investors have succeeded from start to finish. It's a mistake to judge the entire volatility of these stocks based solely on their initial offering price, which virtually no one could afford.
Those who received stock dividends were lucky because they got a little more than they intended. Despite the countless instant gratifications surrounding me, I continue to invest in the traditional way. I own stocks whose returns depend on long-standing fundamental factors. A successful company enters new markets, profits increase, and stock prices rise accordingly, or a poorly performing company transforms into a well-performing one.
A typical high-performing stock in Lynch's portfolio generally takes 3 to 10 years, or even longer, to gain the upper hand. Due to the lack of profitability in the dot-com sector, most dot-com stocks cannot be ranked according to the price-to-earnings ( ROI) benchmark. In other words, there is no 'e' in the PE index.
In this context, both PE factors play a crucial role. Since there is no PE ratio, investors focus on a single, highly popular piece of data: the stock price. In my opinion, stock prices are the least useful piece of information you should rely on, yet in fact, they were the most widely used in 1989 when this book, *On Top of Wall Street*, was written, and stock price news feeds only appeared at the bottom of financial news websites.
Today, you can see telegraphic news bulletins on many media outlets, while many others display small dialog boxes showing the Dow Jones Industrial Average, a composite index of 500 S&P 500 stocks. Those accessing these channels naturally need to know information such as which markets have closed. On popular internet portals , you can click on your own portfolio and find the latest information on each stock, or you can gather information on the prices of over 800 stocks, pagers, or voicemails.
To me, all this information about prices is sending the wrong message. If my favorite internet company sells a share for $30 and your favorite company sells it for only $10, then those who only care about price will say that my company has the upper hand. This is a dangerous illusion . The price the market pays for a stock today or next week does n't tell you which company has the greatest chance of success after two or three years on the IT superhighway.
If you can only stick to one type of data, stick to revenue data assuming the company in question has revenue. I agree with the rather irritating notion that sooner or later, income will determine the success or failure of an equity investment decision . The stock prices today, tomorrow, or next week only distract us .
The internet is a far cry from the first world-changing advancements: railroads, telephones, trains, airplanes, and television, which claimed ownership and had a revolutionary impact on everyday life, or at least on the wealthiest quarter of the world's population. These emerging industries led to the creation of many new companies, but very few of them were able to survive and achieve a dominant position in the industry.
Perhaps the same thing will happen with the internet. One or two big names will dominate this territory, much like McDonald's in the fast-food industry. Specifically, hamburgers or Schlumbergers in the oil and gas services industry. Shareholders in successful companies will become wealthy. Meanwhile, shareholders of companies that are slow, outdated, or falling behind will lose all their money.
Perhaps you'd be smart enough to invest in successful companies that belong to a distinct group of companies with $1 billion in annual revenue. Although a typical dot-com company has no revenue, you can still conduct a brief analysis to get a general idea of the revenue the company needs to achieve in the future to adjust its current stock price .
Let's formulate a hypothesis. dot.com First, you find the business value by multiplying the number of debt shares. For example, 100 million at the current stock price , say, $100 per share, 100 million times $100 is equivalent to $10 billion. And that is the business value of dot.com. When you invest in any company, you expect its business value to increase.
This wouldn't be possible if buyers weren't paying higher prices for the shares to increase the investment's value. With this in mind, before dot.com stock can increase tenfold, the company's business value must increase tenfold, from $10 billion to $100 billion. Once you've achieved your target business values, you'll have to ask yourself how much dot.com needs to earn to reach a valuation of $100 billion.
To get an approximate answer, you can apply the price-income index method specifically to fast-growing activity in currently booming markets, where this index can reach 40 times income. Allow me to digress a little here. Later in this book, I mention the miracle that can turn companies into venture capital assets when people overpay for them, using McDonald's as example A.
In 1972, the company's stock was priced at an unusually high 50 times earnings; contrary to expectations, the stock price plummeted from $75 to $25, a great opportunity to buy at a much more realistic price than the 13 times earnings valuation. On the next page, I also mention the exceptionally high price—500 times the earnings—that shareholders pay for shares in Ross Perot's Electronic Data Systems.
At a price 500 times the earnings, I noted that it would take five centuries for you to reinvest, assuming EDS earnings remain stable. Thanks to the internet, prices that were 500 times income have dropped below a shocking level, as have prices of 50 times and 40 times. The same applies to my theoretical example of dot.com .
In any scenario, for dot.com to become a $100 billion business, we can predict that it would eventually have to generate $2.5 billion in revenue annually. Only three US corporations had revenues exceeding $2.5 billion in 1999 . For this to happen with dot.com, the company would have to join the unique group of hugely successful companies similar to Microsoft.
However, in reality, this is a rare feat. Yes, I'd like to conclude this brief discussion about the internet with one note. There are three ways to invest in this trend without buying into an unrealistic expectation or business value proposition. The first method is a derivative of the earlier pickaxe and shovel tactics.
During the gold rush, most aspiring gold miners lost money, but those who sold their pickaxes, shovels, tents, and even work clothes, like Levi Strauss, made a huge profit. Hey, you can find non-internet companies that indirectly benefit through online transactions . A clear example is a synchronized delivery service, or you could also invest in companies that manufacture switches or related CAC equipment to ensure smooth transactions.
The second method is also known as free internet gaming. It 's where an internet entrepreneur is tied to a non-internet company that has real earnings and a stable stock price. I didn't choose that name. You can find out for yourself , but a few intriguing freelance games caught my attention in a typical scenario where a freelance company is valued, for example, at $800 million in the current market, while the inexperienced internet finance trading company is valued at $1 billion before that capability is proven.
If online financial transactions unfold as promised, it will undoubtedly be significant. Suppose that a segment of the company receives a rapid stock distribution; they will then execute transactions on those distributed shares. Alternatively, if the internet company performs poorly, it will further strengthen the resolve of labor-intensive investors on the opposing side.
The third approach is to create exceptional profits, where a traditional, tightly-knit business like brick and mortar benefits from using the internet to cut costs, increase operational efficiency to achieve higher productivity, and thereby generate greater profits than in an earlier stage of development.
Scanners have been installed in supermarkets. This has helped reduce shoplifting, improve inventory management, and bring greater benefits to supermarket chains. Let's talk again about the future of The Net and its additional benefits, which will create even greater success. But at this point, most of us expect too much, leading to ineffective pricing.
Companies currently valued at $500 million are likely to be successful. Meanwhile, companies that are valued at $10 billion in the future may not even be worth 10 cents. When expectations become reality, the winners will be far more insightful than they are now. Investors who foresee this will be better able to take advantage of it.
Returning to Microsoft, a stock that has increased 100-fold in value, which I've been following along with Cisco and Intel, this giant with ultimate power in the high-tech sector achieved explosive revenue growth almost from its very first days. Microsoft went public in 1986 at a price of 15 cents per share.
Three years later, you can still buy a share for under $1. But since then, the stock price has increased 80-fold. The stock was split several times before going public. Therefore, initial public offerings (IPOs) never actually sell for 15 cents a share in terms of stock splits. Please see the footnotes on the following pages.
If you adopt the Missouri "show me" approach and wait to buy Microsoft stock until it achieves great success with Windows 95, you could still make seven times your initial investment. You don't need to be a computer programmer to recognize Microsoft wherever you look. Except in Apple's territory, all new computers are equipped with Microsoft operating systems, specifically Microsoft Windows.
