Consider this: From the top in through , the Dow produced only a fourbagger: up from to 1, in a half century! From —99 we saw an unprecedented five straight years where stocks returned 20 percent plus. Never before has the market recorded more than two back-to-back 20 percent gains. On of this book I say the breakup of ATT in may have been the most significant stock market development of that era.
In fact, most great investors I know Warren Buffett, for starters are technophobes. I understand banks, savings-and-loans, and their close relative, Fannie Mae. I mentioned that my wife, Carolyn, liked the mystery novelist Dorothy Sayers. The friend sat down at a nearby computer and in a couple of clicks pulled up the entire list of Sayers titles, plus customer reviews and the one-to five-star ratings on the literary Web sites, authors are rated like fund managers.
I bought four Sayers novels for Carolyn, picked the gift wrapping, typed in our home address, and crossed one Christmas gift off my list. This was my introduction to Amazon. Since Amazon existed in cyberspace, and not in suburban mall space, I ignored it. Also, in it was reasonably priced relative to its prospects, and it was well-financed.
In high-tech and dot. Before the Internet came along, companies had to grow their way into the billion-dollar ranks. Judging by the Maserati sales in Silicon Valley, dot. Does it make sense to invest in a dot. If you feel left out of the dot. Those who are allotted shares are lucky to receive more than a handful. I own stocks where results depend on ancient fundamentals: a successful company enters new markets, its earnings rise, and the share price follows along.
Or a flawed company turns itself around. The typical big winner in the Lynch portfolio I continue to pick my share of losers, too! Owing to the lack of earnings in dot. When One Up was written in , a lone ticker tape ran across the bottom of the Financial News Network.
On the popular Internet portals, you can click on your customized portfolio and get the latest gyrations for every holding. Or you can get stock prices on lines, pagers, and voice mail. To me, this barrage of price tags sends the wrong message. This is a dangerous delusion. What Mr. If you can follow only one bit of data, follow the earnings—assuming the company in question has earnings. What the stock price does today, tomorrow, or next week is only a distraction.
The Internet is far from the first innovation that changed the world. The railroad, telephone, the car, the airplane, and the TV can all lay claim to revolutionary effects on the average life, or at least on the prosperous top quarter of the global population. These new industries spawned new companies, only a few of which survived to dominate the field.
The same thing likely will happen with the Internet. Shareholders in those triumphant companies will prosper, while shareholders in the laggards, the has-beens, and the should-have-beens will lose money. Though the typical dot. With that in mind, before DotCom. Permit me a digression here. In the stock was bid up to a precarious 50 times earnings.
Only thirty-three U. A rare feat, indeed. There are three ways to invest in this trend without having to buy into a hope and an extravagant market cap. Today, you can look for non-Internet companies that indirectly benefit from Internet traffic package delivery is an obvious example ; or you can invest in manufacturers of switches and related gizmos that keep the traffic moving. A generation ago, scanners were installed in supermarkets.
This reduced pilferage, brought inventories under better control, and was a huge boon to supermarket chains. As expectations turn to reality, the winners will be more obvious than they are today. Along with Cisco and Intel, that high-tech juggernaut posted explosive earnings almost from the start.
Microsoft went public in at 15 cents a share. Except in the Apple orchard, all new computers came equipped with the Microsoft operating system and Microsoft Windows. Apples were losing their appeal. The more computers that used Windows, the more the software guys wrote programs for Windows and not for Apple.
Apple was squeezed into a corner, where it sold boxes to 7—10 percent of the market. Cisco is another marquee performer. The stock price is up fold since it went public in I overlooked this incredible winner for the usual reasons, but a lot of people must have noticed it. Businesses at large hired Cisco to help them link their computers into networks; then colleges hired Cisco to computerize the dorms. Students, teachers, and visiting parents could have noticed this development. Maybe some of them went home, did the research, and bought the stock.
I mention Microsoft and Cisco to add contemporary examples to illustrate a major theme of this book. Charles Barkley, a basketball player noted for shooting from the lip, once claimed he was misquoted in his own autobiography. Nothing has occurred to shake my conviction that the typical amateur has advantages over the typical professional fund jockey.
In the pros enjoyed quicker access to better information, but the information gap has closed. Often these reports were mailed from headquarters, and it took several days for the information to arrive. News alerts on your favorite companies are delivered automatically to your e-mail address. You can find out if insiders are buying or selling or if a stock has been upgraded or downgraded by brokerage houses.
You can use customized screens to search for stocks with certain characteristics. You can track mutual funds of all varieties, compare their records, find the names of their top ten holdings. Again thanks to the Internet, the cost of buying and selling stocks has been drastically reduced for the small investor, the way it was reduced for institutional investors in On-line trading has pressured traditional brokerage houses to reduce commissions and transaction fees, continuing a trend that began with the birth of the discount broker two decades ago.
Instead of following thousands of companies, now I follow maybe fifty. I continue to serve on investment committees at various foundations and charitable groups, but in all of these cases we hire portfolio managers and let them pick the stocks.
Trendy investors might think the Lynch family portfolio belongs in the New England Society of Antiquities. These businesses continue to prosper, yet the stocks still appear to be reasonably priced. In my experience, six out of ten winners in a portfolio can produce a satisfying result.
