One Up On Wall Street – Peter Lynch

One Up On Wall Street: How To Use What You Already Know To Make Money In The Market by Peter Lynch serves as a near step-by-step tutorial on how to invest. It teaches readers how to identify promising stocks and how to conduct thorough research on them. The author uses illustrations and real-life examples to reinforce his points, offering invaluable insights into the stock market dynamics.

Key message of the book:
Small investors have advantages over large investors and should leverage these to outperform professionals.

Preparing to Invest

Why Professionals Are Lagging – The Amateur’s Advantage

Finance professionals often face career risks, making them hesitant to be the first to invest in certain stocks. As a result, they wait too long and miss out on gains, as these stocks often rise significantly before catching their attention.

3 Questions to Ask Before Investing

1. Do I own a house?
   A house can be a solid investment with tax advantages, leverage potential, and inflation protection. It’s often easier to manage emotionally and financially compared to stocks.
2. Do I need the money?
   Never invest money you can’t afford to lose. The stock market can be unpredictable, especially in the short term, so avoid using funds meant for essential needs like education or living expenses.
3. Do I have the personal qualities to succeed?
   Successful investing requires patience, self-reliance, and emotional control. Investors need to base decisions on research, not emotions or market trends.

Key Takeaways:

• Don’t overestimate the skills of professionals.
• Use what you already know to your advantage.
• Look for opportunities before they’re widely recognized.
• Prioritize buying a house before stocks.
• Focus on investing in companies, not the market as a whole.
• Ignore short-term price fluctuations.
• Both large profits and large losses can occur with common stocks.
• Predicting the short-term market or economy is futile, but long-term stock returns generally outperform bonds.
• Keeping track of companies you invest in is an ongoing process.

Picking winners

First, acknowledge that you have an edge : as a consumer (discover new products that are spreading), as a professional (you know a lot about your industrie). 
Then, you have to investigate.

6 types of companies

Slow Growers

• Definition: Large, mature companies growing slowly, typically at or slightly above the national economic growth rate (around 3% annually).
• Characteristics: Pay regular, high dividends due to limited growth opportunities.
• Examples: Electric utilities, which once grew rapidly, now have stabilized.

Stalwarts

• Definition: Large, established companies with moderate, reliable growth (10-12% annually).
• Characteristics: More resilient during economic downturns, providing stability in a portfolio.
• Examples: Coca-Cola, Procter & Gamble, which perform steadily without dramatic gains or losses.

Fast Growers

• Definition: Smaller, aggressive companies with rapid growth (20-25% annually or more).
• Characteristics: High potential for significant returns but also higher risk, particularly if the company’s growth slows or it becomes too large.
• Examples: Companies like Anheuser-Busch and Wal-Mart, which expanded by capturing larger market shares in their industries.

Cyclicals

• Definition: Companies whose profits and sales fluctuate with the economic cycle.
• Characteristics: High risk due to their dependence on economic conditions; timing of investment is crucial.
• Examples: Ford, American Airlines, where stock prices rise and fall dramatically based on economic trends.

Turnarounds

• Definition: Troubled companies on the brink of failure that have the potential to recover and thrive.
• Characteristics: High-reward investments if the company successfully restructures or receives support.
• Examples: Chrysler and Penn Central, which bounced back from near-collapse to generate significant returns.

Asset Plays

• Definition: Companies sitting on valuable assets that the market has undervalued.
• Characteristics: These can include real estate, valuable patents, or tax-loss carryforwards.
• Examples: Pebble Beach, where the land and other assets were worth far more than the stock price suggested.

Conclusion: Highfliers to Low Riders

Companies don’t remain in the same category forever. Fast growers can eventually slow down and become stalwarts or even sluggards, as seen with industries like carpets, plastics, and computers. For example, companies like Advanced Micro Devices and Texas Instruments, once fast growers, are now cyclicals. Chrysler shifted from a cyclical to a turnaround and back again, illustrating how companies can move between categories.

Growth companies that lose momentum often become turnarounds, while others, like Holiday Inn, transition into asset plays due to valuable real estate. Disney exemplifies a company that has been a fast grower, stalwart, asset play, and turnaround at different times.