Apple is gradually losing its appeal. The more computers use the Windows operating system, the more software experts will write programs for Windows, not for Apple. Apple has been cornered. There, the company only sells 7 to 10% of the market capacity. Meanwhile, computer manufacturers such as Dell, HP, Compaq, IBM, etc., run Microsoft's software.
They waged a fierce price war to sell more computers. This never-ending war has reduced the revenue of computer companies. However, Microsoft remained outside this sphere of influence. Bill Gates' company is not in the consumer computer business. This woman sells gas to power computers. Cisco is also a company that has achieved remarkable success.
Since the company went public in 1990, its share price has increased 480 times. I observe extraordinary winners every day for very ordinary reasons, but I'm sure many people have noticed Cisco. Freelance businesses hire Cisco to help connect computers into systems. Then universities hired Cisco to computerize student dormitories.
Students, teachers, and parents visiting their children can all notice this development. Perhaps some of them went home to do some research and buy stocks. I mention Microsoft and Cisco to provide contemporary examples that illustrate an important theme in this book. That's why even an amateur investor can buy stocks that will be hugely successful in the future, if he pays attention to developments in the workplace, shopping malls, car showrooms, restaurants, or wherever a promising new business is likely to start.
When presenting a topic, I always prioritize clarity, expressed in an organized manner. Charles Barkley, a basketball player famous for his long-range shooting, once stated that he was misquoted in his autobiography. "I don't mean to say I was misquoted in this book, but people have misinterpreted me on one fundamental point, and this is my explanation." Peter Lynch doesn't advise you to buy stock in your favorite store just because you like shopping there, nor does he advise you to buy stock in a manufacturer just because they make products you like, or in a restaurant because you like the food there.
Liking a store, a product, or a restaurant is a good reason to be interested in a company and add it to your research list. But that's not a compelling enough reason to buy the stock. Never invest in any company before you have thoroughly researched at home the company's earnings prospects, financial condition, competitive position, expansion plans , etc.
If you own a retail company, a key element in the analysis is determining whether the company is nearing the end of its expansion phase. I call these the final turns in the game of football. When a stock like RadioShack or Toys R Us has established itself in the top 10% of the national stock market, that's a far cry from owning stores across 90% of the country.
You need to figure out where future growth is coming from and when it's likely to decline. Something has happened that has shaken my belief that the typical amateur investor has more advantages than the typical professional investor. In 1999, professional investors had faster access to more valuable information.
But now, a decade after the information gap was closed , amateurs can gather information about a company in three ways: from the company itself, from Value Line magazine or Standard & Poor's research reports, or from reports by in-house analysts at brokerage firms where these amateurs hold an account.
Typically, these reports are sent by mail from headquarters and it takes several days for the information to reach its destination. Today, a wealth of reports from financial analysts are readily available online. There, users can access the information at any time . Updates about companies you're interested in are automatically sent to your email address.
You can find out who the insiders are buying or selling, or whether brokers are raising or lowering the price of a stock. You can use adjustable screens to search for stocks with specific characteristics; you can also find information about different types of investment funds, compare their data, or find names in the top 10 stock rankings.
You can click on the summary titles attached to the online versions of Forbes, The Wall Street Journal, or Barron's and get a quick overview of most of the popular trading companies. From there, you can access Zacks and obtain a summary classification from all the analysts researching a particular stock.
Thanks to the internet, the cost of buying and selling stocks has decreased significantly for small investors, similar to the reduction in costs for institutional investors in 1975. Online trading has put pressure on traditional brokers to reduce commissions and transaction fees. Continuing on, a trend began with the emergence of low-cost brokers two decades ago.
You might be wondering what has happened to my investment habits since I left Magellan. Instead of pursuing thousands of companies, I now only pursue around 50. I continue to work on investment committees at various institutions and charities, but in all these cases, we hire investment managers and let them make the equity investment decisions .
Savvy investors might think that the Lynch family's portfolio belongs to the New England antiques society. This portfolio includes several savings and debt instruments that I acquired at bargain prices during a period when savings and debt instruments appreciated in value. These stocks have yielded huge profits, and I still hold them today.
Some of us also hold shares in a few growth companies from the 1980s and a few others from the 1970s. These businesses continue to thrive, and their stock prices remain at a reasonable level. Thanks to the internet, the cost of buying and selling stocks has decreased significantly for small investors, just as it did for institutional investors in 1975.
Online trading has put pressure on traditional brokers to reduce commissions and transaction fees. Continuing on, a trend began with the emergence of low-cost brokers two decades ago. You might be wondering what has happened to my investment habits since I left Magellan. Instead of pursuing thousands of companies, I now only pursue around 50.
I continue to work on investment committees at various institutions and charities, but in all these cases, we hire investment managers and let them make the equity investment decisions . Savvy investors might think that the Lynch family's portfolio belongs to the New England antiques society. This portfolio includes several savings and debt instruments that I acquired at bargain prices during a period when savings and debt instruments appreciated in value.
These stocks have yielded enormous returns, and I still hold a portion of them. We also hold shares in some of these growth companies from the 1980s and others from the 1970s; these businesses continue to thrive, and their stock prices remain at a reasonable level. In addition, I still hold low-potential shares of quite a few slow-growing companies at prices far below what I'm willing to pay.
I don't hold shares in these disappointing companies out of stubbornness or nostalgia for the past; the reason I hold them is that these companies are maintaining good financial conditions, which is evidence of a brighter future. My low-potential stocks always remind me of one important thing: you don't necessarily have to make money from every stock you invest in.
In my experience, six out of ten stocks achieving success is a positive outcome. Why is that? Because your losses are limited to the amount of capital you invest in each share, it naturally cannot be less than zero. While the profits you can earn are completely limitless. When you invest $1,000 in a low-potential stock, in the worst-case scenario you might lose $1,000 , but when you invest $1,000 in a high-potential stock, you could earn $10,000, $15,000, $20,000 , or even more after a few years.
All you need to invest successfully throughout your life is to hold a few high-performing stocks, and the profits they generate will offset and outweigh the losses caused by underperforming stocks. I would like to provide an update on two companies in which I do not hold shares but which I have written about in this book: Bethlehem Steel and General Electric.
Both of these companies have taught me valuable lessons. I mentioned that shares of Bethlehem, a once-popular manufacturer of planers, have declined since 1960. It seems that even a long-established and well-known company is proving less attractive to investors than a fledgling new business . Bethlehem, once a globally recognized symbol of America, has continued to disappoint.
In 1958, Bethlehem's stock was selling for $60 a share. But by 1989, besides that, I was still holding low- potential shares in quite a few slow- growing companies at prices far below what I was willing to pay. I don't hold shares in these disappointing companies out of stubbornness or nostalgia for the past; the reason I hold them is that these companies are maintaining good financial conditions, which is evidence of a brighter future.
My low-potential stocks always remind me of one important thing: you don't necessarily have to make money from every stock you invest in. In my experience, six out of ten stocks achieving success is a positive outcome. Why is that? Because your losses are limited to the amount of capital you invest in each share, it naturally cannot be less than zero.
While the profits you can earn are completely limitless. When you invest $1,000 in a low-potential stock, in the worst-case scenario you might lose $1,000 , but when you invest $1,000 in a high-potential stock, you could earn $10,000, $15,000, $20,000 , or even more after a few years. All you need to invest successfully throughout your life is to hold a few high-performing stocks, and the profits they generate will offset and outweigh the losses caused by underperforming stocks.