Why is this? Both teach a useful lesson. I mentioned that shares of Bethlehem, an aging blue chip, had been in decline since A famous old company, it seems, can be just as unrewarding to investors as a shaky start-up. Bethlehem, once a symbol of American global clout, has continued to disappoint. Someday, Bethlehem Steel may rise again. But assuming that will happen is wishing, not investing. Against the odds and under the savvy leadership of Jack Welch, this corporate hulk has broken into a profitable trot.
Buying back shares brings up another important change in the market: the dividend becoming an endangered species. I write about its importance on page , but the old method of rewarding shareholders seems to have gone the way of the black-footed ferret. The bad part about the disappearing dividend is that regular checks in the mail gave investors an income stream and also a reason to hold on to stocks during periods when stock prices failed to reward.
As stock prices rise, the dividend yield naturally falls. Cutting a dividend or failing to raise it was a sign of trouble. To help their shareholders avoid this double taxation, companies have abandoned the dividend in favor of the buyback strategy, which boosts the stock price.
This strategy subjects shareholders to increased capital gains taxes if they sell their shares, but long- term capital gains are taxed at half the rate of ordinary income taxes. Stock market news has gone from hard to find in the s and early s , then easy to find in the late s , then hard to get away from. People are advised to think long-term, but the constant comment on every gyration puts people on edge and keeps them focused on the short term.
Nevertheless, this generation of investors has kept the faith and stayed the course during all the corrections mentioned above. Judging by redemption calls from my old fund, Fidelity Magellan, the customers have been brilliantly complacent.
Only a small percentage cashed out in the Saddam Hussein bear market of Thanks to the day traders and some of the professional hedge fund managers, shares now change hands at an incredible clip. In , three hundred million shares traded was a hectic session on the New York Stock Exchange; today, three hundred million is a sleepy interlude and eight hundred million is average.
Have the day traders given Mr. Market the shakes? Does the brisk commerce in stock indexes have something to do with it? Whatever the cause I see day traders as a major factor , frequent trading has made the stock markets more volatile. A decade ago stock prices moving up or down more than 1 percent in a single trading session was a rare occurrence. At present we get 1 percent moves several times a month. By the way, the odds against making a living in the day-trading business are about the same as the odds against making a living at racetracks, blackjack tables, or video poker.
In fact, I think of day trading as at-home casino care. The drawback to the home casino is the paperwork. Make twenty trades per day, and you could end up with 5, trades a year, all of which must be recorded, tabulated, and reported to the IRS. So day trading is a casino that supports a lot of accountants.
People who want to know how stocks fared on any given day ask, Where did the Dow close? Never has this been truer than in the recent exclusive market, where a few stocks advance while the majority languish. The same story was repeated in , where the elite group of winners skewed the averages and propped up the multitude of losers. More than 1, stocks traded on the New York Stock Exchange lost money in This dichotomy is unprecedented. Recent developments inspire me to put in a good word for biotech— not that amateurs should pick their biotech stocks out of a barrel, but that biotech in general could play the same role in the new century as electronics played in the last.
Today a long list of biotechs have revenue, and three dozen or so turn a profit, with another fifty ready to do the same. One of the numerous biotech mutual funds might be worth a long-term commitment for part of your money. Then, in the bear market of —74, the Nifty Fifty fell 50—80 percent! This unsettling decline disproved the theory that big companies were bearproof. Though it took them a generation to do it, the Nifty Fifty made a full recovery and then some.
Even if you bought them at sky-high prices in , your choice was vindicated. History tells us that corrections declines of 10 percent or more occur every couple of years, and bear markets declines of 20 percent or more occur every six years. Severe bear markets declines of 30 percent or more have materialized five times since the —32 doozie. The long bull market continues to hit occasional potholes. When One Up was written, stocks had just recovered from the crash. The worst fall in fifty years coincided with a Lynch golfing vacation in Ireland.
But I made two trips to Israel and two to India and one to Indonesia, and nothing happened. While the decline scared a lot of people a 35 percent drop in two days can do that , to me the episode was scarier. In the economy was perking along, and our banks were solvent, so the fundamentals were positive. In the country was falling into recession, our biggest banks were on the ropes, and we were preparing for war with Iraq.
But soon enough the war was won and recession overcome, the banks recovered, and stocks took off on their biggest climb in modern history. It would be wonderful if we could avoid the setbacks with timely exits, but nobody has figured out how to predict them. By staying in the market, you more than doubled your reward. The obituary for this bull market has been written countless times going back to its start in To some, stocks looked too expensive in , at Dow 2, To others, they looked extravagant in , above Dow 3, A chorus of naysayers surfaced in , above Dow 4, The downsizing caused disruption and heartache to the recipients of the pink slips, but it also freed up millions of workers to move into exciting and productive jobs in fast-growing small companies.
America has the lowest unemployment rate of the past half century, while Europe continues to suffer from widespread idleness. Big European companies also have downsized, but Europe lacks the small businesses to take up the slack. They have a higher savings rate than we do, their citizens are well educated, yet their unemployment rate is more than twice the U. The basic story remains simple and never-ending.
Companies do better or they do worse. If a company does worse than before, its stock will fall. If a company does better, its stock will rise. Corporate profits are up fifty-five-fold since World War II, and the stock market is up sixtyfold. Many high-tech enterprises the likes of Helix, Photronics, Siliconix, Theragenics that cracked the top are omitted here, because I wanted to showcase the opportunities that the average person could have noticed, researched, and taken advantage of.