What to look for, what to avoid

13 attributes of the perfect stock

• It Sounds Dull—Or, Even Better, Ridiculous
  • Companies with boring or ridiculous names are often overlooked, creating investment opportunities.
  • Example: Pep Boys—Manny, Moe, and Jack sounds ridiculous, which initially kept many investors away, but it proved to be a profitable investment.
• It Does Something Dull
  • A business engaged in boring activities is less likely to attract competition and is often undervalued.
  • Example: Crown, Cork, and Seal, which makes cans and bottle caps, is a mundane business that turned out to be highly profitable.
• It Does Something Disagreeable
  • Businesses involved in unpleasant or unglamorous work can be profitable because they face less competition.
  • Example: Safety-Kleen handles greasy auto parts and restaurant grease traps—an unattractive business that consistently delivered strong profits.
• It’s a Spinoff
  • Spinoffs often perform well as independent entities, benefiting from focused management and strong balance sheets.
  • Example: Toys “R” Us was a successful spinoff from Interstate Department Stores, eventually becoming a highly profitable independent company.
• The Institutions Don’t Own It, and the Analysts Don’t Follow It
  • Companies with little institutional ownership or analyst coverage are hidden gems that may be undervalued.
  • Example: Chrysler at its lowest point was abandoned by institutions and analysts, but those who invested during this time saw significant returns.
• The Rumors Abound: It’s Involved with Toxic Waste and/or the Mafia
  • Companies rumored to be involved in controversial or “unsavory” industries can be undervalued, providing opportunities for investors.
  • Example: Waste Management, Inc. dealt with toxic waste, an industry that deterred many investors due to its negative reputation, leading to underpricing of its stock.
• There’s Something Depressing About It
  • Companies in industries that people find depressing, such as funeral services, can be profitable due to the lack of competition and steady demand.
  • Example: Service Corporation International (SCI), a company specializing in funeral services, operates in a morbid industry but was highly profitable due to steady demand.
• It’s a No-Growth Industry
  • Low or no-growth industries are less competitive and more stable, making them ideal for long-term investments.
  • Example: SCI also exemplifies a company in a no-growth industry (funerals), which allowed it to grow steadily with little competition.
• It’s Got a Niche
  • Companies with a strong niche or exclusive franchise face little competition and can dominate their markets.
  • Example: Vulcan Materials operates in the aggregate (rock and gravel) industry, a niche business with limited competition due to the high transportation costs of competing products.
• People Have to Keep Buying It
  • Products that people must continuously repurchase (e.g., consumables like razor blades or soft drinks) provide stable revenue streams.
  • Example: Gillette makes razor blades, a product people need to buy regularly, providing a stable and continuous revenue stream.
• It’s a User of Technology
  • Companies that benefit from technology, rather than produce it, can grow as tech advances lower their costs.
  • Example: Automatic Data Processing (ADP) uses technology to process payrolls more efficiently, benefiting from advancements in computing without being caught in the tech industry’s volatility.
• The Insiders Are Buyers
  • Significant insider buying is a strong signal that those who know the company best believe in its future success.
  • Example: Teledyne was known for significant insider buying, signaling strong confidence in the company’s future performance.
• The Company Is Buying Back Shares
  • Share buybacks reduce the number of outstanding shares, increasing earnings per share and potentially driving up the stock price.
  • Example: Exxon consistently bought back shares instead of drilling for new oil, which increased earnings per share and boosted the stock price.

What to avoid

1. Hot Industries

   – Description: Industries that are trendy often experience rapid growth, but they attract fierce competition and quickly become unprofitable as numerous competitors enter the market.

   – Example: The carpet industry boomed when prices dropped, leading to an influx of competitors. As a result, profits vanished despite the initial growth.

2. The Next “Something”

   – Description: Stocks touted as the next big thing often fail to live up to expectations, and even the original company they are compared to can struggle.

   – Example: Many companies were called the “next IBM,” but most failed, and even IBM itself went through tough times during that period.

3. Diworsifications

   – Description: Companies that acquire unrelated businesses often overpay and mismanage these acquisitions, leading to poor stock performance.

   – Example: Mobil Oil diworsified by acquiring Marcor Inc., which led to years of poor performance, unlike Exxon, which avoided such mistakes and performed better.

4. Whisper Stocks

   – Description: These are speculative stocks with exciting stories but little substance, often leading to significant losses for investors.

   – Example: Bioresponse, a company focused on extracting lymph from cows, had an intriguing story but eventually failed, resulting in heavy losses for investors.