I would like to provide an update on two companies in which I do not hold shares, but which I have written about in this book. Those are Bethlehem Steel and General Electric. Both of these companies have taught me valuable lessons. I mentioned that shares of Bethlehem, a once-popular manufacturer of planers, have declined since 1960, suggesting that even a long-established company can be just as unattractive to investors as a fledgling new business .
Bethlehem, once a globally recognized symbol of America, has continued to disappoint. In 1958, Bethlehem stock was selling for $60 a share, but by 1989 it had fallen to $17, dealing a heavy blow to loyal shareholders as well as bargain hunters who thought they would make a profit. From 1989 onwards, the stock price continued to fall from $70 to below $10, proving to all of us that a cheap stock can always get even cheaper .
One day, Bethlehem Steel's stock might rise again. But thinking that will happen is just a dream, not an investment. I once mentioned General Electric stock on a nationally televised program because it used to be a huge amount, but in my book I said that General Electric's market size , with a market value of $39 billion and annual earnings of $3 billion, makes it difficult for the company to increase profits quickly.
In fact, this public utility company has delivered more to its shareholders than I had anticipated. After implementing several reforms under the insightful leadership of Jack Welch, the company transformed from a sluggish giant into a more agile and efficient entity. Welch's recent retirement spurred a number of General Electric subsidiaries to operate at maximum efficiency, using large amounts of cash to acquire new companies and successfully buy back shares.
General Electric's trends in the 1990s demonstrated the importance of keeping up with corporate events. Share buybacks also bring about another significant change to the dividend market, making it a potentially extinct phenomenon. I've written about the importance of this issue in later chapters, but the way shareholders used to distribute profits seems to follow the trail of a black-footed fox.
The downside of losing dividends is that regular mail checks provide investors with a stream of income and give them a reason to continue pursuing stocks during periods when the stock price is not yielding a return. In 1999, the dividend yields of the 500 companies in the S&P 500 index fell to a record low of nearly 1%, the lowest since World War II.
The reality is that current interest rates are lower than they were in 1989. Therefore, you would expect bond yields and stock dividends to continue to fall. When stock prices rise, dividend yields naturally decrease. If a stock is priced at $50 and the dividend is $5 per share, then the dividend yield is 10%.
When the stock price rises to $100, the dividend yield drops to 5%, and companies will not be as inclined to increase dividends as they used to. According to The New York Times' observation on October 7, 1999, it was unusual that the economy was still performing well even as companies were increasingly reluctant to raise their dividends.
Not so long ago, when a mature and strong company regularly increased its dividend, it was considered a sign of prosperity. A decrease in dividends or an unusual increase in dividends are signs of instability. Recently, large and powerful companies have become increasingly frugal with their dividends and often use the money to buy back their existing shares.
For example, General Electric reducing the supply of shares increased earnings per share and ultimately resulted in profits for shareholders. However, that profit is only obtained when they sell the shares. If anyone is responsible for the disappearance of dividends, it is the U.S. government. The U.S.
government not only taxes corporate profits but also imposes a full tax on corporate dividends. Therefore, dividends become unearned income to help shareholders avoid double taxation. Companies have eliminated dividends to encourage buyback strategies that help boost stock prices. This strategy imposes taxes on shareholders based on the increase in asset value.
If they sell their shares, the long-term value of the asset is only subject to 50% of the regular income tax rate . I talked about long-term income in my lunch and dinner speeches for 11 years. I asked some of the audience, how many of you are long-term stock investors? Today, the answer is unanimous: everyone is a long-term investor, including the day traders among the audience, who always take a two- hour break.
Long-term investing has become so commonplace that it's easier to admit you're a heavy heroin addict than to admit you 're a short-term investor. Stock market news has gone from being hard to find in the 1970s and early 1980s to being easy to find in the late 1980s and now almost unavoidable. Financial weather is monitored regularly, much like real weather, with its ups and downs, low-pressure areas, fluctuations, and countless predictions about what's coming, as well as the advice on how to respond .
Investors think long-term, but the incessant commentary on every price fluctuation only frustrates them and forces them to focus only on the short term, preventing them from thinking long-term. It would also be a challenge if there were a way to avoid the obsession with the latest ups and downs or to avoid the six-monthly stock market check-up, like checking the oil in a car; perhaps then investors would feel more at ease.
No one believes in long-term investing as strongly as I do. But just as with the golden rule, the principle of treating others as you would like to be treated , preaching is easier than practicing. However, the current generation of investors has maintained their faith and perseverance even in the difficult situations I mentioned above.
Judging by the apology calls from Fidelity Magellan, my former workplace, clients felt completely complacent, with only a very small percentage withdrawing their money from the bear market related to Saddam Hussein. In 1990, thanks to day traders and professional fund managers, stocks changed hands at a breakneck pace.
In 1989, the trading volume of 300 million shares was considered an extremely active trading session on the New York Stock Exchange . But today, a trading session with 300 million shares is considered sluggish, and 800 million shares is seen as normal. Did day traders bring about changes to the market?
Will the booming stock market attract interest? Whatever the cause , here I consider day traders to be a key factor, as their frequent trading has made the stock market even more unstable. While a decade ago, a 1% increase or decrease in stock price within a single trading session was considered rare, today, 1% fluctuations in stock prices occur several times a month.
On the other hand, if we compare the difference in the likelihood of success or failure, making a living from trading today is roughly the same as making a living from racing, card games, or online gambling. Honestly, I view stock trading as a kind of home casino. The downside of a home casino is the office job.
If you conduct 20 transactions per day, you will complete approximately 5000 transactions in a year, and all of these transactions must be recorded, listed, and reported to IES. Therefore, stock trading is a casino that requires many accountants. Everyone wants to know how the stock price increased.
On any given trading day, what level would the Dow Jones index be closest to? As for me, I'm interested in how many stocks increase in price and, conversely, how many stocks decrease in price. These fluctuating numbers paint a more realistic picture than ever before, a picture never more realistic than it is now.
In a monopolistic market, where very few stocks rise and most fall, investors who buy low- or mid-priced stocks are punished for their excessive caution. People are wondering how the S&P 500 index could rise 20% while my stock price is falling? The answer is that a small number of large-cap stocks within the S&P 500 index are outnumbering the average stocks .
For example, in 1998, the S&P 500 index rose 28% overall, but if you look closer, you'll see that the index of the 50 largest companies increased 40% while the other 450 companies remained virtually unchanged. In the Nasdaq market, the automated listing system of the National Association of Securities Dealers in the US, which was the first to adopt the internet and other supporting tools, there are about a dozen large companies whose stocks have been exceptionally successful while all the rest of the companies in the market have failed.
A similar story unfolded in 1999, where a small group of successful stocks outnumbered and overwhelmed a large number of failing stocks. Unlike other separations, this has never happened before in history. Incidentally, I just thought that the S&P 500 index is dominated by large companies, while the Nasdaq index was the domain of emerging companies in the late 1990s.
The giants of the Nasdaq system, such as Intel, Cisco, and a few others, dominated. The Nasdaq index is performing even better than the S&P giants that dominate it. Biotechnology is an industry overflowing with small-cap stocks. My aversion to high technology led me to view a typical biotechnology company with disdain.
$100 million in cash from stock sales, 100 PhDs, 99 microscopes, and zero revenue. Recent advances have inspired me to dedicate a few kind words to biotechnology. It's not that amateur investors should buy shares of biotechnology companies, but rather that the biotechnology industry as a whole could play a significant role in the new century, much like the electricity industry did in the previous century.
