Collection: Peter Lynch - #22 'What To Do When Stocks Go Down?'

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In this episode, Peter Lynch talks about how much further can a stock go down? And the problem you'll face when you buy a company that you don't understand.

In this episode, you’ll learn:

  • What should you do when stock price fell from its high?

  • What happens when you buy a company that you don't understand?

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One of the things I find a rule like – a couple of rules I want to throw up, I find useful. There's lot of times people buy on a basis that stock has gone down this much. You know, how much further can it go down?

I remember when Polaroid went from $130 to $100 and people said, “Here’s this great company, great record. If it ever gets below $100, just buy every share.” You know and it did get below $100 and a lot of people bought on that basis saying, “Look, it’s gone from $135 to $100. It’s now at $95. What a buy!” Within a year, it was $18. And this is a company with no debt. I mean, this company was just so overpriced, it went down.

I did the same thing in my first or second year in Fidelity. Kaiser Industries had gone from $26 a share to $16. I said, “How much lower can it go at $16?” So I think we bought one of the biggest blocks ever probably on the American stock exchange of Kaiser Industries at $14. I said, “It’s gone from $26 to $16. How much lower can it go?”

At $10, I called my mother and said, “Mom, you got to look at this Kaiser Industries. How much lower can it go? It’s gone from $26 to $10.” (Laughter) It went to $6. It went to $5. It went to $4, and it went to $3. And I am fortunate this happened rapidly, or I would probably still be caddying or working at the Stop and Shop. But it happened fast. It was compressed.

At $3, I figured out there’s something wrong here because Kaiser Industries owns 40% of Kaiser Steel, they own 40% of Kaiser Aluminum, they own 32% of Kaiser Cement, they own Kaiser Broadcasting, Kaiser Sand and Gravel, and Kaiser Engineers. They own Jeep. They own business after business, and they had no debt.

I learned this very early. This might be a breakthrough for some of you people. It’s very hard to go bankrupt if you don’t have any debt. It's tricky some people got [Inaudible] at it. So – (Laughter)

So no achievement but they had no debt and the whole company at $3, was selling it about $75 million. At that point, it was equal to buying one Boeing 747. I said there’s something wrong with this company selling for $75 million. I was a little premature at $16, but I said everything’s fine, and eventually this will work out.

And what they do is they gave away all their shares to their shareholders. They passed out shares at Kaiser Cement, they passed out shares in Kaiser Aluminum, they passed out the public shares in Kaiser Steel. They sold all the other businesses, and you got about $50 a share.

But if you didn’t understand the company, if you were just buying on the fact the stock had gone from $26 to $16 and then it had gone to $10, what would you do when it went to $9? What would you do when it went to $8? What would you do when it went to $7? This is the problem people have. They sell stocks because they didn’t know why they bought it, then it goes down and they don’t know what to do.

Do you flip a coin? Do you walk around the block? You know, what do you do? Psychiatrists haven’t worked so far. I have never seen them running in – the psychological psychiatric fund, I have never seen this with the SEC and make it through as a mutual fund. So they haven’t seemed to help. I’ve tried prayer, that hasn’t worked. So if you don’t understand the company, you have this problem when they go down.

Eventually, they always come back, this one doesn't work either. People think RCA just about got back to its 1929 high when General Electric took it over. Lot of double knits never came back. Remember those beauties? Floppy disks, Western Union, the list goes on and on. People say it’ll come back. Well, it doesn’t have to come back.

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