Podcast: Play in new window | Download

Subscribe: Apple Podcasts | RSS

Welcome to Investing for Beginners podcast, this is episode 37. I’m Dave Ahern, and Andrew Sather is here as well. Tonight we’re going to talk about Peter Lynch quotes. This is one of Andrews’s absolute favorite investors.

He read his book quite a while ago called Beating the Street and One Up on Wall Street, and he loved them, and so we thought maybe we would chat a little bit about quotes that Peter Lynch has.

• Find businesses that sell to other businesses or B2B
• Know what you’re buying and why you’re buying it
• All the math you need to invest you learn in fourth grade
• Investment ideas can come from anywhere

And talked a little bit about his investing philosophy and his ideas and saw how they could help you with your investing. So without any further ado, I’m going to have Andrew go ahead and take us away.

Andrew: just as a disclaimer, I haven’t read One Up on Wall Street yet, that’s on my to-do list. Oh, guess I’m missing out right but Beating the Street was the first investing book I ever read.

It’s super easy to read like I just couldn’t put down the book and I mean I guess I could say the same thing about the Intelligent Investor.  But I’m aware that the Intelligent Investor is a lot harder to get through, it’s a lot drier but Beating the Street, he writes in very conversational tone.

It’s almost like a story following his journey in his career and for people don’t know Peter Lynch. He ran the Magellan fund from Fidelity, so super successful in those times he had beaten the SP500 for 11 of the 13 years he ran the fund.

He turned 18 million dollars in assets into more than 14 billion, so he did the whole Michael Jordan thing. if Michael Jordan would have stayed retired where he became the best and then just retired at that point. You know 13 years is such a small period as an investor, so he came out on top and just stopped there. I know I think he talks about just having more of a really easy life and how he didn’t want to be researching as much as he was to find this kind of deals.

One of the things he talks about one of the terms he uses is called a ten bagger. so that was his idea of basically when a stock you buy gets 10x of its value, he calls that ten baggers and he has different strategies in Beating the Street of how he tries to pursue these ten-baggers.

That was one of his unique takes that he contributed to the investing world, and obviously, the two books which you know Dave obviously recommends One Up on Wall Street, I highly recommend Beating the Street. These books have sold millions of copies, and he has had contributions there, and he’s also had some great quotes just talking about the stock market in general that we would like to share with you that you should keep in mind.

We’ve had quotes from Warren Buffett Seth Klarman, we did a Benjamin Graham episode, so put these in your back pocket. And if you’re taking notes may be put these quotes down in your notes, and you know we talked about checklists the other day with one of the episodes.

They had a great breakdown on different buy and sold checklists. I just actually got an email from a listener today who said that he’s working on his stock checklist and so he’s finding the resources we’re providing to be very helpful for that so hat tip to Dave and if that’s the kind of thing that you’re doing with your investing style. Have something that you can refer to over and over again and you know it’s it might not be easy to read a whole book like some of these legends has written and authored.

But if you have even just these little notes and quotable that can guide you in your approach and remind you over and over again. I think it can be really helpful.

So the first quote here we’re going to talk about and Peter Lynch I love this one he says.

“During the gold rush most would be miners lost money but people who sold them picks shovels tents, and blue jeans (Levi Strauss) made a nice profit.”

How many times do we see this with innovations, so we saw it with the dot-com bubble? All these tech companies write the dot-coms this the pets.com that you know pets.com end up going bankrupt. Even companies like Microsoft and even Cisco which I want to talk about Cisco real quick.

But even then I don’t know if Cisco ever recovered, but Microsoft finally recovered 17 years later from when it was when the price was a bubble. But companies like that actually if you would have waited until their valuations became reasonable if you were the way that until the bear market and if you would have bought them and then held to now.

See the next 17 years after the bubble popped for combo stocks is when the picks, shovels, tents, and blue jeans of the technology industry started to make their profits. So again think of the gold rush think of how captivating that story was and how many people must have just abandoned everything that they knew and headed out to California to try them to strike gold.

Right and then you think about the people who were able to capitalize on that by selling things that support the people who are chasing this dream. And you see it in the market, and I think if you look at companies now today like Microsoft, Cisco. I had a pick in the e letter this was back I thought in 2015, and I don’t want to say what the pick was because obviously, I have subscribers who paid for that.

But I will tell you that in that issue I talked about this very concept, and it’s in the technology industry, and that’s one of those B2B businesses. So a business that doesn’t sell the consumers with a cell.

So they’re businesses, and I love b2b businesses because the general public doesn’t know who they are most of the time and that’s how you can have the opportunity because it’s not a popular company. Not a lot of people bid up the stock.

