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One Up On Wall Street (PDF)

July 2, 2021

Peter Lynch is considered one of the best investors in history, and in his
book “One Up On Wall Street,” (download this document in pdf) he distills
much of his knowledge and methods of choosing stocks. As a private
investor, this is one of the rst books that one should read.

Magellan Fund, Peter Lynch‘s fund under Fidelity Investments, achieved

average annual pro tability of 29.2% between 1977 and 1990. He started the
fund with $18 million under management, and by the beginning of the
90s, he was managing $14 billion. 

Unlike e Intelligent Investor or Security Analysis from Benjamin

Graham, it is a book that is very easy to read and understand. With an
entertaining style, Lynch leads the reader through di erent aspects to
consider before buying a share.

Even acknowledging how much the world has changed since this book was
published in 1989, I think it is an excellent read for any beginning investor.

Contents [ hide ]

1 Anyone Can Invest in the Stock Exchange

2 Main Advice From Lynch in “One Up On Wall Street” (pdf)
3 So, how can I beat wall street?
4 Peter Lynch’s famous company classi cation
4.1 Slow-growers
4.2 Stalwarts or medium-growth
4.3 Fast-growers
4.4 Cyclicals
4.5 Turnarounds
4.6 Asset plays or companies with hidden assets
5 Which Companies to Avoid According to Peter Lynch
6 Watch the Pro ts, Always the Pro ts
7 How to Analyze a Balance in 10 Minutes
8 Do you have more than 10 minutes? Follow up with these.
9 Final Tips for Investing in the Stock Market
10 Conclusion on “One Up On Wall Street”
11 References

Anyone Can Invest in the Stock Exchange

“Anyone can invest in the stock market.” at’s Peter Lynch’s mantra. He
recommends paying more attention to the knowledge we have as
consumers or industry insiders than to Wall Street’s recommendations. 

Paying attention to businesses doing well in our daily lives could generate
more insight and help us stay one step ahead of Wall Street. 

Main Advice From Lynch in “One Up On Wall

Street” (pdf)
Ok, so this book is a great way to start investing. Lynch gives general
advice and a detailed checklist to revise any time we make an investment
decision. 

So to begin with, let’s see which is some of the general advice that Lynch
gives to the individual investor:

. First, pay attention to the businesses you are surrounded by, as a

consumer but as a professional as well. It’s better to invest in the
industry you work in than in an industry that you don’t know
anything about. You have to lever the knowledge that you already
have. 
. Once you’ve chosen the industry, Lynch says, focus on nding
companies that Wall Street hasn’t yet discovered. Look for zero or
no analysts coverage and no institutional money.
. When you buy a stock, you have to remember that you are
purchasing a piece of a business. at’s why careful analysis of the
fundamentals is due. 
. Are you worried about the short-term uctuations in the market?
Lynch says to ignore them as they do not re ect fundamental
changes in the structure of the business. It is already very usual that
a er analyzing a particular stock and making the purchase, the
stock price continues to fall.
. Pay attention to the long-term. It is way more predictable than the
random short-term movements of the markets.
. According to Lynch, trying to predict the economy’s performance is
a futile task, and that together with the direction of the short-term
market are two endeavors that the investor in companies should
ignore.

So, how can I beat wall street?

Anyone can do it. Again that’s what Lynch tells us. He argues that anyone
can nd tenbaggers, that is, companies that will multiply their price by
ten. 

To nd these tenbaggers, Lynch recommends: 

. Understanding which businesses are growing and which companies

o er better products than the competition and industry insiders
also recommends. 
. If you work in an industry and understand the complete value
chain, you have an advantage over Wall Street’s analysts. Why does
an engineer who works in the aeronautical sector end up buying
shares in a biotech company? It doesn’t make sense to Lynch.

Lynch provides the example of the couple that spends the weekend
looking for the cheapest airfare to y to London but does not pay thought
at all when investing a large part of their savings in KLM shares. 

e simple truth is that most investors fail to analyze what they are
buying. 

Peter Lynch’s famous company classi cation

In this book, Peter Lynch shared for the rst time his famous way of
classifying companies. ere are six buckets into where a company could
be ranked:

Slow-growers
ese companies already had their moment of glory and no longer are
growing rapidly but could be considered mature companies. eir growth
rate is similar to the growth of the country’s GDP since they grow
simultaneously with the general economy.

You would acquire this type of company with two objectives: 

1) to reduce the risk of the equity portfolio since, in general, they are large
and consolidated companies that have little risk of going bankrupt and 

2) to collect the dividend.

