Learn to Earn - Peter Lynch
Different Stages Of A Company
Company when its young
- Company survival is far from ensured as a lot of problems can crop up like the “great” idea wasn’t that great after all or the company spent all its money before the product is manufactured and shipped to stores, or the company gets sued for stealing the idea, another company comes with a better product etc.
- It is easy to see why one half of all new businesses are dissolved within five years then why the most bankruptcies happen in competitive industries. Example: Electronics.
- Because of high risk in a Juvenile company, the investment needs close attention to the financial health of the company. The biggest problem is that young companies are running out of cash.
- But the good part is that starting from scratch, a young company can grow very fast. It's small and it’s restless and it has plenty of room to expand in all directions.
Companies during Middle age
- Proven record of Reliability.
- More braced to face challenges.
- Need to reinvent in case of midlife crisis. Example: Apple lost its reputation when Apple III came out with some problems. People lost faith in Apple and IBM gained territory. To gain ground, apple reinvented itself by ironing product problems and rigorous MARKETING.
- A company’s midlife crisis puts investors in a quandary. If the stock is already dropped in price, investors have to decide whether to sell it and avoid even bigger losses or hold onto it and hope that the company can launch a comeback. In hindsight, the recovery may look obvious, as in the case of Apple, but at the time of the crises, recovery was far from assured.
Companies during Old age
They had been Great Earners in the past but can’t be expected to keep up to the momentum. It can't stay on top forever. U.S. Steel, General motors and IBM are perfect examples whose most exciting days are behind them.
Why should you invest in blue chip companies?
- Less risky. No danger of going out of business.
- Likely to pay a dividend.
- Valuable assets that might be sold off at a profit.
- Lastly patience is a virtue but not well rewarded when one owns stock in a company that past its prime. Hence, one must exit the stock whose Company has little or no future growth prospects. The last half of the 20th century saw U.S. steel as the most precious stock. But with the beginning of the electronic age at the turn of the century, the stock sold for less in 1995 than it did in 1959.
Companies are so important to the health and prosperity of a country that it's too bad they aren’t a Memorial someplace to the ones that have passed away. There ought to be a book that tells the story of interesting companies that disappeared from the economic landscape and describes how they lived, how they died and how they fit into the evolution of capitalism.
- Economic climate means outside forces that companies must contend with, which help determine whether they make money on lost money, and ultimately, whether they thrive or wither away.
- Three basic conditions: Hot, cold and warm.
- Hot climate makes investors nervous. A cold climate depresses them. What they are always hoping for is the warm climate also known as the Goldilocks climate. Goldilocks climate is when everything is just right.
- Hot climate is when everything is going well, too much prosperity leading to inflation and shortage of things.
- Demand slows down due to inflation. There is an economic deep freeze also known as a recession.
- Only the things which people can't do without or what you can easily afford, can sail through recession. People can make “recession proof” portfolios by buying companies that do well in cold climates. Cyclical companies suffer in cold climates.
- Warm Goldilocks climate is preferred and the government can ‘aid’ in that.
What is the role of government?
Government is now the permanent cure for depression
- Government through its Federal Reserve Bank system, lowers interest rates and pumps money into the economy to jolt it back into action.
- There are millions of people on social security and pensions with money to spend on no matter what.
- 18 million government employees at all levels are an army of spenders.
- Deposit insurance at bank and savings and loan, so if the banks go for bankruptcy people won't lose money as it is insured by other banks or government itself.
- Government rises to stardom. Government has a leading role in the economy. In the 1930s it was only a supporting role. In short, the Government's massive spending power is protecting us.
- History doesn't have to repeat itself. When someone tells you that it does, remind him or her that we haven't had a depression in more than half a century. People who stay out of stock to avoid 1929 style tragedy are missing out on all the benefits of owning stocks.
Bulls & Bears:
- When the bulls are having their run sometimes 9 out of 10 stocks are hitting new highs every week. People are rushing around to buy as many shares as they can afford.
- When stock prices fall 10% from their most recent peak, it's called a “correction”.When stock prices fall 25% or more, it's called a “bear market”.
- In trying to time the market to sidestep with the bears, people often miss out on the chance to run with the Bulls.
- Buy shares in good companies and hold on to them through thick and thin.
- There’s an easy solution to the problem of Bear markets. Setup a schedule of buying stocks or stock mutual funds. You're putting in a small amount of money every month, or four months, or six months. This will remove you from the drama of Bulls and the bears. This process is also known assystematic investment planning (SIP).