His success was hard to miss. Home Depot? It continued to grow at a rapid clip, making the top list for the second decade in a row. Harley Davidson? All those lawyers, doctors, and dentists becoming weekend Easy Riders was great news for Harley.
Home Depot all over again. Who would have predicted two monster stocks from the same mundane business? Small businesses everywhere were curing a headache by letting Paychex handle their payroll. My wife, Carolyn, used Paychex in our family foundation work, and I missed the clue and missed the stock.
Some of the best gains of the decade as has been the case in prior decades came from old-fashioned retailing. The Gap, Best Buy, Staples, Dollar General —these were all megabaggers and well-managed companies that millions of shoppers experienced firsthand.
That two small banks appear on this list shows once again that big winners can come from any industry—even a stodgy slow- growth industry like banking. More than a year later, and looking back on it with some dispassion, I can begin to separate the sensational ballyhoo from the incidents of lasting importance. I rarely take vacations, so the fact that I was traveling at all was extraordinary in itself.
You get to lie on your back, wiggle your way across the metal grating that comes between you and a fatal drop, and then while gripping a guardrail for emotional support, you kiss the legendary stone. Kissing the Blarney stone is as big a thrill as they say—especially the getting out alive. I must have been tired. I never left the hotel room for the entire afternoon.
The next day, the 20th, we flew home. In hindsight they hardly seem worth mentioning. This made me wonder if we should be on vacation at all. Throughout the weekend, between the rounds of golf, I sought out several phones and talked to my office about which stocks to sell, and which stocks to buy at bargain prices if the market fell further. Thanks to the time difference, I finished the round a few hours before the opening bell rang on Wall Street, or else I would probably have played worse.
As it was, a sense of gloom and doom carried over from Friday, and perhaps that explained my 1 putting worse than I usually do, which in the best of times is terrible; and 2 failing to remember my score. My fixation on this mishap caused me to ignore the scenery on the way to Dingle. It could have been Forty-second and Broadway, for all I knew.
Instead, I was on the phone with my home office, deciding which of the 1, stocks in my fund should be sold to raise cash for the unusual number of fund redemptions. There was enough cash for normal circumstances, but not enough for the circumstances of Monday the 19th.
My associates and I sold what we had to sell. First we disposed of some British stocks in the London market. On Monday morning, stock prices in London were generally higher than prices in the U. Then we sold in New York, mostly in the early part of the session, when the Dow was down only points but well on its way to the nadir of We came home on the 20th because all of the above made me desperate to get back to the office.
Fortunately the vast majority of them paid little heed to the distractions cited above. If this is any example, less than three percent of the million account- holders in Fidelity Magellan switched out of the fund and into a money-market fund during the desperations of the week. When you sell in desperation, you always sell cheap.
You could gradually have reduced your portfolio of stocks and come out ahead of the panic-sellers, because, starting in December, the market rose steadily. I prefer to write about something you might find more valuable: how to identify the superior companies. But rule number one, in my book, is: Stop listening to professionals! Twenty years in this business convinces me that any normal person using the customary three percent of the brain can pick stocks just as well, if not better, than the average Wall Street expert.
Dumb money is only dumb when it listens to the smart money. In fact, the amateur investor has numerous built-in advantages that, if exploited, should result in his or her outperforming the experts, and also the market in general. Moreover, when you pick your own stocks, you ought to outperform the experts. Otherwise, why bother? Honesty and not immodesty compels me to report that millions of amateur investors have been well-rewarded for investing in Fidelity Magellan, which is why I was invited to write this book in the first place.
The mutual fund is a wonderful invention for people who have neither the time nor the inclination to test their wits against the stock market, as well as for people with small amounts of money to invest who seek diversification. It means ignoring the stocks that you hear Peter Lynch, or some similar authority, is buying. There are at least three good reasons to ignore what Peter Lynch is buying: 1 he might be wrong!
What makes them better is that you can keep tabs on them, just as I keep tabs on mine. If you stay half-alert, you can pick the spectacular performers right from your place of business or out of the neighborhood shopping mall, and long before Wall Street discovers them. I suspect this highly technical term has been borrowed from baseball, which only goes up to a fourbagger, or home run.
In my business a fourbagger is nice, but a tenbagger is the fiscal equivalent of two home runs and a double. I developed a passion for making ten times my money early in my investing career. The first stock I ever bought, Flying Tiger Airlines, turned out to be a multibagger that put me through graduate school. In the last decade the occasional five-and tenbagger, and the rarer twentybagger, has helped my fund outgain the competition—and I own 1, stocks.
In a small portfolio even one of these remarkable performers can transform a lost cause into a profitable one. The effect is most striking in weak stock markets—yes, there are tenbaggers in weak markets. To make this spectacular showing, you only had to find one big winner out of eleven. The more right you are about any one stock, the more wrong you can be on all the others and still triumph as an investor.
But even if you missed the highs or the lows, you would have done better to have invested in any of the familiar companies mentioned above than in some of the esoteric enterprises that neither of us understands. Luckily the fireman kept his own counsel. In fact, Carolyn is one of my best sources. It turned out to be one of the two most successful consumer products of the seventies.
