Lessons From “Beating the Street” Continued…

Perseverance is not a long race; it is many short races one after another.

– Walter Elliott

In order that a man may be happy, it is necessary that he should not only be capable of his work, but a good judge of his work.

– John Ruskin

Back in late December, I did a two-part series on Peter Lynch’s 25 Golden Rules.

You can catch up here and here.

You can also find them in his book, Beating the Street. If you haven’t read it, it’s one of the top investment books out there.

It’s easy to read too.

As I explained in December, there’s so much an investor can learn from that book. The 25 Golden Rules could easily be all that an investor needs to be successful.

Today’s Global Research & Strategy Notes continues taking in the wisdom of that book. I’ve read through it a few times.

So, the next couple of days I’ll share with you my favorite passages from Beating the Street.

Let’s go…

Beating the Street Continued…

There’s no shame in losing money on a stock. Everybody does it. What is a shame is to hold on to a stock, or, worse, to buy more of it, when the fundamentals are deteriorating. That’s what I try to avoid doing.

Cyclicals are like blackjack: stay in the game too long and it’s bound to take back all your profit.

Stockpicking is both an art and a science, but too much of either is a dangerous thing. A person infatuated with measurement, who has his head stuck in the sand of balance sheets, is not likely to succeed. If you could tell the future from a balance sheet, then mathematicians and accountants would be the richest people in the world by now.

As far as the artist is concerned, finding a winning investment is a matter of having a knack and following a hunch. People with a knack make money; people without it always lose. To study the subject is futile.

The smallest investor can follow the Rule of Five and limit the portfolio to five issues. If just one of those is a 10-bagger and the other four combined go nowhere, you’ve still tripled your money.

Unless a company goes bankrupt, the story is never over. A stock you might have owned 10 years ago, or 2 years ago, may be worth buying again.

As an investment strategy, hanging out at the mall is far superior to taking a stockbroker’s advice on faith or combing the financial press for the latest tips.

You want to avoid the retailers that expand too fast, especially if they’re doing it on borrowed money.

In a retail company or a restaurant chain, the growth that propels earnings and the stock price comes mainly from expansion. As long as the same-store sales are on the increase, the company is not crippled by excessive debt, and it is following its expansion plans as described to shareholders in its reports, it usually pays to stick with the stock.

A technique that works repeatedly is to wait until the prevailing opinion about a certain industry is that things have gone from bad to worse, and then buy shares in the strongest companies in the group.

Whenever I’m evaluating a retail enterprise, in addition to the factors we’ve already discussed I always try to look at inventories. When inventories increase beyond normal levels, it is a warning sign that management may be trying to cover up the problem of poor sales.

You don’t want a company to have too much inventory. If it does, it may mean that management is deferring losses by not marking down the unsold items and getting rid of them quickly. When inventories are allowed to build, this overstates a company’s earnings.

As a place to invest, I’ll take a lousy industry over a great industry anytime. In a lousy industry, one that’s growing slowly if at all, the weak drop out and the survivors get a bigger share of the market. A company that can capture an ever-increasing share of a stagnant market is a lot better off than one that has to struggle to protect a dwindling share of an exciting market.