Cutting right to the chase

Kapil Mehta, an insurance professional, finds One Up on Wall Street, by the legendary Fidelty fund manager Peter Lynch, an excellent guide for investors in India

By Kapil Mehta | Print Edition: January 25, 2007

There are questions that goes through most investors’ mind. Like what are the best investments avenues? Will the Sensex touch 20,000? Or melt down to 10,000? Which are the Infosys and Bhartis of the future? How to make sense of the numerous,often-conflicting analyst recommendations, news headlines, SMS recommendations, friendly tips? What do terms like P/E, short sell, cash flows, sum-of-parts, dilution, share buy-backs, options, futures really mean? What is the right time to sell? And which stocks?

If you have ever wondered about these questions read One Up On Wall Street. This is the perfect book that sifts through jargon, volatile markets and personal characteristics to provide an articulate, clear and practical roadmap to investing in equity. It is well written, easy to read and full of examples to illustrate the points made.

I’m not about to reveal the investment secrets and approach described in the book. For that you will have to read it. However, here is why this book will appeal to all investors:

The author is extremely modest: Peter Lynch is arguably one of the most successful fund managers of all time. He managed Fidelity’s famed Magellan fund for 13 years with over $9 billion of assets, across 1,400 stocks and consistently delivered superior returns. Yet, I was struck by the fact that he writes much more about his failures than his successes. There is no self-congratulatory praise and that tremendously enhances the author’s credibility.

The issue of information overload is deftly addressed: Each day when I read the newspapers, watch television, get the Internet updates, I am left completely confused about the market. Everybody has a point of view and they all seem completely
logical and forceful. This book tells you how to ignore the noise, sift out the relevant information and act.

The investment approach is fact-based: The book sounds a clarion call for rational investing. Lynch makes a powerful case to ignore short-term market fluctuations and judge a stock against a fundamental investment hypothesis. He offers useful pointers on what investment hypotheses to test for and where to source information.

Investment terminology is demystified: The author nicely explains the meaning and inferences that one can draw from numbers like P/E ratios, growth, dividend yields, cash flows, etc. The explanation is easy to understand. Additionally there are many terms, which the author suggests that the investor should not even try to understand because they are irrelevant!

The constant reminder that investment is a means and not the end itself: If there is one message that I would like all readers to take away it is the focus on ensuring the family’s financial security. Lynch makes this point consistently in the book. As an insurance professional, I’ve seen too many families ruined because of rash investing and absence absence
of a long-term view.

After reading this book here is a list of things that I now do differently:
- Only invest money that I won’t need in the next three years in the market.
- Invest directly into stocks not mutual funds.
- Invest in shares where I know something, can understand the product or experience the opportunity first hand.
- Ignore analyst recommendations, ticker-tape perspectives flitting at the bottom of the TV screen and friendly tips.
- Before investing in any company, make sure I spend at least a couple of hours to understand the basics: What is the price per earnings of the share? How will high P/Es (say over 30) be sustained? How does the P/E compare to competitors and how has it tracked over time? How and why are earnings likely to grow over time?
- Take time to feel comfortable about the company’s fundamentals. A few months here or there won’t make a material difference
to returns. Good shares will offer several buying opportunities.
- Avoid knee-jerk reactions. Frequent trading is expensive. Sell when the initial investment hypothesis does not seem to hold
good any more.

Finally, here is how I think Lynch would answer the questions listed at the beginning of this review:
- Buy your home first. It’s hard to lose money on real estate. Only then invest into stocks for the long term. If you really want to be safe, invest in moneymarket mutual funds.
- Sensex levels are irrelevant. Pick stocks you understand and where you can see potential earnings growth.
* The Bhartis and Infosys of tomorrow are companies that have relatively low P/E ratio today, have a strong earnings growth
potential or substantial unrecognised assets and are totally ignored by analysts. So start scanning the newspaper columns
for these companies.
Do your own thinking. Ignore the thousands of tips that you are bombarded with.
- Above all else, focus on earnings and growth

Happy reading.

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