the renowned indian investor mr chandrakant sampat's investment philosophy <ul><li>he looks for durability </li><li>entry barriers</li><li>positive cash flow </li><li>negative working capital </li><li>asset turnover ration of not less than 3.50</li></ul>

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chandrakant sampat entry barriers 

The art of investment has one characteristic that is not generally appreciated. A creditable, if unspectacular, result can be achieved by the lay investor with a minimum of effort and capability; but to imrove this easily attainable standard requires much application and more than a trace of wisdom

Everything should be made simple as possible, but not simpler

It's not supposed to be easy, anyone who finds it easy is stupid.

Few people have what it takes to be a great investors. some can be taught, but not everyone... and those who can be taught can't be taught everything.No rule always works.

The most important thing is...second-level thinking

one of the most important things to bear in mind today is that economics isn't and exact science. it may not even be much of a science at all,in the sense that in science, controlled experiments can be conducted, past results can be replicated with confidence, and cause-and effect relationships can be depended on to hold."One of the things i most want to emphasize is how essential it is that one's investment approach be intuitive and adaptive rather than be fixed and mechanistic.""The defitnition of successful investing is doing better than market and other investors"

"The defitnition of successful investing is doing better than market and other investors" and to accomplish that you need either good luck or superior insights.Remember your goal in investing isn't to earn average returns; you want to do better than average. Thus, your thinking has to be better than others

<ul><li class="ql-align-justify">First-level thinking says, "it's a good company; lets buy the stock". Second level thinking says, 'it's a good company but everyone thinks it's a great company, and it's not. so the stock's overrated or overpriced; let's sell.</li><li class="ql-align-justify">First-level thinking says, "The outlook calls for low growth and rising inflation. Let's dump our stocks." Second-Level-thinking says, "The outlook stinks,but everyone else is selling in panic. Buy!"</li><li class="ql-align-justify">First=level-thinking says, "I think the company's earnings will fall; sell."</li></ul>

What is second level thinking?

Second-level thinking says, "I think the company's earnings will fall less than people expect, and the pleasant surprise will lift the stock; Buy."First-level-thinking is simplistic and superficial; and just about everyone can do it(a bad sign for anything involving an attempt at superiority.) All the first-level thinker needs is an opinion about the future, as in " The outlook for the company is favorable, meaning the stock will go up".

Second-Level Thinker take a great many things into account:<ol><li class="ql-align-justify">What is the range of likely future outcome?</li><li class="ql-align-justify">Which outcome do i think will occur?</li><li class="ql-align-justify">What's the probability I'm right?</li><li class="ql-align-justify">What does the consensus think?</li><li class="ql-align-justify">How does my expectation differ from the concensus?</li><li class="ql-align-justify">How does the current price for the asset comporr with the consensus view of the future, and with mine?</li><li class="ql-align-justify">Is the consensus psychology that's incorporated in the price too bullish or bearish?</li><li class="ql-align-justify">What will happen to the asset's price if the consensus turns out be right, and what if i'm right?</li></ol>

First level thinkers look for simple formulas and easy answers, second level thinkers know that success in investing is the antithesis of simple. "Brokerage firms want you to think everyone's capable of investing-- at 10$ per trade. Mutual fund companies don't want you tp think you can do it; they want youto think they can do it. In the case, you'll put your money into actively managed funds and pay associated high fees.

If your behaviour is conventional, you're likely to get conventional results- either good or bad. Only if your behaviour is unconventional is your performance likely to be unconventional, and only if your judgements are superior is your performance likely to be above average--- "DARE TO BE GREAT", SEPTEMBER 7,2006

The upshot is simple: To achieve superior investment results, you have to hold nonconsensus views regarding value, and they have to be accurate. That's not easy. The attractiveness of buying something for less than it’s worth makes eminent sense. So how is one to find bargains in efficient markets? You must bring exceptional analytical ability, insight or foresight. But because it’s exceptional, few people have it.“Returns and How They Get That Way,” November 11, 2002"

Those who consider the investment process simple generally aren’t aware of the need for— or even the existence of—second- level thinking. Thus, many people are misled into believing that everyone can be a successful investor. Not everyone can. But the good news is that the prevalence of first- level thinkers increases the returns available to second- level thinkers. To consistently achieve superior investment returns, you must be one of them.

In theory there’s no diff erence between theory and practice, but in practice there is.

The Most Important Thing Is . . . 
Understanding Market Efficiency (and Its Limitations)

The theory included concepts that went on to become important elements in investment dialogue: risk aversion, volatility as the definition of risk, risk- adjusted returns, systematic and nonsystematic risk, alpha, beta, the random walk hypothesis and the effi cient market hypothesis.