5. The Middleman

   – Description: Companies that rely heavily on a single customer are at risk of losing contracts or being forced into unfavorable terms, which can drastically reduce profits.

   – Example: SCI Systems was heavily dependent on IBM, and any change in IBM’s needs could have been catastrophic for SCI.

6. Stocks with Exciting Names

   – Description: Companies with flashy or trendy names can attract investors with little scrutiny, leading to investments based more on perception than substance.

   – Example: Xerox had an exciting name that attracted investors, but it struggled as competition increased. In contrast, companies with boring names like Crown, Cork, and Seal often go unnoticed but perform well.

The importance of earnings

Owning a stock = owning a part of a business.

In which of the 6 categories does it stand ?

What is the PE ratio ? Beware of very high PE ratios.

The Two-Minute Drill: The Story

To make a compelling investment case in under two minutes, focus on key factors specific to the type of company you’re analyzing.

Slow-Growing Company

If you’re considering a slow grower, your investment is likely focused on its dividend. The main points of your script should be:

“This company has increased earnings consistently for the past ten years. It offers a reliable dividend yield, and it has never cut or suspended its dividend, even during economic downturns. In fact, the company raised its dividend during the last three recessions. It’s a utility provider, and its new cellular operations could add a nice growth boost over time.”

Cyclical Company

For cyclicals, your focus is on the business cycle and operational improvements. Your pitch might be:

“The auto industry has been in a three-year slump, but this year we’re seeing a turnaround. Car sales are up across the board for the first time in years. GM’s new models are performing well, and in the last eighteen months, the company has streamlined operations by closing inefficient plants and cutting labor costs by 20%. Earnings are poised for a sharp increase.”

Asset Play

For asset plays, highlight undervalued assets and potential upside:

“The stock is trading at $8, but just the videocassette division is worth $4 a share, and the real estate is worth $7. So, I’m getting the rest of the company for a negative $3. Insiders are buying in, the company has stable earnings, and it carries no significant debt.”

Turnaround Company

For turnarounds, focus on how the company is addressing its issues:

“General Mills has dramatically simplified its business by selling off less profitable divisions like Eddie Bauer and Parker Brothers. It’s refocusing on restaurants and packaged foods, and has been buying back millions of shares. The seafood subsidiary has gained substantial market share, and new product lines like low-cal yogurt and no-cholesterol Bisquick are driving earnings up.”

Stalwart Company

When pitching a stalwart, focus on stability, P/E ratios, and potential growth catalysts:

“Coca-Cola is trading at the low end of its P/E range and hasn’t seen much price movement in the last two years. However, the company has made several improvements, like selling part of Columbia Pictures and boosting sales of diet drinks. Japanese consumption of Coca-Cola products is up 36%, and Spanish consumption has increased by 26%. The company is also consolidating its distribution network, which should further accelerate growth.”

Fast-Growing Company

For fast growers, focus on the company’s growth potential and strategy for continued expansion:

“La Quinta started as a profitable motel chain in Texas and has successfully expanded into Arkansas and Louisiana. Last year, it added 20% more motel units, and earnings have consistently increased every quarter. The company plans to continue its rapid expansion, and its debt levels remain manageable. La Quinta has found a niche in the competitive motel industry, and it still has significant room to grow before reaching market saturation.”

Tips to Gather More Information

One of the most effective ways to uncover promising stocks is to ask company managers who their most successful competitors are. This can help identify companies that are flying under the radar.

Calling the Company

Contacting Companies

Professionals frequently reach out to companies for information, but many amateur investors miss out on this valuable practice. Investor relations departments are typically open to answering questions, and in smaller companies, you might even get to speak with top executives, such as the president.

Preparing for the Call

Before you call, prepare thoughtful, targeted questions. Avoid asking questions like “Why is the stock price dropping?” since the company often doesn’t know the answer. Instead, ask about specific business aspects like earnings projections, new product developments, or efforts to reduce debt.

Getting Useful Information

Start by referencing specific information from the company’s reports to show that you’ve done your research. For example, instead of asking vaguely about debt, inquire about reductions noted in the latest financial statement. Two excellent questions to ask are:

• “What are the positives this year?”
• “What are the negatives?”

These questions will give you a more complete picture of the company’s situation.

Expecting Honesty

Companies generally aim to be honest since any misleading information will eventually come to light in quarterly reports. That said, the tone can vary by industry. Mature sectors may downplay their successes, while emerging industries might be overly optimistic.

