One Up On Wall Street
The Wall Street Oxymorons
After talking about how nobody is a born professional in the field of stocks, the author explains in this chapter, why amateurs should look at professionals with a “skeptical eye.”
According to him, multiple factors count while picking a stock, concerning both professionals as well as amateur investors.
The concept of 'Street Lag,' explains that a stock is already a multi-bagger by the time it appears in the radar of the professionals. Sometimes professionals are unable to invest in a potential multibagger. The professional is duty-bound on specific industries, whereas an ordinary investor does not have this constraint and can have his own investment style.
Lynch has opined that professionals invest to avoid losses, and not to make big profits. He says that whoever imagines that the average Wall Street professional is looking for reasons to buy exciting stocks hasn’t spent much time on Wall Street. In his continual exposition of emphasising about professionals being beaten by amateurs, Lynch turns to the rules that constrain professionals.
The worst of the herd mentality takes place in the bank’s pension-fund departments and in the insurance companies. The fund managers buy and sell stocks from pre approved lists. Nine out of ten pension managers work from such lists.
Other constraints faced by a professional which aren't confronted by amateurs are the rules and regulations of the organization that they work for, after having to spend a considerable amount of time convincing potential customers about the logic behind their investment picks, the massive size of the assets to handle etc.
Lynch says that there are some exceptions to the professional investor oxymoron, and points to a few "maverick fund managers" and "innovative fund managers” who do as they please, and are also doing exceptionally well.
Then, he talks about some spectacular stocks that he found, which were potential multibaggers and were so appealing, that almost all the investors would buy them if they could, but unfortunately, they couldn't. Professionals don't find stocks attractive until and unless they've been acquired by institutions and many respected Wall Street analysts.
In this chapter, he talks about the market cap limitations that have been imposed by some fund institutions and companies. Stocks which were below a certain market capitalisation couldn't be selected or purchased. He says that the stocks that he tries to buy are the ones which are overlooked by traditional fund managers and he says that he continues to think like an amateur as frequently as possible.
He draws a few essential conclusions in his chapter, where he says that:
- One doesn't have to invest like an institution because if they do so, they will be doomed to perform like them, which doesn't pan out very well in many cases. He says that investors who are amateur need not report to a higher authority, and they also don't need to spend their time justifying why they bought what they bought, and the prices they paid for it.
- One can find brilliant opportunities in their workplace or neighbourhood, years and months before the news reaches the analysts.
Finally, he ends his chapter by preparing his readers with his final words, “The stock market demands conviction as surely as it victimizes the unconvinced.”