Today, there is a long list of biotechnology companies, with about three dozen profitable and around 50 more showing promise of profitability. Amgen has become a unique biotechnology business with revenues exceeding $1 million . One of the many biotechnology investment funds that might be worth a long-term commitment to .
Market analysts have filled the space and magazines with comparisons between today's market and some market that came before. For example, this event is very similar to 1962, or this reminds me of 1981, or when they feel gloomy, they'll say we're facing the 1929 crisis again. Lately, there's been a tendency to compare it to the 1970s when smaller stocks fluctuated wildly while larger stocks, especially the highly attractive Nifty 50, continuously rose in price.
Then, in the bear market of 1973-1974, the Nifty 50's price fell 50% to 80%. This unusual drop refuted the theory that large companies are unaffected by bears. If you buy Nifty 50 stock and hold that lot of stock for 25 years, a more reasonable hypothesis is that you're stuck in a desolate desert with no radio, television, or magazine to tell you to give up the stock forever.
You won't regret the results, although it took a generation, the Nifty 50 has completely revived and even surpassed the Dow and S&P 500 by the mid-1990s, a complete resurgence from 1974. Even if you bought these stocks at sky-high prices back in 1972, your choice will ultimately be proven. Once again, we are seeing the 50 largest companies selling their shares at prices that skeptics consider unimaginably expensive.
Will today's Nifty 50 stocks suffer a downturn similar to the 1973-74 bull market? That 's something everyone is predicting. History shows us that the reversal of a stock price drop of 10% or more occurs every two years, while in bear markets, a drop of 20% or more occurs every six years. Severe bearish speculation, where stock prices fall by 30% or more, has occurred five times since the 1929-1933 crisis.
It would be foolish to assume we have witnessed the last such event. This explains the importance of not buying stocks or investing in investment funds with money you plan to spend over the next 12 months on college tuition, your wedding, or anything else. You certainly wouldn't want to sell your stocks during a market downturn just to recoup your investment.
When you are a long-term investor, time is a crucial factor to consider. The bull market continued to hit unusual potholes as the book on the top of Wall Street wrote that stocks had only just recovered from the 1987 crash. This worst price drop in 50 years occurred at the same time Lynch was on a golf holiday in Ireland.
I'll need nine or ten more trips. I bought a house in Ireland so I could convince myself that my arrival in Ireland wouldn't trigger a new fear. I also feel quite uncomfortable visiting Israel, Indonesia, or India. Setting foot in countries whose names begin with the letter I always fills me with apprehension.
But I've been to Israel twice, to India twice, and to Indonesia once, and nothing happened. To date, the 1987 price crash has not been repeated. But then bearish speculation reappeared in 1995. I resigned as director of Fidelity Magellan. While the 1987 crash caused widespread fear—a 35% drop in two days was undoubtedly the cause of that fear—the period of 1990 terrified me even more.
Why so? In 1987, the economy was booming again and our banks were able to pay off their debts. That means the fundamentals were all good, but in 1990, the country was in recession, our biggest banks were on the brink of collapse, and we were preparing for war with Iraq. Fortunately, not long after, the war ended victoriously, the country overcame the recession, banks began to recover, and stocks began their fastest rise in modern history.
More recently, we've seen the average of major stocks fall 10% in the spring of 1996, the summers of 1997 and 1998, and the fall of 1999. In August 1998, the S&P 500 index fell 14.5%. This is the second worst month since World War II. Nine months later, stocks rose again, and the S&P 500 index increased by more than 500%.
So what was my purpose in listing all of these events? It would be wonderful if we could avoid price drops, provided we could sell our stocks at the right time. But no one has ever figured out how to predict these price drops. Furthermore, if you sell your shares and avoid a price drop, how can you be sure you'll buy them back during the next upward trend following a price decline?
Here, allow me to tell a story. If you invested $100,000 in stocks on July 1, 1994, and continued investing the entire amount for five consecutive years, your initial $100,000 would have grown to $341,772. But, if you stop for about 30 days during those five years, and those 30 days happen to be the period when the stock was most profitable, your $100,000 would only turn into $153,792, which is disappointing.
By staying in the market, you've doubled your rewards. As a successful investor once said, the loudest debate is always the most intelligent. You can find a compelling reason to multiply your capital in every morning newspaper or every evening news broadcast when "On Top of Wall Street" becomes a bestseller, just as Ravi Batra's "The Great Depression of 1990" achieved this same status.
The obituary for this bull market has been written countless times since 1982. One possible cause is Japan's weak economy, the US trade deficit with China and the world, the 1994 bond market crash, the 1997 emerging market collapse, global warming, the ozone hole, deflation, the Gulf War, customer debt, and most recently, the Y2K phenomenon.
On the second day of the new year, we realize that Y2K is an exaggerated fear, especially since the last Godzilla movie. Overvalued stocks are something investors have been complaining about for years. Some people argued that stock prices in 1989 were too high at the Dow 2600 point level. Others argue that stocks were overvalued in 1992 above the Dow 3,000 point level.
At one point, the complaints resurfaced in 1995 when stock prices rose above the Dow Jones 4,000 points. One day we might witness another severe bear market , but even if stock prices fall by a record 40%, it's still a long way from the point where various experts are urging investors to abandon their stocks.
As I 've noted in previous scenarios, I'm not saying that an overvalued market doesn't exist , but there's no point in worrying about it. It is often said that a bull market must overcome the wall of anxiety. But the worries never stopped. Recently, we have been concerned about how to overcome unimaginable catastrophes such as a third world war , a decisive battle, the ultimate biological weapons attack , nuclear attacks with devastating destructive power, the melting of ice at the poles, ice colliding with the Earth, etc.
Meanwhile, we are witnessing some seemingly impossible but beneficial events, such as the collapse of communism. The U.S. federal government and state governments have achieved budget surpluses . The United States created 17 million new jobs in the 1990s, offsetting the number of job cuts at large public companies.
While downsizing has caused considerable confusion and anxiety among government-sponsored human resources officials, it has freed up millions of workers, leading them to more interesting and rewarding jobs in smaller, fast-growing companies. However, these newly created jobs have not received the attention they deserve .
The United States has its lowest unemployment rate in half a century, while Europe is facing widespread job losses. Many large companies in Europe have also implemented workforce reductions. Europe lacks small businesses where these workers can relocate to work. They have higher savings rates than their citizens and are better educated.
However, unemployment in Europe remains more than twice as high as in the United States, which is another surprising development. In Europe at the end of 1999, there were more people employed than at the end of the previous decade. The main storyline remains simple and has no old-fashioned ending. These vouchers are not lottery tickets.
There is a company associated with each share. Companies either perform better or worse. If a company performs better, its stock price will increase. If you own companies that are performing better and consistently increasing profits, then you're doing well in your business . The company's profits have increased 55 times since World War II, and the stock market has grown 60 times.
Four wars, nine recessions, eight presidential terms, and a scandal—none of these changed the outcomes. In the following table, you will see the names of 20 companies on the list of the 100 most successful companies in the US market in the 1990s. The numbers in the leftmost column indicate the ranking of these companies based on total return on investment in dollars.
Many high-tech companies such as Helix, Fortronics, Siliconics, and Teragenics are among the top 100 most successful companies . But I didn't include names in the list because I only wanted to highlight noteworthy opportunities that any ordinary person can recognize, research, and take advantage of.