In the early part of that decade, before I took over Fidelity Magellan, I was working as a securities analyst at the firm. Hanes was ecstatic. If a product becomes a best-seller without brand-name recognition, imagine how it will sell once the brand is publicized. All she had to do was buy a pair and try them on. These stockings had what they call a heavier denier, which made them less likely to develop a run than the normal stockings.
They also fit very well, but the main attraction was convenience. Hanes already sold its regular brand of stockings in the department stores and the specialty stores. Selling stockings in the grocery store was an immensely popular idea. You could have figured that out by seeing the number of women with plastic eggs in their grocery carts at the checkout counter. Two or three years after the product was introduced, you could have walked into any one of thousands of supermarkets and realized that this was a best-seller.
Once Carolyn alerted me to Hanes, I did the customary research into the story. Hanes turned out to be a sixbagger before it was taken over by Consolidated Foods, now Sara Lee. Husbands usually also known as the Designated Investors probably were too busy buying solar-energy stocks or satellite-dish company stocks and losing their collective shirts. Winchester Disk Drives is the answer. As near to a sure thing as you could get.
That sure thing went from seven dollars to three dollars and fifty cents. We lost fifteen hundred dollars. This is Winchester. The Wall Street Journal calls disk drives one of the major growth industries of this decade. Why should we be the only ones not to get in on it? More realistically, if Mrs. But our Designated Investor, who had plenty of time to buy into The Limited even after he sold out on Winchester, continued to ignore the great spousal tip.
By then there were four hundred Limited stores in the country, and most of them crowded, but Houndstooth was too busy to notice. He was following what Boone Pickens was doing with Mesa Petroleum. Furthermore, there have been promising articles in three different magazines, the stock has become a darling of the big institutions, and there are thirty analysts on the trail. It occurs to the Designated Investor that this is a solid, respectable buy. Turns out to be a public company. That means we can buy the stock.
Pretty good stock, to boot, judging by the special I just saw on PBS. I heard Forbes even had a cover story on it. Gotta be worth at least a couple of thousand from the retirement fund. Other stores carry the same thing now. Once I was standing on the greatest asset play of the century, the Pebble Beach golf course, and it never occurred to me to ask if it was a public company.
I was too busy asking about the distance between the tees and the greens. In a large portfolio such as mine I have to hit several before it makes an appreciable difference. In a small portfolio such as yours, you only have to hit one. People seem more comfortable investing in something about which they are entirely ignorant.
Shun the enterprise around the corner, which can at least be observed, and seek out the one that manufactures an incomprehensible product. I heard about one such opportunity just the other day. More on this later. And how about Coleco? Finding the promising company is only the first step.
The next step is doing the research. This book is divided into three sections. The first, Preparing to Invest Chapters 1 through 5 , deals with how to assess yourself as a stockpicker, how to size up the competition portfolio managers, institutional investors, and other Wall Street experts , how to evaluate whether stocks are riskier than bonds, how to examine your financial needs, and how to develop a successful stockpicking routine.
Part I PREPARING TO INVEST Before you think about buying stocks, you ought to have made some basic decisions about the market, about how much you trust corporate America, about whether you need to invest in stocks and what you expect to get out of them, about whether you are a short-or long-term investor, and about how you will react to sudden, unexpected, and severe drops in price.
It is personal preparation, as much as knowledge and research, that distinguishes the successful stockpicker from the chronic loser. It is the investor. Though many would like to blame their losses on some inbred tragic flaw, believing somehow that others are just born to invest, my own history refutes it.
As far as I know, my father never left the pacing area to check on the price of General Motors, nor did my mother ask about the ATT dividend between contractions. Only in hindsight can I report that the Dow Jones industrial average was down on January 19, , the day I was born, and declined further the week I was in the hospital. The latest proof came in the summer of , when just after the publisher and I reached an agreement to produce this book, a high point in my career, the market lost 1, points in two months.
Most of my relatives distrusted the stock market, and with good reason. Nobody was recommending stocks around our household. The only stock purchase I ever heard about was the time my grandfather, Gene Griffin, bought Cities Service. He was a very conservative investor, and he chose Cities Service because he thought it was a water utility.
When he took a trip to New York and discovered it was an oil company, he sold immediately. Cities Service went up fiftyfold after that. Distrust of stocks was the prevailing American attitude throughout the s and into the s, when the market tripled and then doubled again. My father, an industrious man and former mathematics professor who left academia to become the youngest senior auditor at John Hancock, got sick when I was seven and died of brain cancer when I was ten.
At the age of eleven I was hired as a caddy. That was on July 7, , a day the Dow Jones fell from to They paid me for walking around a golf course. In one afternoon I would outearn delivery boys who tossed newspapers onto lawns at six A. What could be better than that? In high school I began to understand the subtler and more important advantages of caddying, especially at an exclusive club such as Brae Burn, outside of Boston.
In helping D. George Sullivan find his ball, I was helping myself find a career. If you wanted an education in stocks, the golf course was the next best thing to being on the floor of a major exchange. In a single round of play I might give out five golf tips and get back five stock tips in return. Though I had no funds to invest in stock tips, the happy stories I heard on the fairways made me rethink the family position that the stock market was a place to lose money.
