Feb

28

Book Review: Learn to Earn and Beating The Street

February 28, 2007 |

Peter Lynch is a great stock picker. He, like me, is also an advocate of early financial education for all American kids at school. I admire his knowledge and skill, even when his ego may be dangerously enlarged. Peter managed the Fidelity Magellan fund. Such fund was a wreck when he took it, and became one of the top performers of all times, specially when he was the manager. The fund share owners miss him now that he is in semi-retirement.

Two books I have read as part of my financial education are:

Learn to Earn: A Beginner’s Guide to the Basics of Investing and Business
This is a beginner’s guide to understanding how the economy and companies work. It puts everything into perspective and gives you the basics for getting your life in order and moving fast towards financial independence and wealth. It was designed to be used in a financial literacy course.

My favorite chapter is the first chapter: A brief history of capitalism. We learn history at school, but we never learn how this nation became so great (economically). It does explains how, and it does gives some insight in good things that we must make sure keep happening if we want to enjoy this greatness.

The second best, what a coincidence, the second chapter: This underlines how good the book is organized. This chapter gives you real pointers of where to start investing. It explains why you should start now. And although we all know Peter Lynch prefers stocks he does a good comparison across Savings and Money Market accounts, Collectibles, Real Estate, Bonds, and Stocks.

This second chapter also teaches you how to read all of those financial publications that scare people away from finance: the candlestick charts and small print numbers become interesting after reading this.

After you finish reading this book you should be able to understand how the economy works, and how to acquire stocks of good performing companies. You will know how to filter the bad companies from the decent ones. With the knowledge in this book you will probably match or slightly beat the market. You will certainly learn how to get out of a passive working bee life into an ownership life. To pick the superb companies, I believe you have to read another book, like:

Beating the Street
This book is a work-biography. It describes the reasonings and decisions that Peter had to make during his Magellan years. He explains how he picked companies that outperformed the market and most of the other mutual fund managers. He gives concrete examples on why he took the decisions.

The book emphasizes looking for stable companies with a very good chance of growth. It helps you weed out the non-performers, or those who will now know how to perform at the levels you want them to get. The book also shows you how to scout for good opportunities, where to look, and what to look for. It is great if you have decided to go beyond mutual fund investing, and into individual stock picking.

The book has a summary of the findings in two lists: The 20 Golden Rules, and the Principles. The 20 Golden Rules are summarized at the end of the book, so I will let you read them there. My favorite is: “Nobody can predict interest rates, the future direction of the economy, or the stock market. Dismiss all such forecasts and concentrate on what’s actually happening to the companies in which you’ve invested.” The following Principles are half funny, but full of wisdom. They are scattered around the book, so for your and my own benefit I have decided to compile them in a single list:

  • Principle #1 - When the operas outnumber the football games three to zero, you know there is something wrong with your life. (don’t let your professional life take away your personal life)
  • Principle #2 - Gentlemen who prefer bonds don’t know what they are missing.
  • Principle #3 - Never invest in any idea you can’t illustrate with a crayon.
  • Principle #4 - You can’t see the future through a rear view mirror.
  • Principle #5 - There’s no point paying Yo-Yo Ma to play a radio. (on the importance of minimizing load and expenses paid to mutual fund companies)
  • Principle #6 - As long as you’re picking a fund, you might as well pick a good one.
  • Principle #7 - The extravagance of any corporate office is directly proportional to management’s reluctance to reward the shareholders.
  • Principle #8 - When yields on long-term government bonds exceed the dividend yield of the S&P 500 by 6 percent or more, sell your stocks and buy bonds.
  • Principle #9 - Not all common stocks are equally common.
  • Principle #10 - Never look back when you’re driving on the autobahn.
  • Principle #11 - Never bet on a comeback while they’re playing “Taps”.
  • Principle #11 - The best stock to buy may be the one you already own.
  • Principle #13 - A sure cure for taking a stock for granted is a big drop in the price.
  • Principle #14 - If you like the store, chances are you’ll love the stock.
  • Principle #15 - When insiders are buying, it’s a good sign — unless they happen to be New England bankers. (the New England bankers is half irony, half joke).
  • Principle #16 - In business, competition is never as healthy as total domination.
  • Principle #17 - All else being equal, invest in the company with the fewest color photographs in the annual report.
  • Principle #18 - When even the analysts are bored, it’s time to start buying.
  • Principle #19 - Unless you’re a short seller or a poet looking for a wealthy spouse, it never pays to be pessimistic.
  • Principle #20 - Corporations, like people, change their names for one of two reasons: either they’ve gotten married, or they’ve been involved in some fiasco that they hope the public will forget.
  • Principle #21 - Whatever the queen is selling, buy it. (when the government privatizes a company, buy it).

Comments

1 Comment so far

  1. Mad Money : Money And Investing on July 23, 2007 8:02 am

    [...] concussions. Peter Lynch is a good example of traditional style of investing. I have written some reviews, and these are some of his [...]

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