Is This Gambling, Or What?
The third chapter of One Up On Wall Street, looks at investments in debts which comprise of money markets, bonds or certificates of deposit (CDs). He provides a perspective on stocks and bonds from 1988, and these are the things he covered in this chapter:
- According to him, some investors have taken refuge in bonds, after the significant upset such as the 'Hiccup of Last October' [Black Monday].
- He said that the issue concerning stocks and bonds is worthy of resolve upfront, but in a dignified manner. Otherwise, it will show up at the most distressed moments. When stocks are dropping, and people are rushing to banks, to sign up for CDs.
- Based on his perspective, which was from the late 1980s, Peter Lynch looked at bonds as being attractive in the previous 20 years, but not in the 50 years before that.
- Both bond mutual funds as well as bonds used to offer a very high rate of interest 20 years ago, especially when bills came due during the Vietnam war. Rates of bonds drove higher due to inflation, and this made them look attractive. Investors demanded more stocks at the same time because of the protection, which equity provided to them, against inflation.
- Peter Lynch also noted that stocks had an average annual return of 9.8% between 1927 and 1988. On the other hand, inflation averaged 3% per year.
- Lynch argued that stocks are by far the most effective securities for increasing wealth.
- Lynch considers investing as gambling but distinguishes it from speculating by working hard to tilt the odds in one's favour.
- In Lynch’s eyes, there is no hard and fast line between safe and unsafe. According to him, historically, stocks were embraced as investments or dismissed as gambles, and the timing of one’s investments were mostly wrong. For years, stocks in large companies were considered “investments'' and stocks in small companies “speculations”
His conclusion is as follows:
- An understanding of the difference between investing in stocks and investing in debt is essential.
- What's more important than one's security choices is the “skill, dedication and enterprise of the participant”.
- He says that investing in stocks is undeniably more profitable than investing in debt. Since 1927, common stocks have recorded gains of 9.8% a year on average. Investing in stock has unlimited upside because investors are regarded as partners in a prosperous and expanding business.
- Stocks are riskier than bonds in the sense that, if one buys the right stocks at the wrong time and price, then they will be subjected to huge losses.
- Investing in bonds is not risk-free.
- People who succeed in the stock market also accept periodic losses, setbacks, and unexpected occurrences. They realize the stock market is not pure science, and not like chess, where the superior position always wins.
- Lynch mentions that if seven out of ten of his stocks perform as expected, then he is delighted. If six out of ten of my stocks perform as expected, then he is thankful. It takes only six out of ten stock picks to be correct to produce an enviable record on Wall Street.
He concludes this chapter by saying, “To me, an investment is simply a gamble in which you’ve managed to tilt the odds in your favour.”