Visiting Headquarters

Why Visit?

A visit to the company’s headquarters can reveal insights you wouldn’t get from a phone call. The office environment and culture can provide clues about the company’s financial health and priorities.

Signs of a Good Investment

Modest, functional headquarters are a good sign. For instance, Taco Bell’s simple offices behind a bowling alley indicated a company focused on business rather than luxury. This frugality suggested sound financial priorities.

Red Flags

In contrast, extravagant offices with luxurious furnishings could signal misplaced priorities. Excessive spending on appearances may suggest poor management of shareholder money.

Investor Relations in Person

Meeting Corporate Representatives

Attending annual meetings or visiting headquarters allows you to meet company representatives directly. This gives you the opportunity to ask specific questions and gauge their confidence in the business.

Red Flags from Representatives

Be wary if you notice that investor relations representatives appear wealthier than the company’s performance would suggest. If an executive owns a disproportionate amount of stock while the company has a high P/E ratio, it could indicate that the stock is overvalued.

Kicking the Tires

On-the-Ground Research

Practical, hands-on research can reveal a lot about a company. Visiting stores, trying products, and observing customer behavior offer insights that numbers can’t always show. For instance, a visit to a Toys “R” Us store reassured investors that the company knew how to sell toys effectively.

Practical Examples

Before investing in La Quinta or Pic ’N’ Save, visiting their locations confirmed that their business models worked. Similarly, a positive shopping experience at Pep Boys showed that the company had strong sales potential.

Reading the Reports

What to Focus On

When reading annual reports, ignore the glossy pages and focus on the Consolidated Balance Sheet. Pay close attention to the company’s cash position and long-term debt. A strong balance sheet, where cash exceeds debt, is a clear sign of financial health.

Example: Ford’s Balance Sheet

Ford’s 1987 annual report highlighted its robust cash reserves and significant debt reduction, indicating a stable company not at risk of bankruptcy. This type of analysis can give investors peace of mind about the company’s future.

Numbers to consider in the report

Percent of Sales

When a company has caught your attention because of a specific product, it’s crucial to determine what percentage of the company’s total sales it represents. This will give you an idea of the product’s significance to the overall business and whether its success could meaningfully impact the company’s growth.

P/E Ratio

The price-to-earnings (P/E) ratio should be compared with the company’s growth rate. If the growth rate is lower than the P/E ratio, this could signal a potential slowdown in growth.

A more nuanced way to assess the stock is by using the formula:
(Long-term growth rate + Dividend yield) ÷ P/E ratio

For example, if a company has a 12% growth rate, a 3% dividend yield, and a P/E ratio of 10:

• (12 + 3) ÷ 10 = 1.5

A result less than 1 is poor, while a score of 2 or higher is excellent.
For example, a company with a 15% growth rate, 3% dividend yield, and a P/E of 6 would score a strong 3, indicating a very favorable stock.

Net Cash

When a company has an unusually high cash balance, it can be a bargain. For example, if a stock trades at $30 but the company has $15 in cash per share, the real price you’re paying is $15.

Always check the cash position when it makes up a significant portion of the stock price. However, be cautious—if the company misuses the cash (such as with unwise acquisitions or diworsification), it could quickly disappear.

The Debt Factor

Debt levels matter significantly, especially during a crisis. A typical healthy debt-to-equity ratio is around 75% equity and 25% debt, but it’s also important to consider the type of debt.

Bank Debt

• Description: Short-term debt, such as commercial paper, often due on demand.
• Risk: High. If the company struggles financially, the lender can demand immediate repayment, which can force the company into bankruptcy.
• Example: GCA had bank debt, a risky proposition for shareholders since it could be called in at any time.

Funded Debt

• Description: Long-term debt, usually in the form of corporate bonds with maturities of 15-30 years. The company only needs to pay interest until the bond matures.
• Risk: Lower. Funded debt allows more time for the company to manage repayment, reducing the risk of sudden financial collapse.
• Example: Funded debt is generally safer for shareholders, as it gives the company time to recover from crises without the immediate pressure to repay.

By understanding these debt types, you can assess how well a company can handle financial stress, especially in downturns.

Book Value

The book value metric is easy to find but can be misleading, as some assets, such as inventory, might be overvalued. Conversely, certain valuable assets remain “hidden” on the balance sheet.

