PETER LYNCH 00:00
You can’t just go out and buy a stock and hope it goes up. You have to have a reason why you think a stock will go up. You should be able to tell those reasons to someone else in just a few minutes. People who love stocks don’t talk about sports, they don’t talk about their dog, they talk about stories.
A story is what is happening inside a company and signs that point to what is likely to happen in the future. I will be able to put it down in two paragraphs. It could be something like earnings are turning around, a new product, somebody’s gone out of business that was competing with them, they have just discovered oil, they have a new management, is their balance sheets getting better, they are getting rid of a losing division. There is a lot of different elements, but that’s what a story is and that’s what you rely on.
A good story is one that you could tell a fifth grader and he or she would understand. The more complicated the story more likely it is to fall apart. You just need one good simple story to buy a stock and then follow that story.
Read through the story that I wrote for Toys “R” Us back in 1978. You didn’t need a degree from Business School to realize this company had a great formula and had lots of room to grow. The thousands of people who shopped there knew the store was great. I did the rest of the research I needed to fill in the story and bought the stock.
Building stories like this one is how I decide what companies to own and which ones to stay away from. Remember that stories unfold over time. Companies are never stagnant. So, you have to stay tuned and sometimes make adjustments.
Just like playing seven card stud poker or perhaps twenty-seven card stud poker, at the beginning of the game you only know some of the cards. You must place your bet accordingly. As each new card is revealed the game changes. You are forced to alter your betting strategy, perhaps even drop out of the game altogether.