Many of my clients actually seemed to have made money in the stock market, and some of the positive evidence actually trickled down to me. Mostly I caddied for average golfers and average spenders, but if it came down to a choice between a bad round with a big tipper, or a great round with a bad tipper, I learned to opt for the former. Caddying reinforced the notion that it helps to have money.
I continued to caddy throughout high school and into Boston College, where the Francis Ouimet Caddy Scholarship helped pay the bills. In college, except for the obligatory courses, I avoided science, math, and accounting—all the normal preparations for business. I was on the arts side of school, and along with the usual history, psychology, and political science, I also studied metaphysics, epistemology, logic, religion, and the philosophy of the ancient Greeks.
If stockpicking could be quantified, you could rent time on the nearest Cray computer and make a fortune. Actually Wall Street thinks just as the Greeks did. The early Greeks used to sit around for days and debate how many teeth a horse has. They thought they could figure it out by just sitting there, instead of checking the horse.
A lot of investors sit around and debate whether a stock is going up, as if the financial muse will give them the answer, instead of checking the company. In centuries past, people hearing the rooster crow as the sun came up decided that the crowing caused the sunrise. When I hear theories like these, I always remember the rooster.
Flying Tiger was no wild guess. I picked it on the basis of some dogged research into a faulty premise. It went up because we got into the Vietnam War and Flying Tiger made a fortune shunting troops and cargo in and out of the Pacific. Little by little I sold it off to pay for graduate school. I went to Wharton on a partial Flying Tiger scholarship.
If your first stock is as important to your future in finance as your first love is to your future in romance, then the Flying Tiger pick was a very lucky thing. It proved to me that the bigbaggers existed, and I was sure there were more of them from where this one had come. During my senior year at Boston College I applied for a summer job at Fidelity, at the suggestion of Mr.
There were one hundred applications for three summer positions. That fund, run by Gerry Tsai, was one of the two famous go-go funds of this famous go-go era. The other was Fidelity Trend, run by Edward C. Johnson III, also known as Ned. Ned Johnson was the son of the fabled Edward C. Johnson II, also known as Mister Johnson, who founded the company. Mister Johnson believed that you invest in stocks not to preserve capital, but to make money.
Then you take your profits and invest in more stocks, and make even more money. Of course the Dow Jones industrials, at when I reported for work the first week of May, , had fallen below by the time I headed off to graduate school in September, just as the Lynch Law would have predicted.
The whole intimidating business was suddenly demystified—even liberal arts majors could analyze a stock. I was assigned to the paper and publishing industry and set out across the country to visit companies such as Sorg Paper and International Textbook. Since the airlines were on strike, I traveled by bus. By the end of the summer the company I knew most about was Greyhound. After that interlude at Fidelity, I returned to Wharton for my second year of graduate school more skeptical than ever about the value of academic stock- market theory.
It seemed to me that most of what I learned at Wharton, which was supposed to help you succeed in the investment business, could only help you fail. I studied statistics, advanced calculus, and quantitative analysis. My distrust of theorizers and prognosticators continues to the present day.
We got married while I was in the Army, on May 11, , a Saturday when the market was closed, and we had a week-long honeymoon during which the Dow Jones lost This is something I looked up later. From to , I was a lieutenant in the artillery, sent first to Texas and later to Korea—a comforting assignment considering the alternative.
Lieutenants in the artillery mostly wound up in Vietnam. The only drawback to Korea was that it was far away from the stock exchange, and as far as I knew, there was no stock market in Seoul. By this time I was suffering from Wall Street withdrawal. They were buying high-flying issues that kept going up, but for me they suggested conservative issues that kept going down.
The Maine Sugar people had gone around to all the Maine potato farmers to convince them to grow sugar beets in the off-season. This was going to be extremely profitable for Maine Sugar, not to mention for the Maine farmers. By planting the sugar beets—the perfect companion crop to potatoes—farmers could make extra money and revitalize the soil at the same time. Moreover, Maine Sugar was footing the bill for planting the beets.
All the farmers had to do was haul the grown-up beets to the huge new refinery that Maine Sugar had just built. The hitch was that these were Maine farmers, and Maine farmers are very cautious. Instead of planting hundreds of acres of sugar beets, the first year they tried it on a quarter acre, and then when that worked, they expanded to a half acre, and by the time they got to a full acre, the refinery was shut for lack of business and Maine Sugar went bankrupt.
The stock fell to six cents, so one share could buy you six gumballs from a Lions Club machine. I returned from Korea in , rejoined Fidelity as a permanent employee and research analyst, and the stock market promptly plummeted. Lynch Law theorists take note. In May of , I took over the Fidelity Magellan fund. The market stood at and promptly began a five-month slide to I listened politely and then went out and raised the number to 60 stocks, six months later to stocks, and soon after that, to stocks.
The open-minded Ned Johnson watched me from a distance and cheered me on. Instead of settling for a couple of savings-and-loans, I bought them across the board after determining, of course, that each was a promising investment in itself. Since I own 1, at present, I suppose they have a point.
In terms of return on investment, Fidelity Magellan has done much better than Greece over the eleven years, although Greece has an enviable record over the preceding 2, This is a lucky break for you. Of course, not all professionals are oxymoronic. There are great fund managers, innovative fund managers, and maverick fund managers who invest as they please.