“Chicago School Theory”

<ul><li class="ql-align-justify">There are many participants in the markets, and they share roughly equal access to all relevant information. They are intelligent, objective, highly motivated and hardworking. Their analytical models are widely known and employed.</li><li class="ql-align-justify">Thus, market prices represent accurate estimates of assets’ intrinsic value, and no participant can consistently identify and profit from instances when they are wrong.</li></ul>

Efficient market hypothesis

<ul><li class="ql-align-justify">If prices inefficient markets already refl ect the consensus, then sharing the consensus view will make you likely to earn just an average return. To beat the market you must hold an idiosyncratic, or nonconsensus, view.</li><li class="ql-align-justify">although the more efficient markets often misvalue assets, it’s not easy for any one person—working with the same information as everyone else and subject to the same psychological infl uences— to consistently hold views that are different from the consensus and closer to being correct. Th at’s what makes the mainstream markets hard to beat— even if they aren’t always right.</li></ul>

Consensus and non-consensus view

The most important upshot from the efficient market hypothesis is its conclusion that “you can’t beat the market.” One of the greatest ramifi cations of the Chicago theory has been the development of passive investment vehicles known as index funds.According to investment theory, people are risk-averse by nature, meaning that in general they’d rather bear less risk than more.For them to make riskier investments, they have to be induced through the promise of higher returns.“The higher return is explained by hidden risk.”

Index funds and risk

Once in a while we experience periods when everything goes well and riskier investments deliver the higher returns they seem to promise. Those halcyon periods lull people into believing that to get higher returns, all they have to do is make riskier investments. But they ignore something that is easily forgotten in good times: this can’t be true, because if riskier investments could be counted on to produce higher returns, they wouldn’t be riskier.

In fact, some asset classes are quite efficient. In most of these:• the asset class is widely known and has a broad following;• the class is socially acceptable, not controversial or taboo;• the merits of the class are clear and comprehensible, at least on the surface; and• information about the class and its components is distributed widely and evenly.If these conditions are met, there’s no reason why the asset class should systematically be overlooked, misunderstood or underrated

Second- level thinkers know that, to achieve superior results, they have to have an edge in either information or analysis, or both. They are on the alert for instances of misperception. second- level thinkers depend on inefficiency. Where might errors come from? Let’s consider the assumptions that underlie the theory of efficient markets:• many investors hard at work.• They are intelligent, diligent, objective, motivated and well equipped.• They all have access to the available information, and their access is roughly equal.• They’re all open to buying, selling or shorting every asset

A market characterized by mistakes and mispricings can be beaten by people with rare insight. Thus, the existence of inefficiencies gives rise to the possibility of outperformance and is a necessary condition for it. It does not, however, guarantee it.

To me, an ineffi cient market is one that is marked by at least one of the following characteristics: • Market prices are often wrong. Because access to information and the analysis thereof are highly imperfect, market prices are often far above or far below intrinsic values.• The risk- adjusted return on one asset class can be far out of line with those of other asset classes. Because assets are often valued at other- than- fair prices, an asset class can deliver a risk- adjusted return that is significantly too high (a free lunch) or too low relative to other asset classes.

• Some investors can consistently outperform others. coz of the existence of(a) significant misvaluations (b) differences among participants in terms of skill, insight and information access, it is possible for misvaluations to be identified and profited from with regularity.Inefficient markets do not necessarily give their participants generous returns. Rather, it’s my view that they provide the raw material— mispricings—that can allow some people to win and others to lose on the basis of differential skill. If prices can be very wrong, that means it’s possible to fi nd bargains or overpay.

One of the great sayings about poker is that “in every game there’s a fish. If you’ve played for 45 minutes and haven’t fi gured out who the fish is, then it’s you.” The same is certainly true of inefficient market investing.

Think of it this way:• Why should a bargain exist despite the presence of thousands of investors who stand ready and willing to bid up the price of anything that’s too cheap?• If the return appears so generous in proportion to the risk, might you be overlooking some hidden risk?• Why would the seller of the asset be willing to part with it at a price from which it will give you an excessive return?• Do you really know more about the asset than the seller does?• If it’s such a great proposition, why hasn’t someone else snapped it up?

Something else to keep in mind: just because efficiencies exist today doesn’t mean they’ll remain forever.Bottom line: Inefficiency is a necessary condition for superior investing. Attempting to outperform in a perfectly effi cient market is like flipping a fair coin: the best you can hope for is fifty- fifty. For investors to get an edge, there have to be ineffi ciencies in the underlying process— imperfections, mispricings— to take advantage of.

The image here is of the efficient- market- believing fi nance professor who takes a walk with a student.“Isn’t that a $10 bill lying on the ground?” asks the student.“No, it can’t be a $10 bill,” answers the professor. “If it were, someone would have picked it up by now.”The professor walks away, and the student picks it up and has a beer.

Believer vs Non believers of EMH

Th e oldest rule in investing is also the simplest: “Buy low; sell high.” obvious— on the surface: it means that you should buy something at a low price and sell it at a high price. But what, in turn, does that mean? What’s high, and what’s low?On a superficial level, you can take it to mean that the goal is to buy something for less than you sell it for.

The Most Important Thing Is . . . Value

The random walk hypothesis says a stock’s past price movements are of absolutely no help in predicting future movements. In other words, it’s a random pro cess, like tossing a coin. We all know that even if a coin has come up heads ten times in a row, the probability of heads on the next throw is still fifty- fifty.Like￾wise, the hypothesis says, the fact that a stock’s price has risen for the last ten days tells you nothing about what it will do tomorrow.