Dell is the most successful computer company, and almost everyone has heard of Dell at least once. Everyone can recognize Dell's enormous sales and the ever- increasing reputation of Dell computer products. Those who bought Dell stock early on reaped enormous profits, up to 889 times their initial investment.
That means a $10,000 investment in Dell stock right from the start would have yielded an asset worth $899 million. You don't need to be a computer expert to recognize the promising opportunities offered by Dell, Microsoft, or Intel. Every new computer comes with tape printed with the words "Intel Inside." You don't necessarily have to be a genetic engineer to realize that Amgen has transformed from a laboratory into a pharmaceutical manufacturer with two of its best-selling drugs, Swap.
We certainly cannot fail to mention the success of Home Depot. This company continued to grow at a breakneck pace, making it onto the list of the top 100 brands in the 1990s. Harley Davidson. The fact that all of their lawyers, doctors, and dentists have become characters in Easy Riders Weekend is good news for Harley.
Lowe's and once again, Home Depot. Who could have predicted that there would be two classic stocks in the same lackluster industry? Paychex. Many small businesses everywhere no longer have to worry about payroll management thanks to Paychex. My wife, Carolyn, and I have been using Paychex's services to manage our family finances.
I missed the opportunity and didn't buy this stock. Several of the most profitable companies in the past decade, as well as in previous decades, have come from the traditional retail sector. The Gap, Best Buy, Staples, Dollar General. All of these companies are well-managed, have seen their stock prices increase by up to a million times, and have millions of customers who have directly experienced their services.
The fact that two small banks appear on this list once again proves that exceptionally successful companies can come from any industry, even a slow-growing and sluggish one like banking. My advice to you for the next decade is to patiently observe and look for companies that will achieve great success in the future.
You might find a company like that. Peter Lynch and John Rothchild. Foreword, a note from Ireland. You can't study today's stock market without analyzing the events that unfolded between October 16th and 20th, 1987. That was the most unusual week I've ever experienced. More than a year later, looking back on this moment with an objective and calm attitude , I have been able to separate the sensationalist uproar from events of lasting importance.
The following are some of the most memorable events that remain in my memory. On October 16th, a Friday, my wife, Carolyn, and I had a wonderful day driving through County Cork, Ireland. I rarely go on vacation, so the fact that I'm traveling is strange in itself. I didn't even stop once to visit the headquarters of a well-known business company.
Typically, I'll deviate in any direction to gather the latest information on sales, inventory, and earnings. But there doesn't appear to be any S&P 2 balance sheet reports anywhere within a 250-mile radius of us. We visited Blarney Castle, where the legendary Blarney Stone rests atop the wall of the building, a place steeped in countless ancient stories.
You'll have to lie on your back and carefully squeeze through the wire mesh that keeps you from a hellish fall. And then, while trying to grab onto a railing to regain courage. When you place a kiss on the legendary Blarney Stone, the sensation is so exhilarating and joyful, as if you've just escaped the clutches of death.
So, to escape the lingering effects of our visit to Blarney Rock, we spent both quiet weekend days playing golf in Waterville on Saturday and in Dooks on Sunday, and then driving around the beautiful Kerry Belt area. On Monday, October 19th, I faced my final challenge, which also demanded intense focus, intelligence, and unwavering endurance.
The Killeen golf course in Killarney has 18 holes, making it one of the most challenging golf courses in the world. And after loading my golf clubs into the car, I drove with Carolyn across the Dingle Peninsula to the seaside resort of the same name. We had booked a room at the Sheen Falls Hotel, and I must have been very tired.
That's why I didn't leave my hotel room all that afternoon. We had dinner with two friends, Elizabeth and Peter Calorie, at a famous seafood restaurant called Doyle's Seafood Restaurant. After October 20th, we boarded a plane to go home. Small events, of course—I didn't mention my own small events. After considering the facts, I find these events not worth mentioning.
A year later, you'd probably remember the Sistine Chapel, not your blistered feet from running all over the Vatican. But, I'll tell you what worries me. Because I'm in the mood to solve a trap. On Thursday, the day we departed for Ireland after work, the Dow Jones Industrial Average fell 48 points, and on Friday, the day we arrived, it dropped a further 108.36 points.
This makes me wonder whether we should go on vacation or not. I was only thinking about the Dow Jones index and completely ignored Blarney, not even when I kissed the rock during the weekend between golf sets. I tried to find a few phones and talk to my office about which stocks to sell and which to buy at bargain prices.
If the market continues to fall, on Monday, the day I compete in Killarney, the Dow Jones Industrial Average will drop another 508 points. Thanks to the time difference, I finished my set a few hours before the first bell rang on Wall Street. Not exactly, I played worse, you could say, a gloomy and despondent feeling started in me from Friday and perhaps that explains why I played worse than usual, if not the worst I've ever played .
And there are two things I can't remember: the match score. The only metric I cared about then was that over 1 million shareholders in the Magellan Fund had just lost 18% of their assets, equivalent to $2 billion, in Monday's trading session. My obsession with this unfortunate event rendered me oblivious to the surrounding scenery on the way to Dingle.
All I was aware of at the time was 40 seconds and the highway. I didn't get a wink of sleep all afternoon at the Cill Riala hotel, as the preceding passage might have suggested. Instead, I spoke on the phone with my head office to decide which of the 1,500 stocks in our fund should be sold to raise cash to offset the fund's unusually low cash flow.
We had enough money to use under normal circumstances, but not enough under the circumstances of Monday, October 19th. In a way, I couldn't decide whether the world was coming to an end, whether we were falling into a recession, or whether things were n't so bad after all. And one thing is certain: only Wall Street is uninvolved.
My colleagues and I sold what we had to sell. First, we sold some UK stocks on the London Stock Exchange on Monday morning; London stock prices were generally higher than in the US market due to an unusual storm that forced the London Stock Exchange to close the previous Friday. Therefore, the massive price drop that day was avoided.
Then we sold some stocks on the New York Stock Exchange, mostly at the start of trading when the Dow had only dropped 150 points, and soon after it fell to its lowest point of 508 points. That evening at Doyle's restaurant, I couldn't even tell you what kind of seafood I had. You can no longer tell the difference between cod and shrimp when your investment fund can no longer keep up with the gross national income ( GNP) of a small coastal nation.
We returned home on the 20th because all of the above events awakened in me a strong desire to return to my office. This is a possibility I've been preparing to face since the day we arrived in Ireland. Honestly, I'll let these things happen to me naturally. Lessons from October. I've always believed that investors should ignore the ups and downs of the market.
Fortunately, most of them weren't too concerned about the ups and downs I mentioned above. Consider the following example . Less than 3% of the millions of account holders at Fidelity Magellan have withdrawn their investments from the fund and transferred them to a money market fund. Throughout the week when the market was declining .
When you sell stocks during a market downturn, you will always have to accept selling them at a lower price. Even if October 19th makes you anxious about the stock market, you don't necessarily have to sell your shares that day, or even the next day. You can gradually reduce your portfolio and outmaneuver the panicked stock sellers.
Because since the beginning of December, the market has seen a steady increase in prices. By June 1988, the market had recovered 400 points from the recession, equivalent to over 32%. I want to add three more lessons to the dozens we should be learning from November. Don't let distractions ruin a good portfolio.
Second, don't let hassles ruin a great vacation, and third, never travel abroad when you 're worried about finances. I could write several more chapters on this topic with more noteworthy events, but I probably won't waste your time. I prefer writing about what you find more valuable. How to identify outperforming companies: whether the Dow Jones reaches 508 points or 108 points, these outperforming companies will always succeed.