Hidden Assets

Hidden assets are valuable resources owned by a company but undervalued or not reflected on its balance sheet. These include natural resources, real estate, brand names, patents, or tax breaks that offer potential upside for astute investors.

1. Natural Resources: Companies owning land, timber, oil, or precious metals often record these assets at historical cost, far below their current market value. Example: Handy and Harman held large inventories of precious metals recorded at outdated prices, while their actual value far exceeded the book value.
2. Brand Names and Patents: Well-known brands or patented products may be listed at little value on the balance sheet but can generate significant revenue. Example: Coca-Cola and Robitussin’s brand value is far higher than what appears on their official book values.
3. Real Estate: Companies with large real estate holdings often carry them at their original purchase price, sometimes decades old, understating their current market value. Example: Santa Fe Southern Pacific owned 1.3 million acres in California at a fraction of its real value, making it a hidden asset play.
4. Goodwill Write-Offs: When a company acquires another business, the excess paid over the book value is recorded as “goodwill” and depreciated over time, potentially leading to undervalued earnings on paper. Example: Coca-Cola Enterprises recorded $2.7 billion in goodwill for its bottling franchises, but the actual value of these franchises continues to rise.
5. Subsidiary Holdings: When a company holds shares in another company or owns valuable subsidiaries, these assets are often undervalued by the market. Example: UAL, before rebranding as Allegis, owned subsidiaries like Hilton International and Hertz. These assets were worth more than UAL’s market price, making United Airlines effectively free to investors.
6. Foreign Ownership of U.S. Companies: European parent companies often hold undervalued U.S. subsidiaries. By investing in the parent company, you can acquire the U.S. business at a discount and get the European operations as a bonus. Example: Del Haize of Belgium owned 25% of Food Lion, so investors in Del Haize received both the U.S. and European operations.
7. Cellular Franchises: Local phone companies are often granted cellular franchises at no cost, representing a hidden asset that may not be reflected in the stock price. Example: Pacific Telesis included $9 per share worth of cellular value, hidden within its broader telecom operations.
8. Tax-Loss Carryforwards: Companies emerging from bankruptcy or turnarounds may possess large tax-loss carryforwards, which allow them to offset future profits against past losses and avoid paying taxes. Example: Penn Central doubled its earnings by using tax-loss carryforwards after bankruptcy, significantly boosting its stock price.

Cash Flow

Be sure to focus on free cash flow, not the cash flow that will need to be reinvested. Refer to Warren Buffett’s concept of owner’s earnings for a clearer understanding. [[Owner earnings]]

Inventories

If inventory grows faster than sales, it’s a red flag, especially for retailers.
Always check to ensure it isn’t building up too much.

Pension Plans

These are outlined in the annual report.
Pension plans represent a hidden future cost.

Bottom Line

This is often misunderstood.
It’s useful for comparing companies within the same industry.

Recheck the Story

It’s worthwhile to recheck the story behind your investments every few months.

Periodic Review of Investments

• Description: Regularly re-evaluating your investments is essential. Review reports like Value Line, quarterly earnings, and even visit stores to observe the company’s performance. This helps ensure the original reasons for investing remain valid.
• Example: If a company was thriving due to strong sales and market expansion, check whether the merchandise is still appealing and if the company is growing as expected.

Phases of Growth Companies

• Description: Growth companies generally move through three phases:

1. Start-up Phase: The riskiest phase, where the company is still proving its business model.
2. Rapid Expansion Phase: The safest and most profitable phase, as the company scales by replicating a successful formula.
3. Mature/Saturation Phase: Growth slows, and the company must find new ways to increase earnings.

• Example: Automatic Data Processing was still in the rapid expansion phase, having not yet saturated the market, which made it a solid investment at the time.

General Stock Checklist

• P/E Ratio: Compare it with similar companies in the industry to determine if it’s high or low.
• Institutional Ownership: Favor stocks with lower institutional ownership.
• Insider Activity: Insider buying and company share buybacks are positive signals.
• Earnings Record: Look for consistent earnings growth. Sporadic earnings are a red flag, except in asset plays.
• Balance Sheet Strength: Check the debt-to-equity ratio and financial strength rating.
• Cash Position: A strong cash position can act as a safety net, potentially setting a floor on the stock price.

Depending on the [[Types of companies]]

Slow Growers

• Dividend History: Ensure consistent dividend payments and regular increases.
• Dividend Payout Ratio: A lower payout ratio offers a cushion during tough times.