The random walk 
hypothesis

Another form of relying on past stock price movements to tell you something is so- called momentum investing. It, too, exists in contravention of the random walk hypothesis. I’m unlikely to do it justice. But as I see it, investors who practice this approach operate under the assumption that they can tell when something that has been rising will continue to rise.

Momentum investing

Momentum investing might enable you to participate in a bull market that continues upward, but I see a lot of drawbacks. One is based on econo￾mist Herb Stein’s wry observation that “if something cannot go on forever, it will stop.” What happens to momentum investors then? How will this approach help them sell in time to avoid a decline? And what will it have them do in falling markets?

The way I see it, day traders considered themselves successful if they bought a stock at $10 and sold at $11, bought it back the next week at $24 and sold at $25, and bought it a week later at $39 and sold at $40. If you can’t see the fl aw in this— that the trader made $3 in a stock that appreciated by $30.

Day traders

value investing and growth investing. In a nutshell, value investors aim to come up with a security’s current intrinsic value and buy when the price is lower, and growth investors try to find securities whose value will increase rapidly in the future.

Value vs growth investing

To value investors, an asset isn’t an ephemeral concept you invest in because you think it’s attractive. It’s a tangible object that should have an intrinsic value capable of being ascertained, and if it can be bought below its intrinsic value, you might consider doing so. Thus, intelligent investing has to be built on estimates of intrinsic value. Th ose esti￾mates must be derived rigorously, based on all of the available information.

Value investing

What is it that makes a security— or the underlying company— valuable? There are lots of candidates: financial resources, management, factories, retail outlets, patents, human resources, brand names, growth potential and, most of all, the ability to generate earnings and cash flow. The emphasis in value investing is on tangible factors like hard assets and cash flows.Intangibles like talent, popular fashions and long- term growth potential are given less weight.

There’s even something called “net- net investing,” in which people buy when the total market value of a company’s stock is less than the amount by which the company’s current assets— such as cash, receivables and inventories— exceed its total liabilities.In this case, in theory, you could buy all the stock, liquidate the current assets, pay off the debts, and end up with the business and some cash. Pocket cash equal to your cost, and with more left over you’ll have paid “less than nothing” for the business.

Net-Net investing

"This is that rarity, a useful book."--Warren Buffett Howard Marks, the chairman and cofounder of Oaktree Capital Management, is renowned for his insightful assessments of market opportunity and risk. After four decades spent ascending to the top of the investment management profession, he is today sought out by the world's leading value investors, and his client memos brim with insightful commentary and a time-tested, fundamental philosophy. Now for the first time, all readers can benefit from Marks's wisdom, concentrated into a single volume that speaks to both the amateur and seasoned investor. Informed by a lifetime of experience and study, The Most Important Thing explains the keys to successful investment and the pitfalls that can destroy capital or ruin a career. Utilizing passages from his memos to illustrate his ideas, Marks teaches by example, detailing the development of an investment philosophy that fully acknowledges the complexities of investing and the perils of the financial world. Brilliantly applying insight to today's volatile markets, Marks offers a volume that is part memoir, part creed, with a number of broad takeaways. Marks expounds on such concepts as "second-level thinking," the price/value relationship, patient opportunism, and defensive investing. Frankly and honestly assessing his own decisions--and occasional missteps--he provides valuable lessons for critical thinking, risk assessment, and investment strategy. Encouraging investors to be "contrarian," Marks wisely judges market cycles and achieves returns through aggressive yet measured action. Which element is the most essential? Successful investing requires thoughtful attention to many separate aspects, and each of Marks's subjects proves to be the most important thing.

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Howard Marks (born Dennis Howard Marks) was a Welsh author, former teacher and drug smuggler who achieved notoriety as an international cannabis smuggler through high-profile court cases, supposed connections with groups such as the CIA, the IRA, MI6, and the Mafia, and his eventual conviction at the hands of the American Drug Enforcement Administration. At the height of his drug career, he was said to have controlled 10% of the world's hashish trade.Marks attended Balliol College, Oxford between 1964 and 1967 to study Natural Science, with a Physics (B.A., Oxon).

Howard Marks

The Most Important Thing

Charlie and I are not stock-pickers; we are business-pickers.

Gamblers vs Investors

Capitalism has two sides: The system creates an ever-growing pile of losers while concurrentlydelivering a gusher of improved goods and services. Schumpeter called this phenomenon “creativedestruction.”

The two sides of capitalism

episodically–it becomes easy to buy pieces of wonderful businesses at wonderful prices.It’s crucial to understand that stocks often trade at truly foolish prices, both high and low. “Efficient”markets exist only in textbook.In truth marketable stocks and bonds are baffling, their behavior usually understandable only in retrospect.Controlled businesses are different breed.They sometimes command ridiculously higher prices than justified but are almost never available at bargain valuations.Unless under duress,the owner of a controlled business gives no thought to selling at a panic-type valuation

Volatily is an opportunity

The weeds wither away in significance as the flowers bloom Over time, it takes just a few winners to work wonders. And, yes, it helps to start early and live into your 90s as well.