Mediocre companies will fail, and investors in those companies will receive commensurate rewards. Finally, if I can remember what I ate at Doyle's, I'll definitely let you know. Introduction. The advantages of velvet, wild money. This is where the author , a professional investor, promises readers that in the next 30 pages , he will share his secrets to success.
The number one rule in my book is never to listen to professionals. Two, ten years of experience in this field has convinced me that any average person using 3% of their normal brain capacity can invest in stocks as successfully as, if not more successfully than, an average street stock market expert.
I know you wouldn't expect a plastic surgeon to advise you to do your own surgery, or a plumber to tell you to install your own water heater, or a barber to suggest you get a bangs haircut. However, this isn't surgery, plumbing, or a haircut; this is about investing, where wise money isn't necessarily wise, and foolish money is n't necessarily stupid as we think.
Foolish money is only stupid when it follows wise money . This is where the author, a professional investor, promises readers that in the next 30 pages, he will share practical secrets. Amateur investors possess numerous advantages of their own, which, if properly utilized and exploited, can lead to greater success than professionals and significantly outperform the market in general.
Furthermore, when you decide to invest your own stocks, you'll have to do better than the professionals. And finally, there's no reason why you shouldn't try to do better than them. I'm not suggesting or advising you to sell all your investment funds, because if that happened on a large scale, I would surely be unemployed.
Furthermore, there are no problems with investment funds , especially those that perform well and generate returns for investors. It was honesty, not arrogance, that compelled me to declare that millions of amateur investors have received well-deserved rewards by investing in Fidelity Magellan, and that is precisely why I was invited to write this book in the first place.
Investment funds are a great invention for those who lack both the time and the inclination to test their intelligence in the stock market, as well as for those with only a small amount of investment capital but who want to diversify their investments. Only when you've decided to invest on your own should you actually do it yourself .
This means ignoring all the tricks, all the encouragement from stockbrokers, or all the tempting suggestions from your favorite newsletter, and focusing only on your own research. That means ignoring any stocks you hear Peter Lynch or some similar author is going to buy. There are at least three compelling reasons to ignore the stocks that Peter Lynch would buy.
First, he could make mistakes. The long list of failures I've compiled always reminds me that so-called smart money has been stupid 40% of the time . Secondly, even if he's right, you never know when he might change his mind and sell a particular stock. And you three have better resources than those that are always around you.
To maximize the advantages of those resources, you need to regularly monitor and supervise them, just as I supervise my own resources. If you're smart, you can buy spectacularly successful stocks in your area or in the surrounding market long before Wall Street discovers them. You can't become a US consumer with a credit card without doing some basic research on a dozen companies beforehand.
And if you work in this field, you'll need even more analysis. It is from these analyses that you will find the 10-span bags. I've seen this happen repeatedly throughout my tenure at Fidelity. The magical 10-span bag , in Wall Street parlance, is a stock where you make a tenfold return on your initial investment.
I suspect this highly technical term was borrowed from baseball, where a home run gives you four times the maximum score—in my business, quadrupling your money is pretty good, but ten times is even better. Because, in financial terms, it's equivalent to 2.5 home runs. If you've ever managed to increase your money tenfold, you'll understand how appealing that is.
From the very beginning of my investing journey, I developed a passion for making my money ten times larger than the first stock I bought. Flying Tiger Airlines stock brought me a huge amount of money, many times my initial investment. Thanks to that, I had enough money to cover my tuition fees until graduation.
Over the past decade, by consistently buying stocks that have increased fivefold or tenfold in value, I've managed to gain an edge in the fierce competition. And right now, I own 1400 stocks in a small portfolio, and even just one outstandingly successful stock can miraculously turn a disastrous outcome into a fantastic one .
This effect is even more pronounced in weak stock markets. Yes, stocks that increase tenfold in value are very common in weak markets. Let's go back to 1982, the year before the advent of the speculative stock market. Let's assume you invested $10,000 in 10 stocks in the following table on December 22, 1980, and held those stocks until October 4, 1983.
That's strategy A. Strategy B is similar, except you also invested in the 11th stock, the Stop & Shop stock, and that Stop & Shop stock increased tenfold. The result of strategy A is that your $10,000 will grow to $13,040, representing a total return of 30.4% after nearly 3 years, while S&P 500 stocks yielded a total return of 40.6% over the same period.
You have every right to look at these results and say, "What a bargain. Why should I give up this amazing investment opportunity to the professionals?" But, if you add Stop & Shop stock, your $10,000 will more than double to $21,000. That gives you a total return of 110.6% and a chance to be proud on Wall Street.
Furthermore, if you invest in Stop & Shop because you see the company's growing potential, your total return could double again. To achieve this spectacular result, you just need to find one stock that will be exceptionally successful among these 11 stocks. The more accurate your decisions are about one stock , the more likely you are to make mistakes about others.
But, you will still succeed as an investor. Apples and Donuts. You might think that's the bag phenomenon. The "10-gang" figure only appears in an unusual stock at an extraordinary company like Brain O Biofeedback or Cosmic R&D. This is the kind of stock savvy investors usually avoid. In reality, there are many "10- gang" stocks at companies you'll likely recognize.
Let me name a few: Dunkin' Donuts, Walmart, Toys R Us, Stop & Shop, and Subaru. There are many companies with products you admire and love. But has anyone ever doubted that if you had bought Subaru stock along with a Subaru car, you would be a millionaire today? Yes, that's right. This surprising calculation is based on a few assumptions.
First, you bought the stock at an extremely low price, two dollars a share in 1977. Second, you sold it at a very high price in 1986, reaching $312 a share – and this price doesn't match the 1/8 split of the stock, meaning... An old stock is split into eight new shares. That means you've increased your money 156 times, equivalent to 39 home runs.
So if you invest $6,140 in stock, the equivalent price of a car, you 'll have exactly $1 million. Instead of constantly exchanging stocks, you now have enough money to buy a castle and two Jaguars in your garage. You can't make $1 million by investing in Dunkin' Donuts stock with the same amount of money you spend on donuts ( how many donuts an average person can eat?), but if you buy two dozen donuts a week for $270 in 1982, and you invest the same amount in stock, four years later the stock will be worth $1,539, a sixfold increase.
So if you invest $10,000... If you invested in Dunkin' Donuts stock, after 4 years you would have earned a total profit of $47,000. If in 1976 you bought 10 pairs of jeans at The Gap for $180, by now those jeans would be worn out, but 10 shares of Gap bought at the same price of $180 , $18 per share as the initial offering price, would be worth $250,000 when the market rose in 1987.
So, a $10,000 investment in Gap would have generated a profit of $250,000. If during 1973 you spent 31 nights on business at La Quinta Motor Inns, paying $11.98 per night for a room, and you combined that $371.38 room bill with buying La Quinta stock for the same amount (equivalent to 23.21 shares), your stock would be worth...
A $4,363.08 investment over 10 years would yield a profit of $107,500 for a $10,000 La Quinta stock. If, during 1969, you found yourself paying $980 for a traditional funeral for a relative organized by one of Service Corporation International (SCI) agencies, and despite your grief, you still invested an additional $980 in SCI stock, your shares would be worth $14,352.19 in 1987.
Thus, a $10,000 investment in SCI stock would have yielded a profit of $137,000. If, going back to 1982, in the same week you bought the first Apple computer for $2,000 to help your children with their studies and college admissions, you also invested $2,000 in Apple stock. By 1987, those Apple shares would be worth $11,950, enough to cover a year's college tuition.