Stalwarts

• P/E Ratio: Make sure you’re not overpaying based on the stock’s P/E ratio.
• Diworseification: Be wary of acquisitions that could negatively impact future earnings.
• Growth Rate: Confirm that long-term growth is steady and consistent.
• Recession Performance: Check the stock’s performance during past market downturns.

Cyclicals

• Inventory and Supply-Demand: Monitor these closely to anticipate market shifts.
• P/E Contraction: Expect the P/E to shrink as the business cycle matures.
• Cycle Knowledge: Use your understanding of industry cycles to predict upturns and downturns.

Fast Growers

• Product Relevance: Ensure the product driving growth is significant to the company’s core business.
• Growth Rate: A steady growth rate of 20-25% is ideal. Be cautious with rates above 25%.
• Expansion Success: Look for evidence of successful expansion beyond the initial market.
• Growth Potential: Verify that the company still has room to grow.
• P/E Ratio vs. Growth Rate: The P/E ratio should be in line with the growth rate.
• Expansion Speed: Rapid or slowing expansion can indicate future stock performance.
• Institutional Ownership: Prefer stocks with low institutional ownership and limited analyst coverage.

Turnarounds

• Survival Ability: Assess the company’s cash, debt levels, and its ability to survive without going bankrupt.
• Bankruptcy Status: If the company is bankrupt, determine what assets remain for shareholders.
• Turnaround Plan: Evaluate whether the company has cut costs effectively or eliminated unprofitable divisions.
• Business Recovery: Check for signs of improving business operations.
• Cost-Cutting: Understand how cost-cutting measures impact profitability.

Asset Plays

• Asset Value: Identify the true value of the company’s assets, including any hidden ones.
• Debt Impact: Determine how much debt reduces the asset value.
• New Debt: Be cautious if the company is taking on new debt, which could erode asset value.
• Potential Raiders: Consider whether a raider could unlock asset value for shareholders.

Key Investment Tips

• Understand the companies you own and the specific reasons for holding the stock. (“It’s really going up!” doesn’t count.)
• Categorize your stocks to better understand what to expect from each one.
• Big companies have small moves, while small companies have big moves.
• Consider the size of a company if you expect it to profit from a specific product.
• Look for small companies that are already profitable and have shown their business model can be replicated.
• Be wary of companies with growth rates of 50% to 100% per year; such growth is often unsustainable.
• Avoid hot stocks in trendy industries.
• Diversification often leads to “diworseification”—expanding into unrelated areas can harm a company’s earnings.
• Long shots rarely pay off.
• It’s better to miss the first move in a stock and wait to see if the company’s plans are working.
• People often get valuable insights from their jobs that professionals may not see for months or years.
• Separate stock tips from the tipper, no matter how rich or smart they are.
• Some stock tips can be valuable, especially from experts in the field, but beware of tips from people outside their industry.
• Invest in simple companies that are dull, out of favor, and overlooked by Wall Street.
• Moderately fast growers (20-25%) in non-growth industries make ideal investments.
• Look for companies with niches that dominate a segment of the market.
• When buying depressed stocks, choose companies with strong financials and avoid those burdened with debt.
• Debt-free companies can’t go bankrupt.
• Managerial ability is important, but it’s difficult to assess. Focus on the company’s prospects, not the CEO’s resume.
• A lot of money can be made when a troubled company turns around.
• P/E ratio matters: even if everything else is perfect, an overpriced stock won’t make you money.
• Find a storyline to follow that helps you monitor a company’s progress.
• Look for companies that buy back their shares consistently.
• Study a company’s dividend history and how it performed in past recessions.
• Favor companies with little or no institutional ownership.
• All else being equal, prefer companies where management has a significant personal investment over those where executives are compensated only by salary.
• Insider buying is a positive sign, especially when multiple insiders are purchasing.
• Devote at least one hour per week to investment research. Calculating your dividends or gains doesn’t count.
• Be patient. A watched stock never boils.
• Don’t rely solely on stated book value. Real value is what counts.
• When in doubt, wait and check again later.
• Spend as much time researching a stock as you would in choosing a new refrigerator.

Building a Portfolio

• 3 to 10 stocks is enough to diversify.
• Stick to your circle of competence—invest in companies you understand.

When to Sell?

Knowing why you bought a stock helps you determine the right moment to sell.