The lesson for investors

The math isn’t complicated: When the share count goes down, your interest in our many businesses goes up. Every small bit helps if repurchases are made at value-accretive prices. Just as surely, when a company overpays for repurchases, the continuing shareholders lose. At such times, gains flow only to the selling shareholders and to the friendly, but expensive, investment banker who recommended the foolish purchases.

Buybacks

When you are told that all repurchases are harmful to shareholders or to the country, or particularly beneficial to CEOs, you are listening to either an economic illiterate or a silver-tongued demagogue (characters that are not mutually exclusive)

Charlie and I plead ignorance and firmly believe that near-term economic and market forecasts are worse than useless

Message to market forcasters

Berkshire’s contribution via the corporate income tax was $32 billion during the decade, almost exactly a tenth of 1% of all money that the Treasury collected. And that means – brace yourself – had there been roughly 1,000 taxpayers in the U.S. matching Berkshire’s payments, no other businesses nor any of the country’s 131 million households would have needed to pay any taxes to the federal government. Not a dime.

Show off warren

Millions, billions, trillions – we all know the words, but the sums involved are almost impossible to comprehend.Let’s put physical dimensions to the numbers:• If you convert $1 million into newly-printed $100 bills, you will have a stack that reaches your chest• Perform the same exercise with $1 billion – this is getting exciting!–and the stack reaches about 3⁄4 of a mile into the sky• Finally, imagine piling up $32 billion,the total of Berkshire’s 2012-21 federal income tax payments.Now the stack grows to more than 21 miles in height,about three times the level at which commercial planes fly

Charlie and I think pretty much alike. But what it takes me a page to explain, he sums up in a sentence. His version, moreover, is always more clearly reasoned and also more artfully – some might add bluntly – stated.

Nothing beats having a Great partner

• The world is full of foolish gamblers, and they will not do as well as the patient investor.• If you don’t see the world the way it is, it’s like judging something through a distorted lens.• All I want to know is where I’m going to die, so I’ll never go there. And a related thought: Early on, write your desired obituary – and then behave accordingly.• If you don’t care whether you are rational or not, you won’t work on it. Then you will stay irrational and get lousy results.

Few of charlie's thoughts

• Patience can be learned. Having a long attention span and the ability to concentrate on one thing for a long time is a huge advantage.• You can learn a lot from dead people. Read of the deceased you admire and detest.• Don’t bail away in a sinking boat if you can swim to one that is seaworthy.• A great company keeps working after you are not; a mediocre company won’t do that.• Warren and I don’t focus on the froth of the market. We seek out good long-term investments and stubbornly hold them for a long time.

• Ben Graham said, “Day to day, the stock market is a voting machine; in the long term it’sa weighing machine.” If you keep making something more valuable, then some wise person is going to notice it and start buying.• There is no such thing as a 100% sure thing when investing. Thus, the use of leverage is dangerous. A string of wonderful numbers times zero will always equal zero. Don’t count on getting rich twice.• You don’t, however, need to own a lot of things in order to get rich.• You have to keep learning if you want to become a great investor. When the world changes, you must change.

• Warren and I hated railroad stocks for decades, but the world changed and finally the country had four huge railroads of vital importance to the American economy. We were slow to recognize the change, but better late than never.• Finally, I will add two short sentences by Charlie that have been his decision-clinchers for decades: “Warren, think more about it. You’re smart and I’m right.” And so it goes. I never have a phone call with Charlie without learning something. And, while he makes me think, he also makes me laugh.

Lessons from annual letter of 2022-by warren buffet

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Motivation & Inspiration

Annual letter 2022 by Warren Buffet (Key points to remember)

invest in stocks not to preserve capital, but to make money. Then you take yourprofits and invest in more stocks, and make even more money.

Why to invest

efficient-market hypothesis(that everything in the stock market is “known” and prices are always “rational”)

Efficient-Market-Hypothesis(EMH)

“Don’t gamble; take all your savings and buy some good stock and hold it till it goes up, then sell it. If it don’t go up, don’t buy it.”

Don't Gamble

market-capitalization rule: Size is measured by multiplying the number of outstanding shares by the current stock price.

Market Cap

Consistent winners raise their bet as their position strengthens, and they exit the game when the odds are against themConsistent winners also resign themselves to the fact that they’ll occasionally be dealt three aces and bet the limit, only to lose to a hidden royal flush.They realize the stock market is not pure science, and not like chess, where the superior position always wins. If 7 out of 10 of my stocks perform as expected, then I’m delighted. If six out of ten of my stocks perform as expected, then I’m thankful. 6 out of 10 is all it takes to produce an enviable record on Wall Street.