The power of common sense. To reap these huge profits, you need to buy and sell stocks at the right times. But even if you miss the highest or lowest prices, you can still do better investing in any of the familiar companies I mentioned above, rather than investing in mysterious businesses that none of us understand.
There's a very famous story about a New England firefighter. Apparently, back in the 1950s, he couldn't recognize that a local factory like Tampax, later the Tampax Corporation, was expanding at a breakneck pace. He assumed they couldn't be growing so fast unless they were in a boom period, and with that assumption, he and his family decided to invest $2,000.
Furthermore, for the next five years, they consistently invested an additional $2,000 each year. By 1972, the firefighter had become a millionaire, and he had never even bought Subaru stock. I'm not sure if our lucky investor ever consulted a stockbroker or other stock market expert . But surely many people told him that his hypothesis was wrong and that if he knew what was good for him, he should stick to the stocks that companies were buying or the electrical stocks that were booming at the time.
Fortunately, the firefighter stood his ground. You might think that it's the complex and sophisticated stories of the experts surrounding Trump's machinery that give us the best investment ideas. But I've had many ideas of my own in the way that firefighter did . I have hundreds of conversations with companies every year and spend hours in those High-level meetings with CEOs, executives, financial analysts, and my colleagues in the investment fund business, but I 've stumbled upon some exceptionally successful stocks in situations entirely outside of working hours, and surely you can too.
I was really impressed with Taco Bell on a trip to California. La Quinta Motor Inns was recommended to me by an employee at its competitor, Holiday Inn . Volvo, the kind of car my family and many friends use. Apple computers, my child has one at home and then the systems director bought a few to install in the office.
Service Corp International, an electronics analyst at Fidelity, someone completely unrelated to funeral homes. So, that's not his area of expertise. I was on a business trip to Texas. Dunkin Donuts, I like their coffee, and recently La Pierre, an import recommended by my wife. In fact, Carolyn is one of my most valuable sources of information.
My price. She was the one who discovered Leggs. Leggs is a perfect example of the power of common sense . Leggs turned out to be one of the two most successful consumer products of the 1970s, the early years of that decade, before I took over Fidelity Magellan. I was working as a stock analyst for the firm.
I knew about the textile industry from traveling across the country visiting textile mills, calculating profit margins, price-to-income ratios, and the durability of canvas fibers. All that information was worth less than Carolyn's. I hadn't found Leggs in my research , but she found it while shopping at a grocery store.
Right on a metal rack standing alone near the checkout counter was a brand-new women's hosiery product packaged in colorful plastic eggs. The Hanes company was testing L'eggs in several locations across the country, including the suburbs of Boston. When Hanes interviewed... Hanes interviewed hundreds of women after they left the test supermarkets and asked if they had bought any stockings.
The majority answered yes. However, most couldn't remember the brand name. Hanes was overjoyed and ecstatic. If a product becomes a bestseller without brand recognition, imagine how much better it will sell once the brand becomes famous. Carolyn didn't need to be a textile expert to realize that L'eggs was a superior product.
All she had to do was buy a pair and try them on; they were rated as having better elasticity than regular stockings, meaning the fibers were n't stretched as much. They also fit well. But the main appeal was convenience. You could find L'eggs displayed right next to chewing gum and razors, and you didn't need to make a special trip to a large supermarket.
Hanes sold the stockings with Their regular brand was available in supermarkets and specialty stores. However, the company determined that women, on average, visit each other once every six weeks. Meanwhile, they go to the grocery store twice a week. This also means they have 12 opportunities to buy L'eggs for every opportunity to buy the regular brand.
Selling socks in a grocery store is an incredibly popular idea. You can see that when you look at the number of women with plastic egg-shaped shopping carts at the checkout counter, and you can imagine how many pairs of L'eggs socks will be sold nationwide after I say this. How many women buy long socks?
How many sales clerks see women buying socks, and how many husbands see their wives come home with socks, know about L'eggs' success? The answer is millions. Just two or three years after the product was launched, you could walk into any one of the thousands of supermarkets and realize it. It was a bestseller.
From there, it was n't hard to see that L'eggs was a Hanes product, and Hanes was listed on the New York Stock Exchange. When Carolyn told me about Hanes, I did my usual research on their success story, and it was even more amazing than I'd imagined. So, with the same fervent belief as the firefighter who bought Tambrands stock, I introduced Hanes stock to Fidelity's investment fund manager.
Hanes stock had sixfold before the company was acquired by Consolidated Foods and is now owned by Lee. L'eggs continues to generate a fortune for Sara Lee and has continued to grow steadily for over a decade, and I'm convinced that Hanes stock could have increased 50fold if it hadn't been acquired. The great thing about L'eggs is that you don't necessarily need to know about the product from the start.
Whether you buy it or not... One , two, or three years after L'eggs became nationally popular, you could at least triple your money . Many people didn't , especially husbands, who were known as "designated investors" perhaps too busy buying solar energy stocks or satellite dish companies, and thus missed out on significant profits.
Consider the case of Harry Hunstud, a friend of mine—I've slightly altered his name to protect this unfortunate individual. In fact, there's always a small Hunstud in all of us. This designated investor, one in every family, spent his mornings reading The Wall Street Journal and a regular stock market newsletter he subscribed to for $250 a year.
He was looking for the ideal stock with limited risk, but Conversely, it had great potential for success. Both magazines and periodicals mentioned Winchester Disk Drives stock, a small but highly efficient company promising a glorious future. Hunstud couldn't tell the difference between a hard drive and a fragile floppy disk , but he called his broker and learned that Merrill Lynch had placed Winchester stock on its list of preferred stocks to buy.
Hunstud thought all of this couldn't be a coincidence. He was soon convinced that investing the hard-earned $3,000 he had made in Winchester stock was a wise idea . He eventually conducted his research. Hunstud's wife, or rather, someone who knew nothing about serious currency trading— their roles could be reversed, but this was an extremely rare phenomenon—had just returned home from the shopping mall after discovering a new women's clothing store called The Limited.
The store was incredibly busy, and she didn't... I can't wait to tell my husband about the friendly salespeople and the surprisingly low prices. There, I bought Jennifer a whole fall wardrobe. She exclaimed, "It all only cost $275!" " 275 dollars?" the designated investor grumbled, "While you're out wasting money, I'm stuck at home all day trying to make some." And he found the answer: Winchester Disk Drives.
You must also see that we will definitely succeed. Therefore, we will invest $3,000 in this stock. "I hope you know what you're doing," the man, who knew nothing about the serious world of currency trading, said. "Do you remember Herbalife Photocell?" What's certain is that $7 has turned into $3.50, and we've lost $500.
Yes, but that's Herbalife, and this is Winchester. The Wall Street Journal has called the drive business one of the major growth industries of this decade. So there's no reason why we should exclude ourselves from the game, right? The ending of this story is easy to imagine. Winchester Disk Drives has a poor quarter, or there's an unexpected competition in the disk drive business that sends the company's stock price plummeting from $10 to $5.
The designated investor has no way of understanding the implications of these events, so he decides to make the prudent decision to sell all his shares and is still happy that he only lost an extra $1,500 , less than five wardrobes of Jennifer's. Meanwhile, Hunt Stood is unaware that the stock price of The Limited, the store that his wife Henrietta was so impressed with, has grown at a steady pace , from under 50 cents a split-adjusted share in December 1979, to $9 in 1983, and then continued to increase 20 to 23 times, and even so...
