The legendary American investor, Peter Lynch, called his most famous book One Up On Wall Street.
The premise of the book was simple. Lynch’s core idea was that you – yes you – can beat the money managers of Wall Street or the City by applying simple, commonsense rules when you pick your shares.
Of course, that presupposes that you have some level of knowledge and understanding of the shares yourself. And that takes some ground work… a lot of reading at the very least.
And that can put a lot of busy, well-intentioned investors off. Even to the extent that they’ll concede it would be a simple solution… and a lot less hassle… to just give their hard earned money to a fund manager.
But this is madness. Give your money to a fund manager only if you’re content to pay exorbitant fees for the privilege and for your money to track the market…
An invaluable tool for helping you beat the market
If you want to beat the market… and the fund managers… then you need to be carefully choosing individual shares.
And there’s a way you can find these shares without doing all that hard work and decision making yourself. You can do it without being a Peter Lynch. In fact, it’s a way that will allow you to discover excellent shares and feel like Peter Lynch. And you can have this all without having to do very much at all.
In his book, Lynch tells you to ignore the analysts and experts. By that, he means the highly paid stockbrokers and bank analysts who have an agenda when they tell you to buy a share.
Bank analysts get paid by the company in question to write bullish research. And sometimes brokers just need to hit their targets for volume – so they’ll plug any old stock. Remember, the more volume brokers push through, the better they’re paid.
Next, Lynch tells you to do your own research. Once you’ve hit on an idea you like, then you need to try to find out what it is that makes it a good company. What is it that will make it a good investment?
The way Lynch found many of his best investments was just by observing what was happening in his day to day life… what he saw in the high street… or overheard in a restaurant, perhaps. But whilst a hunch might be enough to give him a lead, he still made sure he went away and understood what the business did… and how it could grow his money. That’s an approach that you see repeated time and again from some of the world’s greatest investors.
According to our own Dr Mike Tubbs of Research Investments, there are a few simple rules to follow that will help you find good stocks.
Of course, a company’s valuation needs to be reasonable to start with. But there are other important things to look at…
“The first rule is to select companies with financial strength – look at the balance sheet and cash carefully. Then make sure the company is growing profitably and has a leading market position in its niche. And make sure that it is doing well in overseas markets as well as the UK – there is much more risk if a company is limited to the UK market.
“The company also needs to have a sustainable edge in its market. This usually means it re-invests in its own future. Put another way, it is sufficiently profitable to be able to invest a sizeable proportion of its revenues in new products and services coming out of research and development. This kind of re-investment can have a dramatic positive impact on the share price down the line.”
How to get 'one up' on the City
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Good investing,
Frank Hemsley
For The Right Side
Your capital is at risk when you invest in shares, never risk more than you can afford to lose. Please seek independent financial advice if necessary. Fleet Street Publications Ltd. 0207 633 3600.
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