Consistent Winners

<ul>
<li>Patience</li>
<li>Self-reliance</li>
<li>Common sense</li>
<li>A tolerance for pain</li>
<li>Open-mindedness</li>
<li>Detachment</li>
<li>Persistence</li>
<li>Humility</li>
<li>Flexibility</li>
<li>A willingness to</li>
<li>Do independent research, an equal willingness to admit to mistakes, and the</li>
<li>Ability to ignore general panic.</li>
</ul>

PERSONAL QUALITIES IT TAKES TO SUCCEED

• Don’t overestimate the skill and wisdom of professionals.• Take advantage of what you already know.• Look for opportunities that haven’t yet been discovered and certified by WallStreet—companies that are “off the radar scope.”• Invest in a house before you invest in a stock.• Invest in companies, not in the stock market.• Ignore short-term fluctuations.• Large profits can be made in common stocks.• Large losses can be made in common stocks.• Predicting the economy is futile.• Predicting the short-term direction of the stock market is futile.

Lessons from section 1 :

• The long-term returns from stocks are both relatively predictable and also farsuperior to the long-term returns from bonds.• Keeping up with a company in which you own stock is like playing an endlessstud-poker hand.• Common stocks aren’t for everyone, nor even for all phases of a person’s life.• The average person is exposed to interesting local companies and productsyears before the professionals.• Having an edge will help you make money in stocks.• In the stock market, one in the hand is worth ten in the bush.

The best place to begin looking for the tenbagger is close to homeCan’t think of any such opportunity in your own life? What if you’re retired, live ten miles from the nearest traffic light, grow your own food, and don’t have a television set? Well, maybe one day you have to go to a doctor. The rural existence has given you ulcers, which is the perfect introduction to SmithKline Beckman.people who buy stocks about which they are ignorant may get lucky and enjoy great rewards, it seems to me they are competing under unnecessary handicaps

Stalking the Tenbagger

This gives an incredible head start in anticipating an improvement in earnings—and earnings, as you’ll see, make stock prices go higher.You’re looking for a situation where the value of the assets per share exceeds the price per share of the stock. In such delightful instances you can truly buy a great deal of something for nothing. I’ve done it myself numerous times.

Edge as a consumer:

I could go on for the rest of the book about the edge that being in a businessgives the average stockpicker. On top of that, there’s the consumer’s edge that’shelpful in picking out the winners from the newer and smaller fast-growingcompanies, especially in the retail trades. Whichever edge applies, the excitingpart is that you can develop your own stock detection system outside the normalchannels of Wall Street, where you’ll always get the news late.

Invest in things you know about. Neither of us should let an opportunity pass us by again.Investing without research is like playing stud poker and never looking at the cards.

Know what to own

place it into one of six general categories:slow growersstalwartsfast growerscyclicalsasset playsand turnarounds.

THE SIX CATEGORIES

Usually these large and aging companies are expected to grow slightly faster than the gross national product.Slow growers didn’t start out that way.They started out as fast growers and eventually pooped out, either because they had gone as far as they could, or else they got too tired to make the most of their chances. Sooner or later every popular fast-growing industry becomes a slow-growing industry, aluminum was a fast-growth industry. In the twenties the railroads were the great growth companies,

The slow Growers

Then cars became the fast-growth industry, and for a time it was steel, then chemicals, then electric utilities, then computers.Another sure sign of a slow grower is that it pays a generous and regular dividend. companies pay generous dividends when they can’t dream up new ways to use the money to expand the business. You won’t find a lot of two to four percent slow growers in my portfolio, because if companies aren’t going anywhere fast, neither will the price of their stocks. If growth in earnings is what enriches a company, then what’s the sense of wasting time on sluggards?

When you traffic in stalwarts, you’re more or less in the foothills: 10 to 12 percent annual growth in earnings.In fact, when anyone brags about doubling or tripling his money on a stalwart (or on any company, for that matter), your next question ought to be: “And how long did you own it?” In many instances the risk of ownership has not resulted in any advantage to the owner, who therefore took chances for nothing always keep some stalwarts in portfolio because they offer pretty good protection during recessions and hard times.

THE STALWARTS

These are among my favorite investments: small, aggressive new enterprises that grow at 20 to 25 percent a year. If you choose wisely, this is the land of the 10-to 40-baggers, and even the 200-baggers. With a small portfolio, one or two of these can make a career.A fast-growing company doesn’t necessarily have to belong to a fast-growing industry.All it needs is the room to expand within a slow-growing industry. Beer is a slow-growing industryThere’s plenty of risk in fast growers, especially in the younger companies that tend to be overzealous and underfinanced.

THE FAST GROWERS

Wall Street does not look kindly on fast growers that run out of stamina and turn into slow growers, and when that happens, the stocks are beaten down accordingly. Once a fast grower gets too big, it faces the same dilemma as Gulliver in Lilliput. There’s simply no place for it to stretch out.But for as long as they can keep it up, fast growers are the big winners in the stock market. I look for the ones that have good balance sheets and are making substantial profits. The trick is figuring out when they’ll stop growing, and how much to pay for the growth.

A cyclical is a company whose sales and profits rise and fall in regular if not completely predictable fashion. In a growth industry, business just keeps expanding, but in a cyclical industry it expands and contracts, then expands and contracts again.The autos and the airlines, the tyre companies, steel companies, and chemical companies are all cyclicals. Even defense companies behave like cyclicals, since their profits’ rise and fall depends on the policies of various administrations.

