One Up on Wall Street

One Up on Wall Street talks about the challenges of being a stock market investor, while also exploring how anyone can pick good, well-performing stocks without having much knowledge in the field, by following a few key practices.

According to Peter Lynch, there are a few categories of stocks you should know before deciding where to put your money:

Slow growers. Stalwarts. Fast growers. Cyclicals Turnarounds. Asset plays.

Let’s start with the first one – slow growers. These companies are usually large, part of a mature industry, and therefore grow slower.

Stalwarts are a little bit riskier. They’re growing at a rate of 10-15% per year. Sell them if you make a 30-50% percent gain!

Then, there’s fast growers. They break the patterns and grow significantly, making them risky investments, as they can also lose their current price very fast. These companies can prove to have a high return on investment.

When it comes to fast growers, always ask yourself: Can it keep up with this growth pace? Is this sustainable? If you find that the risk is too high compared to the company’s valuation, and that the market is just going crazy over it without a reliable reason, don’t go for it. 

Then, there’s cyclicals. These companies’ profits or losses move in concordance with the business cycle. One disadvantage of this type of stock is that they produce goods that consumers will postpone buying in times of financial uncertainty.

Fifth, there’s turnarounds, which are companies that have problematic balance sheets. Their stocks can prove to be a very rewarding investment if the business manages to bounce back. However, if the opposite happens, the risk of losing the value of your investment increases significantly.

Finally, asset plays are based on the idea that the company owns something valuable the market doesn’t see. It could be equipment or a piece of land or real estate that is worth the company’s entire market capitalization alone, for example.

What’s a tenbagger? Lynch uses this term to describe a stock that has gone up ten times its value since the time of purchase. Fortunately, there are some characteristics that make it easier for investors to spot these stocks. The 1st one would be the name. Yes, you’ve heard that right, a funny or dull name can be a sign of a good early investment. If the company has a funny name, will Wall Street brokers be eager to brag about buying it? Not so much! The 2nd and 3rd characteristics are related to what the company’s doing. Does it do something dull or disagreeable? This indicates most investors aren’t going to buy it any time soon. The 4th characteristic is that it might be…