John Templeton is one of the best. He is a pioneer in the global market, one of the first to make money all around the world. His shareholders avoided the —74 collapse in the U. Not only that, he was one of the first to take advantage of the fact that the Japanese Dow Jones the Nikkei average is up seventeenfold from to , while the U. Dow Jones has only doubled.
Max Heine now deceased at Mutual Shares fund was another ingenious freethinker. Ken Heebner at Loomis-Sayles sticks his neck out, too, and the results have been remarkable. Peter deRoetth is another friend who has done extremely well with small stocks. DeRoetth is a Harvard Law School graduate who developed an incurable passion for equities. The secret of his success is that he never went to business school—imagine all the lessons he never had to unlearn.
And Warren Buffett, the greatest investor of them all, looks for the same sorts of opportunities I do, except that when he finds them, he buys the whole company. These notable exceptions are entirely outnumbered by the run-of-the-mill fund managers, dull fund managers, comatose fund managers, sycophantic fund managers, timid fund managers, plus other assorted camp followers, fuddy- duddies, and copycats hemmed in by the rules. You have to understand the minds of the people in our business.
We all read the same newspapers and magazines and listen to the same economists. I doubt there are any ex-surfers or former truck drivers, either. My wife once did some research into the popular theory that great inventions and great ideas come to people before they reach thirty. Nevertheless, with the vast majority of the fund managers being middle-aged, it cuts out all the potential genius on the earlier and the later ends of the geriatric spectrum. There are simply too many obstacles between them and the tenbaggers.
The Limited is a good example of what I call Street lag. When the company went public in , it was all but unknown to the large institutions and the big- time analysts. Halliday attributed the disinterest of Wall Street to the fact that Columbus, Ohio, was not exactly a corporate Mecca at the time. A lone analyst Susie Holmes of White, Weld followed the company for a couple of years before a second analyst, Maggie Gilliam for First Boston, took official notice of The Limited in The first institution which bought shares in The Limited was T.
Rowe Price New Horizons Fund, and that was in the summer of By then there were one hundred Limited stores open for business across the country. Thousands of observant shoppers could have initiated their own coverage during this period.
Still, by , only two institutions owned Limited stock, accounting for 0. In there were four hundred Limited stores doing a thriving business and only six analysts followed the stock. This was seven years after Ms. By then, there were more than thirty analysts on the trail thirty-seven as of this writing , and many had arrived just in time to see The Limited drop off the edge. My favorite funeral home company, Service Corporation International, had its first public offering in Shearson was the first major brokerage firm to show an interest, and that was in By then the stock was a five-bagger.
Throughout the decade of the s, when Subaru was making its biggest moves, only three or four major analysts kept tabs on it. Neither was interested five years ago. I could go on, but I think we both get the point. Contrast the above with the fifty-six brokerage analysts who normally cover IBM or the forty-four who cover Exxon. The fund manager most likely is looking for reasons not to buy exciting stocks, so that he can offer the proper excuses if those exciting stocks happen to go up.
In fact, between the chance of making an unusually large profit on an unknown company and the assurance of losing only a small amount on an established company, the normal mutual-fund manager, pension- fund manager, or corporate-portfolio manager would jump at the latter. The worst of the camp-following takes place in the bank pension-fund departments and in the insurance companies, where stocks are bought and sold from preapproved lists.
Two company presidents, Smith and Jones, both of whom have pension accounts managed by the National Bank of River City, are playing golf together, as they always do. Both men ought to be satisfied, but Jones is livid. Almost by definition the result will be mediocre, but acceptable mediocrity is far more comfortable than diverse performance. It would be one thing if an approved list were made up of, say, thirty ingenious selections, each chosen via the independent thinking of a different analyst or fund manager.
Then you might have a dynamic portfolio. But the way it usually works is that each stock on the list has to be acceptable to all thirty managers, and if no great book or symphony was ever written by committee, no great portfolio has ever been selected by one, either. I am reminded here of the Vonnegut short story in which various highly talented practitioners are deliberately held back the good dancers wear weights, the good artists have their fingers tied together, etc.
The would-be decision-makers hardly know what they are approving. I think of this every time I buy shirts. Coaches can at least relax between seasons. Fund managers can never relax because the game is played year-round. The wins and losses are reviewed after every third month, by clients and bosses who demand immediate results.
Boon Doggle knows his stocks. All he wants is to be left alone to do his job. Between these strenuous three-month checkups, Flint calls Doggle twice a day for an update. He wastes so many hours talking to Flint about picking good stocks that he has no time left to do his job. Fund managers in general spend a quarter of their working hours explaining what they just did—first to their immediate bosses in their own trust department, and then to their ultimate bosses, the clients like Flint at White Bread.
Fortunately for Doggle there is no date attached to these purchases, so Flint never realizes that Xerox and Sears have been in the portfolio since , when bell-bottom pants were the national rage. Then Flint moves along to Seven Oaks International, which happens to be one of my all-time favorite picks. Ever wonder what happens to all those discount coupons—fifteen cents off Heinz ketchup, twenty-five cents off Windex, etc.
Your supermarket wraps them up and sends them off to the Seven Oaks plant in Mexico, where piles of coupons are collated, processed, and cleared for payment, much as a check is cleared through the Federal Reserve banks. Seven Oaks makes a lot of money doing this boring job, and the shareholders are well-rewarded. After two or three similar episodes, he vows never to buy another off-beat company and to stick to the Xeroxes and the Searses.