THE CYCLICALS

Charts of the cyclicals look like the polygraphs of liars, or the maps of the Alps, as opposed to the maps of Delaware you get with the slow growers.Coming out of a recession and into a vigorous economy, the cyclicals flourish, and their stock prices tend to rise much faster than the prices of the stalwarts. This is understandable, since people buy new cars and take more airplane trips in a vigorous economy, and there’s greater demand for steel, chemicals, etc.

You can lose more than fifty percent of your investment very quickly if you buy cyclicals in the wrong part of the cycle, and it may be years before you’ll see another upswing. Cyclicals are the most misunderstood of all the types of stocks. The major cyclicals are large and well-known companies, they are naturally lumped together with the trusty stalwarts.

Timing is everything in cyclicals, and you have to be able to detect the earlysigns that business is falling off or picking up. If you work in some professionthat’s connected to steel, aluminum, airlines, automobiles, etc., then you’ve gotyour edge, and nowhere is it more important than in this kind of investment.

These aren’t slow growers; these are no growers. These aren’t cyclicals that rebound; these are potential fatalities.Turnaround stocks make up lost ground very quickly.The best thing about investing in successful turnarounds is that of all the categories of stocks, their ups and downs are least related to the general market. There are several different types of turnarounds, and I’ve owned all of them at one time or another. There’s the bail-us-out-or-else kind of turnaround where the whole thing depended on a government loan guarantee.

TURNAROUNDS

There’s the who-would-have-thunk-it kind of turnaround, such as Con Edison. Who would ever have believed you could lose this much money in a utility, as the stock price fell from $10 to $3 by 1974; and who would have believed you could make this much, as the price rebounded from $3 to $52 by 1987?

There’s the little-problem-we-didn’t-anticipate kind of turnaround, such asThree Mile Island. This was a minor tragedy perceived to be worse than it was,and in minor tragedy there’s major opportunity. I made a lot of money inGeneral Public Utilities, the owner of Three Mile Island. Anybody could have.You just had to be patient, keep up with the news, and read it with dispassion.

I try to stay away from the tragedies where the outcome is unmeasurable, suchas the Bhopal disaster at the Union Carbide plant in India. This was a terriblegas leak that resulted in thousands of deaths, and how much the families wouldget out of Union Carbide in damages was an open question

There’s the restructuring-to-maximize-shareholder-values kind of turnaround,such as Penn Central. Wall Street seems to favor restructuring these days, and any director or CEO who mentions it is warmly applauded by shareholders.Restructuring is a company’s way of ridding itself of certain unprofitable subsidiaries it should never have acquired in the first place.The earlier buying of these ill-fated subsidiaries, also warmly applauded, is called diversification. I call it diworseification.

An asset play is any company that’s sitting on something valuable that you know about, but that the Wall Street crowd has overlooked.The asset play is where the local edge can be used to greatest advantage.Asset opportunities are everywhere. Sure they require a working knowledge of the company that owns the assets, but once that’s understood, all you need is patience.

THE ASSET PLAYS

Companies don’t stay in the same category forever. Over my years of watching stocks I’ve seen hundreds of them start out fitting one description and end up fitting another.Fast growers can lead exciting lives, and then they burn out, just as humans can. They can’t maintain double-digit growth forever, and sooner or later they exhaust themselves and settle down into the comfortable single digits of sluggards and stalarts.Cyclicals with serious financial problems collapse and then reemerge as turnarounds.

HIGHFLIERS TO LOW RIDERS

Growth companies that can’t stand prosperity foolishly diworseify and fall out of favor, which makes them into turnarouds McDonald’s is a classic fast grower, but because of the thousands of outlets it either owns or is repurchasing from the franchisees, it could be a great future asset play in real estate.

Are you looking for slow growth, fast growth, recession protection, a turnaround, a cyclical bounce, or assets?Putting stocks in categories is the first step in developing the story.Getting the story on a company is a lot easier if you understand the basic business.The simpler it is, the better I like it. 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.

The story of the perfect stock

“Any idiot can run this business” is one characteristic of the perfect company,the kind of stock I dream about. You never find the perfect company, but if youcan imagine it, then you’ll know how to recognize favorable attributes,

Any idiot can run this business

The perfect stock would be attached to the perfect company, and the perfect company has to be engaged in a perfectly simple business, and the perfectly simple business ought to have a perfectly boring name. The more boring it is, the better.

(1) IT SOUNDS DULL—OR, EVEN BETTER, RIDICULOUS

I get even more excited when a company with a boring name also does something boring. A company that does boring things is almost as good as a company that has a boring name, and both together is terrific. If a company with terrific earnings and a strong balance sheet also does dull things, it gives you a lot of time to purchase the stock at a discount.

(2) IT DOES SOMETHING DULL

Better than boring alone is a stock that’s boring and disgusting at the same time. Something that makes people shrug, retch, or turn away in disgust is ideal.

