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The Advantages Of Dumb Money
The first rule of this book is that people should stop listening to professionals, because after spending twenty years in the market, any regular person who uses at least 3% of their brain's capacity, can understand and pick stocks efficiently just like an average expert on Wall Street. Investing is not rocket science, instead, it is about smart money. The author says that when a person picks a stock of their own, they should outperform the experts.
Lynch also talks about mutual funds. He says that it is a wonderful avenue for people who do not have sufficient time or inclination to 'test their wits against the stock market.' It is also fit for those who seek diversification and have small amounts of money to invest.
He mentions that there are three good reasons why people should ignore what Lynch himself is buying: These reasons basically apply to all those who blindly follow famous investors or analysts.
- He might be wrong
- Even if he is right, one doesn't know when he might change his mind about a stock
- One has better sources to refer to, and it is all around them.
Lynch writes that the more right a person is about one stock, the more wrong they can be on all others and still end up triumphing as an investor.
One may have thought that a ten-bagger can only happen with some stock in a weird company, which generally investors avoid. But that's not the case, and there are numerous multi-baggers in respectable companies like Dunkin Donuts, Stop & Shop, etc who have given handsome returns.
While discussing the power of shared knowledge, he explains that to get spectacular returns, one has to sell and buy at the right time. He explained with an example that his wife Carolyn is one of his best sources because she had discovered L’eggs which turned out to be one of the two most successful customer products of the 70’s. His wife didn't have to be a textile analyst to realize that the company was selling a superior product; all she had to do was to try the product after buying it.
He says that people are more comfortable in making investments in something about which they don't have full knowledge.
He says that finding a company that is promising is only the first step post that, conducting a thorough research is important which helps one to understand companies and their products better.
Lynch writes that he is confident that any investor can benefit from the same tactics. According to him, it does not take much to 'outsmart the smart money'.
The book One up on Wall Street is divided into three parts where the first one deals with how one can assess themselves as a stock picker, how they can size up the competition and how one can decide if stocks are riskier than bonds. This part also focuses on how one should examine their financial needs and also develop a successful stock-picking routine.
In the second part of this book, he writes about how one can find promising opportunities and can decide what to look for and what to avoid. It discusses in detail how one should use brokers, annual reports and other resources to their best advantage. It also deals with what one can make of the various numbers involved in the technical evaluation of stocks.
The third part of his book deals with how one can design a portfolio or keep track of companies in which one is interested. Apart from this, Lynch also writes about when one can buy or sell the follies of options and futures and also comprises some general observations about the health of Wall Street, the stock market and American enterprise, all of which Lynch has noticed in due course of twenty years of investing.
