3

I recently read the book "One Up on Wall Street" by Peter Lynch. It was a very readable book and I feel as if I learnt a lot which built on my beginner level knowledge.

Whilst reading I made notes and I'm looking to compile a 'cheat sheet' of the most valuable knowledge so I can sit down and study some companies.

I have already experimented buying stock in a few companies with minimal research but having now read this book I feel like my decision making processes were 'school boy' compared to even having a basic foundation.

Below is my current 'cheat sheet' so far. I would be grateful to have feedback- is this a worthwhile process? What other 80/20 'low hanging fruit' knowledge have I missed? Is what I've got so far any good? or am I totally missing the point. Apologies if this question is considered too wide in scope. I have reviewed the criteria.

  • Boring name, boring occupation. Find a company with a boring name that does something boring.
  • Does something simple

"When somebody says, “Any idiot could run this joint,” that’s a plus as far as I’m concerned, because sooner or later any idiot probably is going to be running it."

For every single product in a hot industry, there are a thousand MIT graduates trying to figure out how to make it cheaper in Taiwan.

  • Company diversification. The company is not trying to diversify into unrelated industries, but related industries, therefore benefiting from the synergy of existing experience.

  • Growth category - Sort the stock into a growth category - slow growers, stalwarts, fast growers, cyclicals, asset plays, and turnarounds.

  • Company Growth Cycle. There are three phases to a growth company’s life:

    • the start-up phase, during which it works out the kinks in the basic business;

    • the rapid expansion phase, during which it moves into new markets;

    • the mature phase, also known as the saturation phase, when it begins to prepare for the fact that there’s no easy way to continue to expand.

  • Two minute monologue about what the company does. What is the company trying to do to enhance its position? Be able to tell the story so that anyone can understand it. (It would be good to know what methods are available to get information about a company)

    • How well do I know the company, industry, product?
  • Profit. Revenue - costs = Profit. Rising profits year on year.

  • Current Assets

    • Current overall-cash position. For example: \$5.672 billion in cash and cash items, plus \$4.424 billion in marketable securities. Compared year on year, If the company is putting away more cash - sign of prosperity.
  • Debt reduction. When cash increases relative to debt, it’s an improving balance sheet. When it’s the other way around, it’s a deteriorating balance sheet.
  • Company buying back shares. Shown by shares outstanding reducing year on year. Are the directors buying shares.
  • Price to earnings ratio. Market Value per Share / Earnings per Share.
    • suppose that a company is currently trading at \$43 a share and its earnings over the last 12 months were \$1.95 per share. The P/E ratio for the stock could then be calculated as 43/1.95, or 22.05.
  • Growth Rate.

    • Divide the \$8.35 billion in cash and cash assets by the 511 million shares outstanding. There’s \$16.30 in net cash to go along with every share of Ford.

    • Find the long-term growth rate. Company X’s is 12 percent. Add the dividend yield - company X pays 3 percent. Divide by the p/e ratio - Company X’s is 10. 12 plus 3 divided by 10 is 1.5. Less than a 1 is poor, and 1.5 is okay, but what you’re really looking for is a 2 or better. A company with a 15 percent growth rate, a 3 percent dividend, and a p/e of 6 would have a fabulous 3. If the p/e of Coca-Cola is 15, you’d expect the company to be growing at about 15 percent a year, etc. But if the p/e ratio is less than the growth rate, you may have found yourself a bargain.

    • In general, a p/e ratio that’s half the growth rate is very positive, and one that’s twice the growth rate is very negative.

  • Balance Sheet. A normal corporate balance sheet has two sides. On the left side are the assets (inventories, receivables, plant and equipment, etc.). The right side shows how the assets are financed. A normal corporate balance sheet has 75 percent equity and 25 percent debt.

  • Type of debt. It’s the kind of debt, as much as the actual amount, that separates the winners from the losers in a crisis. There’s bank debt and there’s funded debt. Funded debt gives companies time to wiggle out of trouble.

  • Inventory. With a manufacturer or a retailer, an inventory buildup is usually a bad sign. When inventories grow faster than sales, it’s a red flag. The items held in the inventory are correctly valued.

In my research I did find a great channel on youtube called Moneyweek, with lectures by Tim Bennett youtube.com/watch?v=xlYDonZLoHg which are a great addition.

This question is of a similar nature: How to evaluate stocks? e.g. Whether some stock is cheap or expensive?

  • 1
    Let me just make the standard suggestion that no one can beat the market consistently. Instead of trying to cherrypick a stock that will outperform the market, invest in mutual funds, particularly index tracking mutual funds. – barrycarter Mar 22 '16 at 14:19
  • 2
    I'll also make a suggestion, I'd ignore barrycarter. It's one thing to keep your retirement funds in a set of index and other broad market funds. But if you've got this much interest in picking your own positions, open a brokerage account and go for it. I think you have a very broad set of criteria and it seems you're choosing for long term holding periods, I think you should run with it. You probably won't win every time, but at least you'll be paying attention. – quid Mar 22 '16 at 18:19
1

So, first -- good job on making a thorough checklist of things to look into.

And onto your questions --

is this a worthwhile process?

Even independent of specific investing goals, learning how to research is valuable. If you decided to forgo investing in stocks directly, and chose to only invest in index funds, the same type of research skills would be useful. (Not to mention that such discipline would come in handy in other fields as well.)

What other 80/20 'low hanging fruit' knowledge have I missed?

While it may not count as 'low hanging fruit', one thing that stands out to me is there's no mention of what competition a company has in its field. For example, a company may be doing well today, but you may see signs that it's consistently losing ground to its competition. While that alone may not dissuade you from investing, it may give you something to consider.

Is what I've got so far any good? or am I totally missing the point.

Your cheat sheet seems pretty good to me. But a lot depends on what your goals are. If you're doing this solely for your education and experience, I would say you've done well. If you're looking to invest in a company that is involved in a field you're passionate about, you're on the right track. But you should probably consider expanding your cheat sheet to include things that are not 'low hanging fruit' but still matter to you.

However, I'd echo the comments that have already been made and suggest that if this is for retirement investments, take the skills you've developed in creating your cheat sheet and apply that work towards finding a set of index funds that meet your criteria.

Otherwise happy hunting!

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.