(3) IT DOES SOMETHING DISAGREEABLE

Spinoffs of divisions or parts of companies into separate, freestanding entitiesLarge parent companies do not want to spin off divisions and then see those spinoffs get into trouble, because that would bring embarrassing publicity that would reflect back on the parents. Therefore, the spinoffs normally have strong balance sheets and are well-prepared to succeed as independent entities. And once these companies are granted their independence, the new management, free to run its own show, can cut costs and take creative measures that improve the near-term and long-term earnings

(4) IT’S A SPINOFF

If you find a stock with little or no institutional ownership, you’ve found a potential winner.Find a company that no analyst has ever visited, or that no analyst would admit to knowing about, and you’ve got a double winner.

(5) THE INSTITUTIONS DON’T OWN IT, AND THE ANALYSTS
DON’T FOLLOW IT

It’s hard to think of a more perfect industry than waste management.If there’s anything that disturbs people more than animal casings, grease and dirty oil, it’s sewage and toxic waste dumps.

(6) THE RUMORS ABOUND: IT’S INVOLVED WITH TOXIC
WASTE AND/OR THE MAFIA

In this category my favorite all-time pick is Service Corporation International (SCI), which also has a boring name.At last count the company owned 461 funeral parlors, 121 cemeteries, 76 flower shops, 21 funeral product-and-supply manufacturing centers, and 3 casket distribution centers, so they’re vertically integrated. They broke into the big-timewhen they buried Howard Hughes.

(7) THERE’S SOMETHING DEPRESSING ABOUT IT

I prefer to invest in a low-growth industry like plastic knives and forks, but only if I can’t find a no-growth industry like funerals.That’s where the biggest winners are developed.In a no-growth industry, especially one that’s boring and upsets people, there’s no problem with competition. You don’t have to protect your flanks from potential rivals because nobody else is going to be interested.

(8) IT’S A NO-GROWTH INDUSTRY

I’d much rather own a local rock pit than own Twentieth Century-Fox, because a movie company competes with other movie companies, and the rockpit has a niche. Twentieth Century-Fox understood that when it bought up Pebble Beach, and the rock pit with it. Certainly, owning a rock pit is safer than owning a jewelry business. If you’re in the jewelry business, you’re competing with other jewelers from across town, across the state, and even abroad, since vacationers can buy jewelry anywhere and bring it home. But if you’ve got the only gravel pit in Brooklyn,

(9) IT’S GOT A NICHE

you’ve got a virtual monopoly, plus the added protection of the unpopularity of rock pits.The insiders call this the “aggregate” business, but even the exalted name doesn’t alter the fact that rocks, sand, and gravel are as close to inherently worthless as you can get. That’s the paradox: mixed together, the stuff probably sells for $3 a ton. For the price of a glass of orange juice, you can purchase a half ton of aggregate, which, if you’ve got a truck, you can take home and dump on your lawn.

I’d rather invest in a company that makes drugs, soft drinks, razor blades, or cigarettes than in a company that makes toys. In the toy industry somebody can make a wonderful doll that every child has to have, but every child gets only one each. Eight months later that product is taken off the shelves to make room for the newest doll the children have to have—manufactured by somebody else.Why take chances on fickle purchases when there’s so much steady businessaround?

(10) PEOPLE HAVE TO KEEP BUYING IT

When insiders are buying like crazy, you can be certain that, at a minimum, the company will not go bankrupt in the next six months. When insiders are buying, I’d bet there aren’t three companies in history that have gone bankrupt near term. Long term, there’s another important benefit. When management owns stock, then rewarding the shareholders becomes a first priority, whereas when management simply collects a paycheck, then increasing salaries becomes a first priority. Since bigger companies tend to pay bigger salaries to executives,

(11) IT’S A USER OF TECHNOLOGY

there’s a natural tendency for corporate wage-earners to expand the business at any cost, often to the detriment of shareholders. This happens less often when management is heavily invested in shares.If the stock price drops after the insiders have bought, so that you have a chance to buy it cheaper than they did, so much the better for you.But there’s only one reason that insiders buy: They think the stock price is undervalued and will eventually go up.

Buying back shares is the simplest and best way a company can reward its investors. If a company has faith in its own future, then why shouldn’t it invest in itself, just as the shareholders do? The announcement of massive share buybacks by company after company broke on October 20, 1987 the fall of many stocks, and stabilized the market at the height of its panic. Long term, these buybacks can’t help but reward investors.

(13) THE COMPANY IS BUYING BACK SHARES

When stock is bought in by the company, it is taken out of circulation, therefore shrinking the number of outstanding shares. This can have a magical effect on earnings per share, which in turn has a magical effect on the stock price.If a company buys back half its shares and its overall earnings stay the same, the earnings per share have just doubled. Few companies could get that kind of result by cutting costs or selling more widgets. common alternatives to buying back shares are (1) raising the dividend, (2) developing new products, (3) starting new operations, and (4) making acquisitions.

The reverse of buying back shares is adding more shares, also called diluting.

Diluting of shares

If I could avoid a single stock, it would be the hottest stock in thehottest industry, the one that gets the most favorable publicity, the one that every investor hears about in the car pool or on the commuter train—and succumbing to the social pressure, often buys.If you aren’t clever at selling hot stocks (and the fact that you’ve bought them is a clue that you won’t be), you’ll soon see your profits turn into losses, because when the price falls, it’s not going to fall slowly, nor is it likely to stop at the level where you jumped on.