No capital gains are expected relative to the share price.

Stalwarts or medium-growth
ese are companies with an average annual growth of their pro ts of
between 10% and 12%. 

It is always advisable to have a good mix of these types of companies in the

portfolio since these types of companies tend to provide some protection
against the sharp drops that fast-growing companies can have in
recessions.

Fast-growers
Here is where the money is generally made, according to Lynch, since they
are companies that are in frank expansion and their pro ts grow between
20% and 25% annually. 

ey are generally smaller and more aggressive companies. 

Cyclicals
ese are companies whose sales and pro ts expand and contract with
some regularity. 

ese companies shine out of a recession, but on the other hand, they can
lose up to 50% of value.

Turnarounds
ese companies with zero growth are about to go bankrupt but are good
because their movements have nothing to do with market cycles. 

In general, a new manager or a change in the company’s strategy allows

better forecasting of future results.

Asset plays or companies with hidden assets

ese companies have a hidden asset that the market has not fully valued:
they can be TV rights, real estate, a tax credit that allows you not to pay
taxes in the future, game royalties.

Which Companies to Avoid According to Peter

Lynch
In general, the companies to avoid are the hottest stocks in the market,
those stocks that Wall Street analysts talk about, and in the industry
where there is the most growth.

Some other companies to avoid:

. Avoid companies that promote themselves as “the next Facebook,”

“the next Net ix.” Surely you had the opportunity to hear someone
on television or in some medium say precisely that phrase.
. Avoid companies that start to buy businesses in areas in which they
do not have experience or that are not directly related to the central
business where they can obtain results above the cost of capital.
Lynch calls these types of companies “diworsi cations.” 
. Avoid “whisper stocks,” those recommended stocks that no one
knows about, but because they are a “tip,” they have a particular
attraction. ey come to you recommended by a relative or friend in
the form of “whisper stock,” as Lynch says.
. Finally, it is also advisable to avoid companies concentrating a large
part of their sales on a single customer.

Watch the Pro ts, Always the Pro ts

is chapter is probably one of the most interesting of the book. Lynch
makes a particular emphasis on earnings, of course. Companies are worth
what they earn; if they earn more in the future than expected, they should
be worth more.

To analyze a company’s pro ts, you have to forecast what could happen in
5 dimensions to which Lynch pays particular attention. 

Pro ts can increase or decrease depending on:

. Cost reduction: can the company reduce the cost of materials, the
cost of labor, or the xed costs incurred each year?
. Increase prices: does the company have enough power to increase
its prices year a er year and not lose customers? is would be one
of the signs that the company has a MOAT that protects its source of
pro t.
. Expand to new markets: can the company enter new markets with
its current product?
. Expand in current markets: can the company continue to grow in
existing markets as a result of an increase in its market share?
. Revitalize, close, or dispose of an operation that is losing money:
can the company close an operation that is losing money and thus
improve its pro ts?

Lynch makes a hilarious comparison between a stock and how we would

value a human being: everything a person owns (golf clubs, a car, a house,
etc.) minus what they owe (poker debts, credit cards, etc.) is the net worth
or book value of the person. 

In addition to that, there is also the ability to generate pro t in the future.

How to Analyze a Balance in 10 Minutes 

How to analyze a balance in 10 minutes according to Peter Lynch:

. In current assets, look at the position of cash and marketable

securities; add them together to see how much cash you have
available. See if it is increasing or decreasing from previous years.
. In liabilities, see the amount of long-term debt and see if it is
increasing or decreasing (if cash has been growing and this type of
debt is decreasing, then the balance is getting stronger and
stronger); then view the total and calculate the net cash position.
. Current or short-term debt can be ignored or assumed to be paid
with the rest of current assets.
. Look at the summary of the last ten years to analyze trends and see
what happened to the number of shares; if it decreases because the
company is buying back stock, it is a good sign.
. Divide the net cash position by the number of shares to see how
much cash there is per share.

