gmsc’s money tips #15:

Peter Lynch, who became famous as the money manager whose management of the Fidelity Magellan Fund gave it an annual return of 28.06% through the ’70s and ’80s wrote a book called One Up on Wall Street. In it, he gives some excellent advice on picking stocks, which is passed on in this entry in Peter Lynch’s own words.

Getting the story on a company is a lot easier if you understand the basic business. That’s why I’d rather invest in pantyhose than in communications satellites, or in motel chains than fiber optics. The simpler it is, the better I like it.

You can never find the perfect company, but if you can imagine it, then you’ll know how to recognize favorable attributes, the most important 13 of which are as follows:

a) It sounds dull - or, even better, ridiculous. – Pep Boys – Manny, Moe and Jack – is the most promising name I’ve ever heard. It’s better than dull - it’s ridiculous. What Wall Street analyst in his right mind would recommend a stock called Pep Boys – unless, of course, the Street already realizes how profitable it is, and by then, it’s up tenfold already.

b) It does something dull.

c) It does something disagreeable.

d) It’s a spin-off.

e) The institutions don’t own it, and the analysts don’t follow it!

f) The rumors abound – It’s involved with toxic waste and/or the mafia.

g) There’s something depressing about it.

h) It’s a non-growth industry. In a no-growth industry, especially one that’s boring and upsets people, there’s no problem with competition. You don’t have to protect your flanks from potential rivals because nobody else is going to be interested.

i) It’s got a niche. For example, drug companies and chemical companies have niches – products that no one else is allowed to make.

j) People have to keep buying it.

k) It’s a user of technology.

l) The insiders are buyers.

m) The company is buying back stock.

In the next entry, Peter Lynch will return again, but with advice on stocks to avoid!