Stocks I’d Avoid

Another stock I’d avoid is a stock in a company that’s been touted as the next.

BEWARE THE NEXT SOMETHING

Instead of buying back shares or raising dividends, profitable companies often prefer to blow the money on foolish acquisitions. The dedicated diworseifier seeks out merchandise that is (1) overpriced, and (2) completely beyond his or her realm of understanding. This ensures that losses will be maximized.These frequent episodes of acquiring and then regretting, only to divest and acquire and regret once again

AVOID DIWORSEIFICATIONS

If a company must acquire something, I’d prefer it to be a related business, but acquisitions in general make me nervous. There’s a strong tendency for companies that are flush with cash and feeling powerful to overpay for acquisitions, expect too much from them, and then mismanage them. I’d rather see a vigorous buyback of shares, which is the purest synergy of all.

I get calls all the time from people who recommend solid companies for Magellan, and then, usually after they’ve lowered their voices as if to confide something personal, they add: “There’s this great stock I want to tell you about. It’s too small for your fund, but you ought to look at it for your own account.It’s a fascinating idea, and it could be a big winer.”Whisper stocks have a hypnotic effect, and usually the stories have emotional appeal.You can get tenbaggers in companies that have already proven themselves. When in doubt, tune in later.

BEWARE THE WHISPER STOCK

The company that sells 25 to 50 percent of its wares to a single customer is in a precarious situation. Short of cancellation, the big customer has incredible leverage in extracting price cuts and other concessions that will reduce the supplier’s profits. It’s rare that a great investment could result from such an arrangement.

BEWARE THE MIDDLEMAN

It’s too bad that Xerox didn’t have a name like David’s Dry Copies, because then more people would have been skeptical of it. As often as a dull name in a good company keeps early buyers away, a flashy name in a mediocre company attracts investors and gives them a false sense of security. As long as it has “advanced,” “leading,” “micro,” or something with an x in it, or it’s a mystifying acronym, people will fall in love with it.

BEWARE THE STOCK WITH THE EXCITING
NAME

Sometimes it takes years for the stock price to catch up to a company’s value, and the down periods last so long that investors begin to doubt that will ever happen. But value always wins out.Analyzing a company’s stock on the basis of earnings and assets is no different from analyzing a local laundromat, drugstore, or apartment building that you might want to buy. Although it’s easy to forget sometimes, a share of stock is not a lottery ticket. It’s part ownership of a business.Although it’s easy to forget sometimes, a share of stock is not a lottery ticket. It’s part ownership of a business.

Earnings, Earnings, Earnings

Any serious discussion of earnings involves the price/earnings ratio—also known as the p/e ratio, the price-earnings multiple, or simply, the multiple. This ratio is a numerical shorthand for the relationship between the stock price and the earnings of the company.The p/e ratio can be thought of as the number of years it will take the company to earn back the amount of your initial investment— assuming, of course, that the company’s earnings stay constant. However, you don’t have to go through this exercise because the p/e ratio of 10 tells you it’s ten years.

THE FAMOUS P/E RATIO

You’ll also find that the p/e levels tend to be lowest for the slow growers and highest for the fast growers, with the cyclicals vacillating in between.An average p/e for a utility (7 to 9 these days) will be lower than the average p/e for a stalwart (10 to 14 these days), and that in turn will be lower than the average p/e of a fast grower (14–20). Some bargain hunters believe in buying any and all stocks with low p/e’s, but that strategy makes no sense to me.

These are some lessons that peter lynch thought us in one up on wall street

THE NATIONAL BESTSELLING BOOK THAT EVERY INVESTOR SHOULD OWN Peter Lynch is America's number-one money manager. His mantra: Average investors can become experts in their own field and can pick winning stocks as effectively as Wall Street professionals by doing just a little research. Now, in a new introduction written specifically for this edition of One Up on Wall Street, Lynch gives his take on the incredible rise of Internet stocks, as well as a list of twenty winning companies of high-tech '90s. That many of these winners are low-tech supports his thesis that amateur investors can continue to reap exceptional rewards from mundane, easy-to-understand companies they encounter in their daily lives. Investment opportunities abound for the layperson, Lynch says. By simply observing business developments and taking notice of your immediate world -- from the mall to the workplace -- you can discover potentially successful companies before professional analysts do. This jump on the experts is what produces "tenbaggers," the stocks that appreciate tenfold or more and turn an average stock portfolio into a star performer. The former star manager of Fidelity's multibillion-dollar Magellan Fund, Lynch reveals how he achieved his spectacular record. Writing with John Rothchild, Lynch offers easy-to-follow directions for sorting out the long shots from the no shots by reviewing a company's financial statements and by identifying which numbers really count. He explains how to stalk tenbaggers and lays out the guidelines for investing in cyclical, turnaround, and fast-growing companies. Lynch promises that if you ignore the ups and downs of the market and the endless speculation about interest rates, in the long term (anywhere from five to fifteen years) your portfolio will reward you. This advice has proved to be timeless and has made One Up on Wall Street a number-one bestseller. And now this classic is as valuable in the new millennium as ever.

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