One Up On Wall Street: How to Use What You Already Know to Make Money in the Market

Lynch discusses the optimal timing for buying and selling stocks. He emphasizes that the best time to buy stocks is when you find a solid company at a good price, similar to finding a bargain at a department store. Lynch highlights two particular periods when great bargains are likely: end-of-the-year tax selling and market downturns.

Lynch notes, “The first is during the peculiar annual ritual of end-of-the-year tax selling […] This selling begets more selling and drives perfectly good issues to crazy levels” (245-46). He suggests that this period often presents opportunities to buy quality stocks at reduced prices.

Another ideal time to buy is during market collapses or downturns. Lynch points out, “If you can summon the courage and presence of mind to buy during these scary episodes when your stomach says ‘sell,’ you’ll find opportunities that you wouldn’t have thought you’d ever see again” (246).

Regarding selling, Lynch advises against market timing based on external factors. Instead, he suggests selling should be based on changes in a company’s fundamentals or when the original reasons for buying no longer apply. He provides detailed guidelines for selling different types of stocks, such as slow growers, stalwarts, cyclicals, fast growers, turnarounds, and asset plays, and emphasizes the importance of understanding the reasons behind your investment decisions.

Lynch’s advice on buying and selling revolves around having a deep understanding of the companies you invest in, rather than trying to time the market based on external factors.

Lynch debunks common misconceptions about stock prices. He emphasizes that many popular theories about stocks are as misguided as ancient superstitions:

“IF IT’S GONE DOWN THIS MUCH ALREADY, IT CAN’T GO MUCH LOWER”: Lynch highlights the fallacy of this belief with the example of Polaroid, which plummeted from $143½ to $14⅛. He stresses that there’s no rule dictating how low a stock can go (259).

“YOU CAN ALWAYS TELL WHEN A STOCK’S HIT BOTTOM”: Lynch warns against trying to catch the bottom of a falling stock, likening it to catching a falling knife. He advises waiting until the stock stabilizes before considering a purchase (260).

“IF IT’S GONE THIS HIGH ALREADY, HOW CAN IT POSSIBLY GO HIGHER?”: Lynch counters this misconception with examples of stocks like Philip Morris, which continued to rise exponentially despite an already high price (262).

“IT’S ONLY $3 A SHARE: WHAT CAN I LOSE?”: Lynch argues that the price of a stock is irrelevant to its risk; a stock can lose value regardless of its initial price (263).

“EVENTUALLY THEY ALWAYS COME BACK”: Lynch refutes this with the example of companies like RCA, which never recovered after declining (264).

“IT’S ALWAYS DARKEST BEFORE THE DAWN”: Lynch cautions against assuming that a situation can’t worsen, using the oil-drilling industry as an example (264).

“WHEN IT REBOUNDS TO $10, I’LL SELL”: Lynch advises against holding a stock in hopes of it returning to a specific price, suggesting that this often leads to disappointment (265).

“WHAT ME WORRY? CONSERVATIVE STOCKS DON’T FLUCTUATE MUCH”: Lynch notes that even stocks that are considered stable, like utilities, can experience significant volatility (265).

“IT’S TAKING TOO LONG FOR ANYTHING TO EVER HAPPEN”: Lynch encourages patience with investments, highlighting cases where stocks eventually surged after long periods of stagnation (266).

“LOOK AT ALL THE MONEY I’VE LOST: I DIDN’T BUY IT!”: Lynch advises against lamenting missed opportunities, as this can lead to irrational investment decisions (268).

“I MISSED THAT ONE, I’LL CATCH THE NEXT ONE”: Lynch warns that trying to compensate for missed opportunities by investing in similar stocks often leads to losses (268).

“THE STOCK’S GONE UP, SO I MUST BE RIGHT, OR…THE STOCK’S GONE DOWN SO I MUST BE WRONG”: Finally, Lynch emphasizes that a stock’s short-term price movement is not a reliable indicator of an investment’s soundness (268).

Lynch’s insights are a reminder that investing requires a balanced approach, free from common misconceptions and emotional reactions.

Lynch discusses his skepticism toward investment gimmicks like options, futures, and short selling. He expresses a firm belief in traditional stock investments over these complex and risky alternatives.

Options and Futures: Lynch has never engaged in futures or options trading, viewing them as distractions from traditional stock investments. He acknowledges the usefulness of futures in commodity trading but sees no such benefit for stocks. He cites reports indicating that 80-95% of amateur players in futures and options lose money, which he considers worse odds than gambling. Lynch dismisses the lure of options, noting their high cost and the fact that they often expire worthless, leading to significant losses.

Short Selling: Lynch explains short selling as borrowing and selling a stock, hoping to repurchase it at a lower price to profit from the difference. However, he highlights the risks involved, such as potential losses if the stock price increases instead of declining. He shares a cautionary tale of a successful investor who suffered a substantial loss from short selling.

Lynch’s key message is that traditional stock investments are a more productive and less risky path to financial growth. He discourages readers from being swayed by the seeming allure of sophisticated investment strategies like options, futures, and short selling.

Lynch reflects on his experiences with how the stock market reacted to major news events. He emphasizes the unpredictable and often counterintuitive nature of the stock market.

Lynch recounts several historical events, such as presidential elections, crises, and market fluctuations, highlighting the market’s varied responses. He notes that sometimes the market reacts dramatically to seemingly minor events, while at other times, it shows surprising resilience in the face of significant news. For instance, during the Cuban Missile Crisis, the market fell less than 3%, but President Kennedy’s criticism of U.S. Steel led to a much steeper decline.

Lynch also discusses trends and changes in the market, such as the rise of Japanese stocks, the impact of the options and futures markets, and the shifting influence of institutional investors. He argues that despite these changes, the fundamentals of investing remain the same: One should focus on the quality and performance of individual companies rather than try to time the market or follow market trends.

Lynch concludes with a personal anecdote reflecting his investment philosophy. It’s August 1982, and Lynch is traveling with his family to a wedding, with plans to visit several companies along the way. Despite the grim economic mood and the Dow Jones Industrial Average being low, he remains committed to his investments.

During this trip, Lynch receives news of a significant market upturn. This sudden change reinvigorates investor enthusiasm, contrasting sharply with the previous pessimism. Lynch highlights his constant readiness and commitment to being fully invested, regardless of market fluctuations. He emphasizes the importance of staying informed and maintaining priorities, even amid unexpected market surges.