He also decides to sell Seven Oaks at the earliest opportunity so that the memory of it will be expunged forever from his list. A successor always wants to start off with a positive feeling, which means keep the Xerox and wipe out the Seven Oaks. The portfolio departments of many regional banks outside of New York City have done an outstanding job picking stocks for an extended period of time.
Many corporations, especially the medium-sized ones, have distinguished themselves in managing their pension money. The secondary result is that the bigger funds are forced to limit themselves to the top 90 to companies, out of the 10, or so that are publicly traded.
That cuts out a lot of opportunities, especially in the small fast-growing enterprises that tend to be the tenbaggers. Size is measured by multiplying the number of outstanding shares by the current stock price. This results in a strange phenomenon: large funds are allowed to buy shares in small companies only when the shares are no bargain. By definition, then, the pension portfolios are wedded to the ten-percent gainers, the plodders, and the regular Fortune bigshots that offer few pleasant surprises.
No wonder so many pension-fund managers fail to beat the market averages. Equity mutual funds such as mine are less restricted. Flint hovering over my shoulder. My biggest disadvantage is size. The bigger the equity fund, the harder it gets for it to outperform the competition. Big funds have the same built-in handicaps as big anythings—the bigger it is, the more energy it takes to move it. The stocks I try to buy are the very stocks that traditional fund managers try to overlook.
In other words, I continue to think like an amateur as frequently as possible. Nor do you have to force yourself to think like an amateur if you already are one. In the unlikely event that your mate is dismayed at your stock selections, you could always hide the monthly statements that arrive in the mail. If no company seems attractive on the fundamentals, you can avoid stocks altogether and wait for a better opportunity.
Equity fund managers do not have that luxury, either. Most important, you can find terrific opportunities in the neighborhood or at the workplace, months or even years before the news has reached the analysts and the fund managers they advise.
This issue of stocks versus bonds is worth resolving right up front, and in a calm and dignified manner, or else it will come up again at the most frantic moments, when the stock market is dropping and people rush to the banks to sign up for CDs. Lately, just such a rush has occurred. Investing in bonds, money-markets, or CDs are all different forms of investing in debt—for which one is paid interest. For years the Indians have been the subjects of cruel jokes because of it—but it turns out they may have made a better deal than the buyers who got the island.
Bonds have been especially attractive in the last twenty years. Not in the fifty years before that, but definitely in the last twenty. People who bought U. Bondholders have no more choice in the matter than property owners who face a condemnation. On the other hand, if interest rates go in a direction that works against the bondholders, the bondholders are stuck with the bonds.
Then the bond funds were invented, and regular people could invest in debt right along with tycoons. After that, the money-market fund liberated millions of former passbook savers from the captivity of banks, once and for all. There ought to be a monument to Bruce Bent and Harry Browne, who dreamed up the money-market account and dared to lead the great exodus out of the Scroogian thrifts.
They started it with the Reserve Fund in My own boss, Ned Johnson, took the idea a thought further and added the check-writing feature. Prior to that, the money-market was most useful as a place where small corporations could park their weekly payroll funds. The check- writing feature gave the money-market fund universal appeal as a savings account and a checking account.
If your money has stayed in a money-market fund since , you certainly have no reason to feel embarrassed about it. The year that short-term interest rates rose to 17 percent and the stock market dropped 5 percent, you made a 22 percent relative gain by staying in cash.
But the morning after the crash, with the Dow beaten back to , you felt vindicated. You avoided the whole trauma of October With stock prices so drastically reduced, the money-market actually had outperformed the stock market over the entire year—6. Over the long haul they always do. Historically, investing in stocks is undeniably more profitable than investing in debt. In fact, since , common stocks have recorded gains of 9. The long-term inflation rate, as measured by the Consumer Price Index, is 3 percent a year, which gives common stocks a real return of 6.
The real return on Treasury bills, known as the most conservative and sensible of all places to put money, has been nil. The advantage of a 9. When you lend money to somebody, the best you can hope for is to get it back, plus interest.
Sure, the original bondholders have gotten their money back, the same as they would have with a bank CD, but the original stockholders have gotten rich. They own the company. Even blue-chip stocks held long term, supposedly the safest of all propositions, can be risky.
Less than one percent worth of annual appreciation is all you got in 57 years of sticking with a solid, world-famous, and successful company. Glance at a list of the original Dow Jones industrials from Leather Preferred? These once-famous stocks must have vanished long ago. Then from the list we see Baldwin Locomotive, gone by ; the list includes such household names as Paramount Famous Lasky and Remington Typewriter; in , Remington Typewriter disappears and United Drug takes its place.
In , we find Corn Products Refining on the list, but by it, too, is taken off and replaced by Swift and Co. During certain periods it seems to take forever for the theoretical 9. The Dow Jones industrials reached an all-time high of But with the possible exception of the very short-term bonds and bond funds, bonds can be risky, too.
If you are truly risk-averse, then the money-market fund or the bank is the place for you. Otherwise, there are risks wherever you turn. Yes, I know bonds pay off in Try holding on to a year bond with a 6 percent coupon during a period of raging inflation, and see what happens to the value of the bond. A lot of people have invested in funds that buy Government National Mortgage Association bonds Ginnie Maes without realizing how volatile the bond market has become.