Do you have more than 10 minutes? Follow up

with these.
Other metrics to observe in a balance:

. Percentage of sales: what percentage of total sales does the agship

product of the company represent?
. Price/earnings: e price is fair if the P/E equals the annual growth
rate of earnings. If the P/E is less than the growth rate, then we have
a bargain. If it is higher, we have a rather expensive company. Of
course, the whole process should require more detailed analysis; in
short, the PEG Ratio compares the P/E of a company with its most
recent annual growth rate in earnings. If a company has been
growing at 20% per year and has a P/E of 20, it would have a PEG
ratio of 1, indicating that its price is within normal parameters.
. Cash position: subtract long-term debt from net cash position and
calculate per share cash compared to the share price. 
. Debt factor: here, we compare debt with equity. An average balance
has 75% equity and 25% debt (that would be a strong balance); a
weak balance, on the other hand, would be 80% debt and 20%
equity. is is especially risky in young companies. ese ratios, in
any case, are indicative and are not a rule that must be strictly
adhered to.
. Dividends: e good thing about companies that pay dividends is
that it protects free cash ow from being spent on diworsi cations.
In addition, the presence of the dividend may cause the price not to
fall as much when there is a downturn since the return of the stock
would increase dramatically, and other investors would end up
buying the stock just for that.
. Book value: the book value of debt is always almost the real value.
On the other hand, you have to be careful with the value of assets
because they are carried on the books with di erent criteria
depending on the asset.
. Hidden assets: companies that own natural resources, such as land,
oil, or precious metals, record these assets at a book value that is a
fraction of their real value. Other assets such as trademarks,
patents, and licenses are also carried to book value and continue to
depreciate until they disappear from the balance sheet. Tax breaks
can also be a hidden asset.
. Free-cash ows: it is the cash with which the company keeps to do
business. e best companies are the ones that can generate cash
without spending much cash. For some companies, it is easier to
generate cash than for others. It always refers to the free-cash ow,
which is what remains a er investments in CAPEX. 10% is ne; 20%
is fantastic.
. Inventories: when inventories grow more than sales, it is a bad sign,
especially in retailers and manufacturing companies. Look at the
“management discussion on earnings” notes. If inventories begin to
empty, it is the rst sign that there is a turnaround.
. Pension plans: these are obligations the companies agree to pay;
therefore, they should be seen as debt. Pay attention speci cally to it
on turnarounds.
. Growth rate: the only growth that matters is growth in earnings. If
the business can increase prices year a er year without losing
customers, we have a tremendous investment. A company growing
at 20% selling at a P/E of 20 is a much better investment than a
company selling at a P/E of 10 growing at 10%.
. e bottom line: earnings a er taxes. It is only helpful to compare
these margins for companies in the same industry. e company
with the highest pro t margin is, by de nition, the one with the
lowest costs in the entire industry. ese are the ones that have the
best chance of survival.

Final Tips for Investing in the Stock Market 

Near the end of the book, Peter Lynch ends with some conclusions and
nal tips for anyone who wants to embark on the adventure of buying
individual stocks:

. At some point in the next three months or the next year or the next
three years, the market will have a sharp fall, that is almost certain.
ese falls are great opportunities to buy good companies at auction
prices.
. To get ahead of the market, you don’t have to be right all the time,
just a small number of times.
. Di erent categories of companies have various risks and rewards.
You can make much money by building a portfolio with stalwarts
with a yield of 20 or 30% per year.
. In the short term, the price of the shares typically moves in the
opposite direction to the fundamentals. In the long term, the
market follows the fundamentals.
. Just because a company is having bad results does not mean that it
can perform even worse.
. Just because the price of a company’s share goes up does not mean
that we are right.
. Just because the price of a company’s share goes down does not
mean that we are wrong.
. Buying a stock with a poor forecast just because the stock is cheap is
a futile technique.
. Selling the stock of a fast-growing company just because the stock
appears to be slightly overvalued is a losing technique.
. You don’t lose anything by not buying a share that later became a
tenbagger.
. When good cards come out, then add to the position and vice versa.
. Our position will not improve if we cut the owers and water the
weeds.
. You don’t have to “kiss all the girls.” You do not have to buy all the
stocks that you think are going to rise, only those in which a careful
analysis has been made on whether it is a good investment or not.

Conclusion on “One Up On Wall Street”

Each book has a di erent impact on each person, so it’s challenging to
make recommendations. But if you are beginning your path in nance,
then I think this book is an excellent rst step. 

While some of the tips and strategies Lynch shares have become outdated
over the years, it is still an excellent read written in clear, easy-to-
understand language.

References
Lynch, P. (1989). One Up On Wall Street: How to Use What You Already
Know to Make Money in the Market. First Fireside Edition. New York:
Simon & Schuster.

Peter Lynch. (nd). In Wikipedia. Retrieved November 18, 2020, from

https://en.wikipedia.org/wiki/Peter_Lynch#cite_note-3

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