He bought the stock at $9 and, after a price drop to $5, he was able to five times his money because the stock price then rose to $52, a 100-fold increase from the initial price . Therefore, if Hunt Stood had invested $10,000 in the stock from the start, he could have made over $1 million . More realistically, if Mrs.
Hunt Stood had combined the $275 she spent on Jennifer's wardrobe with another $275 invested in the stock, it's conceivable that her small investment could have covered a semester's tuition for her daughter. However, our designated investor, despite having ample time to buy The Limited stock after selling her Winchester shares, continued to miss this excellent opportunity at the time, given that The Limited had 400 stores.
The whole country was bustling with customers. But Hunt Stood was too busy to notice . He was preoccupied with watching what Boone Pickens was doing with Mesa Petroleum. It was near the end of 1987, and perhaps just before the Dow had fluctuated slightly and reached 508 points, that Holmes finally discovered that The Limited was on his brokerage firm's list of stocks to buy.
Furthermore, there were numerous promising articles in three different magazines. The stock had become a favorite of large corporations, and as many as 30 analysts were studying it. The designated investor found it to be a truly worthwhile purchase. One day, he complained to his wife, "It's ridiculous!
Do you remember that The Limited store you loved so much?" It turns out it 's a pretty well-known company. "That means we can buy their stock." A fantastic stock. The PBA's special news section said so. He even heard Forbes had a cover story about it. Anyway, smart money would n't be enough to buy this stock.
We need at least $2,000 from our retirement fund. "We still have $2,000 in retirement fund?" Henrietta asked skeptically. "Of course we do, " the designated investor snapped, and sure enough, more than that. Thanks to that store you love. But you don't shop at The Limited anymore. Henrietta said, "The goods there are expensive and not unique anymore." " Other stores sell similar things too ." "That makes no sense," our designated investor yelled.
"You're not talking about shopping, you're talking about investing." Holmes had bought the stock at $50 right before the record high price in 1987. But then, the stock price quickly dropped to $16, and when it was about half that, he sold it. Again, glad to have limited his losses. Was this a stock company?
I was a good man who reprimanded Huntooth for missing out on The Limited. I also didn't buy a stock that was going up, and my wife saw the crowd that Huntooth's wife saw at the shopping mall . I also bought The Limited stock when the story about the company became popular. But when the fundamentals started to decline, I continued to hold the stock and accepted the temporary loss.
In fact, I could have written several more pages about The ten-pound bags I missed and many more regrettable examples will unexpectedly appear in this book. Even when I missed promising opportunities, I still had the ability and the foresight. When I was facing the most valuable competition of the century, the Gold Pill Peach competition, I didn't have the presence of mind to ask if it was a reputable company .
I was too busy judging the distance from the tee to the hole. Fortunately, we have plenty of ten-pound bags around us, so we can recognize the majority and still buy the desired stocks. In a large portfolio like mine, I would have to buy some stocks before they made a significant difference . But, with a small portfolio like yours, just one stock is enough.
Furthermore, the interesting thing about investing in familiar companies like Leggs or Dunkin' Donuts is that when you're putting on your socks or sipping your coffee, you're also... Conducting the kind of fundamental analysis that Wall Street analysts are hired to do—visiting stores and testing products—is one of the key elements of an analyst's job.
Spending your whole life buying cars or cameras will develop a sense of what's good, what's bad, what to sell, and what not to sell. If you don't know anything about cars, you know something else, and most importantly, you know it before Wall Street knows why they had to wait for Merrill Lynch's restaurant expert to introduce Dunkin' Donuts when eight new restaurants had already opened in your area .
Merrill Lynch's restaurant analyst will discover Dunkin' Donuts for a few reasons I'll explain soon. By the time the stock price has increased fivefold from $2 to $10, you'll have discovered it when it was only $2, boosting your computer clock speed to 1 billion Hz. Among amateur investors, for some reason, they consider driving around town eating donuts as the investigation phase.
Initial capital isn't a complicated habit. There seems to be an unwritten rule on Wall Street: If you don't understand it, invest all your life savings into it. Avoid businesses that dominate a market segment because at least we can observe them, and look for businesses that produce products nobody understands.
One day I heard about a similar opportunity—a report a staff member placed on my desk—a great opportunity to invest in a company that produces 1-megabit CMOS DRAM memory chips, bipolar RISC simplified instruction set computer integrated circuits, synchronous sign-point arithmetic, AI data processing, 6 GHz wide memory optimized program drive, asynchronous backward-compatible duplex communication protocol, peripheral channel architecture, and a set of components.
Remember four interleaved layers, a 15-nansecond response time , boosting my computer clock speed to 1 billion Hz, and activating my megaflop . If you can't tell the difference between a racehorse and a memory chip, you'd better stay away from it. Even if your broker calls and tells you this is a once-in-a-decade opportunity to make billions of dollars, stay away from Cabbage Patch.
Does that mean I'm advising you to buy stock in every new fast-food company, every business with a trending product, or every public enterprise that opens a local retail outlet? If it were that simple, I would n't have lost money on Bleckner's Hay, the ambitious Bay 11 company across the street from my office.
If I had just eaten their sandwich and not bought their stock, those 50 shares could have bought a tuna in cereal. I would We'll talk more about this failure later. And what about Coleco? Just because the Cabbage Patch doll was the best-selling toy of the century couldn't save a mediocre company with a terrible balance sheet.
And although the stock surged for about a year, fueled by the hype of family video games and the Cabbage Patch craze, it eventually plummeted from its record high of $65 in 1983 to its recent low of $13.40. As a result, the company declared bankruptcy in 1998. We'll delve deeper into the Cabbage Patch case in Chapter 11.
Finding a promising new company is only the first step. The next step is to conduct research. Research that helps you differentiate Toys "R" Us from Coleco, Apple Computer from TeleVideo, or Piedmont Airlines from People Express. Now, after mentioning People Express, I wish I had researched more thoroughly.
What happened to that airline? If so, there is Perhaps I wouldn't have bought their stock. Although I experienced some setbacks during my 12 years running Fidelity Magellan, the fund still grew 20 times on average per share, partly thanks to the little-known and out-of- favor stocks that I was able to identify and research myself.
I firmly believe that any investor can succeed using similar strategies, without spending too much to make smart money even smarter, because, as I said, smart money isn't always smart. This book is divided into three parts. Part one: investment preparation, chapters 1 to 5, addresses the problem: how to assess yourself as a stock investor, how to measure the level of competition, portfolio managers, investors in large companies, other Wall Street experts.
How to identify high-risk stocks or bonds. What about further? How do you investigate your financial needs and how do you develop a successful stock investing habit? Part two, chapters 6 through 15, addresses how to find the most promising opportunities, what to look for and avoid in a company, how to optimally use stock brokers, annual reports and other resources, and the constituent factors of indicators, price-earnings ratios, and cash flow ratios often mentioned in technical analyses of stocks.
Part three, long-term vision, chapters 16 through 20, addresses how to establish a portfolio, how to closely monitor the companies you are interested in, when to buy and sell, decisions regarding options and futures contracts, and some general observations on the strength of Wall Street, American businesses, and the stock market.
These are things I have been very interested in for over 20 years of stock investing. Because Alpha Books' stock market book series meets the growing demand from readers for information about stocks, securities, and investment strategies, Alpha Books has chosen to purchase the translation and publishing rights to this series of books on stock investment, including the best and most famous books written by authors.
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