These days, bond funds fluctuate just as wildly as stock funds. The same volatility in interest rates that enables clever investors to make big profits from bonds also makes holding bonds more of a gamble. Historically, stocks are embraced as investments or dismissed as gambles in routine and circular fashion, and usually at the wrong times. Once the unsettling fact of the risk in money is accepted, we can begin to separate gambling from investing not by the type of activity buying bonds, buying stocks, betting on the horses, etc.
To a veteran handicapper with the discipline to stick to a system, betting on horses offers a relatively secure long-term return, which to him has been as reliable as owning a mutual fund, or shares in General Electric. It may take days of extra work to figure all this out. In fact, the stock market most reminds me of a stud poker game.
Betting on seven-card stud can provide a very consistent long-term return to people who know how to manage their cards. By asking some basic questions about companies, you can learn which are likely to grow and prosper, which are unlikely to grow and prosper, and which are entirely mysterious. You can never be certain what will happen, but each new occurrence—a jump in earnings, the sale of an unprofitable subsidiary, the expansion into new markets—is like turning up another card.
As long as the cards suggest favorable odds of success, you stay in the hand. These are the players who undertake to maximize their return on investment by carefully calculating and recalculating their chances as the hand unfolds. Consistent winners raise their bet as their position strengthens, and they exit the game when the odds are against them, while consistent losers hang on to the bitter end of every expensive pot, hoping for miracles and enjoying the thrill of defeat.
In stud poker and on Wall Street, miracles happen just often enough to keep the losers losing. They accept their fate and go on to the next hand, confident that their basic method will reward them over time. People who succeed in the stock market also accept periodic losses, setbacks, and unexpected occurrences. Choose items to buy together.
In Stock. Why Gold? Why Now? Customers who viewed this item also viewed. Page 1 of 1 Start over Page 1 of 1. Hunter Riley III. Paul Mladjenovic. John Roberts. Don Durrett. Precious Metals Investing For Dummies. About the Author Michael Maloney is widely recognized as a leading expert on monetary history, economics, investing, and precious metals.
Don't have a Kindle? About the author Follow authors to get new release updates, plus improved recommendations. Michael Maloney. Brief content visible, double tap to read full content. Full content visible, double tap to read brief content. Read more Read less. Customer reviews. How customer reviews and ratings work Customer Reviews, including Product Star Ratings help customers to learn more about the product and decide whether it is the right product for them.
Learn more how customers reviews work on Amazon. Images in this review. Reviews with images. See all customer images. Top reviews Most recent Top reviews. Top reviews from the United States. There was a problem filtering reviews right now. Please try again later. Verified Purchase. I started following Mike a couple months ago and I'll have to say him and his team of analyst do a great job of providing truth pertaining to monetary history and the correlating connection with gold and silver.
In the beginning of the book it takes you into multiple monetary history and gradually educate you throughout the times and how gold and silver has always been the remaining asset to with stand the economic upheaval of the age. Many more in the book for you to find out. This author has been instrumental in guiding me to investing and increasing my knowledge base several fold.
This book is my first in the precious metals segment and cant say anything more than being a tremendous blessing. He is the best at explaining in the industry and is very very interesting and knowledgeable. This is the "regular expressions" of investing. What everyone should master first. Regular Expressions is something from computer programming that many say everyone should learn before anything else.
Given that investing deals with money it makes sense that first thing you should learn is "what is money". This book answers that question. Then you move into how to increase you store of money. I gave my copy to my brother so this is my second purchase of this book. I don't like ebooks. This was my first book on gold and silver investing. I did exactly that. Author has a new book scheduled for March Mike's take on investing by looking through the cycles in our economic history is unmatched and well done.
He has inspired me to do my own research, and I have found Mike's extrapolations to be solid. I have shared this book with my father and friends, and they are eager to learn more about the secrets of money and how to protect wealth in the coming transfer. Highly recommend this book for any investor, and consider it a great reference tool for further research. I primarily got this book because I have been following Mike Maloney and his YouTube channel for a year now.
Great content. If you want a better understanding of economics and how money flows in the economy follow Mike Maloney. He has alot to teach and updates his YouTube channel on a regular basis. I like the historical context provided Knowing the information from this book is vital to setting a strong foundation for your financial future.
On some level most of us understand the government and the profit motive screw the common people over. Well this book is like a sword and shield defending your right to know and defending your right to fight. I am really glad to have read this book. Mike Maloney has certainly done a huge amount of research into monetary history and how events in the past are set to keep repeating themselves. I thoroughly enjoyed reading this book on a topic I would otherwise have avoided. I really get the feeling that Mike Maloney is concerned for the average working person and is doing his best to educate us to what is occurring in the financial world.
I look at currency and money in a completely different way now. See all reviews. Top reviews from other countries. I found it very, very, eeducational. Knowledge is power. Thank you Mr.
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Michael Maloney is widely recognized as a leading expert on monetary history, economics, economic cycles investing, and precious metals. Mike Maloney is the author of Guide to Investing in Gold and Silver, part of Robert Kiyosaki's"Rich Dad's Advisors" series of books. Beginning investors will find thorough guidelines for making good decisions in this study of private gold ownership. Emphasis is placed on the.