Collection: Peter Lynch - #36 'Stock Picking And When To Sell'



[Transcript]

PETER LYNCH 00:00

Many people ask me, when is the right time to sell a stock?


Selling stocks is a matter of comparing stories. If story A is better than Story B, then Sell B and buy more A. If you own eight companies, you are playing eight simultaneous games of poker. So only stay in the games that you have the best chance of success. Now remember that stories rarely change overnight. It may take years for good one to be recognized by the market. Give your good stories the time to grow.


Your advantage in picking stocks is your direct experience with companies as a consumer, on your job as a professional or as a neighbor. Use those advantages as a place to start looking for good stocks.


You have several things that you possess that will make you a good investor. They are inherent to your life. It is the field you work in. It is the area where you live, there may be some local company that is terrific. You are a consumer, you see some products, you see some services that are terrific.


We bought a Volvo, it was better than the American station wagons. It was safer. The price was right. I did a little bit of research. I found that Volvo the stock, Swedish company, was selling equal to its cash. You are paying almost nothing for the company. They had lots of other divisions that were doing terrific. Buying that car turned out to be a great way to begin researching the stock.


Sometimes, people take things for granted. My field was the mutual fund industry. In the early 1970’s the industry grew slowly, but then it took off in the 80’s. Money piled into the money market funds and equity funds. Like an idiot, I missed stocks like Dreyfus, Pioneer, T. Rowe Price, Strategic investments, Franklin Resources. There were lots of companies that went up dramatically. This is my own field. All I had to do was buy these things. It was really dumb.


Back in the 1950’s a fireman from New England noticed a factory in his town seemed to be hiring and expanding all of the time. This person didn’t have a great computer. He wasn’t a professional investor. He was just an observant neighbor. He decided to put $2,000 per year into Tambrands, then called Tampax. By 1972, the fireman was a millionaire just from using his local edge.


Investing is a personal thing. You have to do it by yourself. You don’t do it with a committee. You have to be able to have the emotional strength to stand the volatility of the market in general and stocks in general. The key organ here is not the brain, it’s the stomach. Do you have the stomach for this? Do you have the patience for it? You should be able to look in the mirror and say to myself, “What am I going to do if the market goes down”?


If you know something that will drive a company’s earnings higher, you know something that will drive the company stock higher sooner or later. But you can’t just guess at it. You have to have some reasons, such as costs are coming down, are new products going to be a big hit?


Research is developing a company’s story, an idea of why earnings should go up or down. It doesn’t mean sitting in the library for hours, reading SEC fillings or fiddling with a calculator. Research is exciting. It is very little math.


When I owned Chrysler, it was the biggest position of my fund, when I was at a movie theater or at a sports event, I would run into somebody driving a minivan and I would ask them what do you think of the minivan? Would you buy another one? What do you like about it? People some would say, well it’s a little underpowered. They only have a four-cylinder engine. I knew they were already working on a six-cylinder engine. So, this is research.


Research starts with the things you know, your edge. If you are a mechanic, look at the tools you use. Which are the best? Which are the best value? Or if you are a doctor, see what new technology saves the insurer money, or software systems that reduce costs at hospitals.


You probably already know a few companies quite thoroughly. The amateur investor probably can follow between five and eight companies. They could lecture in these five or eight companies. They know them very well.


There are 10,000 to 15,000 public companies in United States. There are lots more overseas. So, you don’t have to be experts on lots of companies. You just have to know a few very well. It is a lot of fun. It only takes a few hours a month. It is not a full-time job.


I owned Dunkin Donuts for 12 years. I think I might have talked to them once every year. The story didn’t change a lot. You don’t have to worry about low-cost imports coming from Korea, when you own a donut company. You don’t have to worry about the economy. You don’t have to worry about someone investing a new computer chip. The story doesn’t change that much.


McDonald’s earnings have gone up I think more than 80-fold over the last 30 years. The stock has gone up a hundred-fold. What made McDonald’s earnings continue to grow? If they just stuck with a cheap cheeseburger and cheap hamburger at lunch, they probably would have run into earnings problems 10-15 years ago.


But they expanded their menu, they kept their costs low, they added breakfast, they went overseas. Every day they add two or three more restaurants. People thought there was no room for more McDonalds 5-10-15 years ago. They were wrong. If they had done the research, they would have said “Well there are a couple of hundred countries out there”. There are lots of places to grow.


(Source: https://youtu.be/cRMpgaBv-U4)

 

[YAPSS Takeaway]

Research is developing a company’s story, an idea of why earnings should go up or down. It doesn’t mean sitting in the library for hours, reading SEC fillings or fiddling with a calculator. Research is exciting. It is very little math. ~Peter Lynch