Now let people know about it, yeah you have the fund managers, the insiders and all these guys who follow these industries and who know what you know which companies that do are good at b2b sales. But a lot of the general public and you know the average Joe and these people who are bidding up Tesla, Chipotle, and Amazon.

They’re not most of the time going to look at these type of companies. So I found this company in 2015 that is a b2b and it’s a supporter of the tech industry and that’s been my best stock pick since the inception of the eLetter.

That one is up over a hundred percent; I don’t know one hundred and forty percent. Somewhere in that range last time I checked and continuing to hold because even though there’s a trailing stop, it’s just gone straight up for the most part.

So it’s nice, and there’s just so much opportunity so as an investor if you can look at the next innovation and we talked about Tesla last week. Electric cars could be one of those nice innovations we’ve talked about Corning before Dave, and how they create glass and I believe they have these windshields that kind of play off of the whole electric car thing.

So don’t quote me on that but the general idea is the same,  you can find these companies that are providing services and just supporting products to the innovations and if those valuations are better than the actual innovations which they tend to be.

Because that story’s not going to be there like the Gold Rush story would be for a new technology, technological innovation then that’s where a lot of opportunities can come. And that’s where you can make what Peter Lynch calls a ten bagger. Where you can seriously multiply your money.

I think it’s something to take an account and not ignore.

Dave: I agree, and the example you gave of Corning is a perfect example of that and it kind of segues into the quote that I wanted to chat about a little bit.

The quote that I’d like to talk about is

“Know what you own and know why you own it.”

So you know when I think of that quote I think about Corning. Corning is a perfect example of that we’ve talked about this company before and their business design if you will as they make glass and is that exciting? Hardly, is it sexy very much not, but what they do is they make glass for companies like Apple.

Who happen to produce iPhones and how many billions of iphones are there around the world? And Corning is making the glass for the iPhone, so you know that’s a great reason to own Corning is because of what they make and who they supply it to.

It’s not about just the product that they make, but it’s also about who they’re selling it to and it kind of goes along with what Andrew was saying earlier about the miners.

So if Apple ever went out of business obviously, that would kill Corning, but the flip side of that is as they continue to do well and sell more iPhones and you know Corning is going to have lots of customers that they can help with this. And you know like with the glass with the cars that he was talking about, there’s just so many different other avenues that they’re trying to branch out of just helping Apple or Samsung with the glass screens for the iPhones or the Samsung phones that we all use the Android phone.

So you know there’s that aspect of it, then you know also knowing what you own and why you own it, so there’s a company that I bought about two years ago it’s called Trinity Industries. And then again not a sexy company but what they do is they produce railroad cars. That’s it, they make I mean they make a few other things, but the majority of their business is producing railroad cars and talk about assets.

I mean you know that’s one big hunk of metal that you’re selling to people, and you know the shelf life of something like that is 30 or 40 years before the company’s going to need a new one. So you know that’s what they do, and you know they’ve started to create other side businesses.

Which I think is a brilliant way of people are investing in buying these cars so instead of the car just being sold to a railroad. You know then now instead you have investors investing in the cars because it’s a hard asset that will be sold one day and you can make a lot of money on that and so and it’s also a fixed, firm asset.

It’s never going to go bad it’s never going to go away, it’s not going to fall out of favor and you know it’s just a great opportunity.

So the reason why I bought that company was that I was looking for something that would be solid, stable you know not exciting and had a lot of potential for growth. And it has, and it’s gone up, and I think 140 percent since I bought it.

It’s been amazing for me, but it’s not sexy, and it was something that I found completely by all the different principles that Andrew and I talked about. Something I screened for, I came across it three or four times during my weekly screenings. And I started to do some investigation into it, found out it had all kinds of great multiples.

but it was just you know ignored by the market because it’s not exciting, it’s not sexy. people were didn’t know about it and you know it just was one of those companies that had fallen out of favor but the reason why I bought it was because of it was undervalued by any stretch of metrics that you looked at. And also because of the type of products that they’re producing had a benefit to society and had a benefit to our economy and it was a great hard fixed asset.

It wasn’t some ethereal thing out in the world where you didn’t know if they had any value to it. I mean we talked about Tesla a couple of weeks ago and so compared Tesla’s assets to Trinities, and this is it’s night and day so to me that is a safe company to buy into. Where Tesla’s not, so that’s to me, that’s knowing what I own, and I know why I own it.

Andrew: yeah I mean assets are cash right.

 

+Dave: yes.

Andrew: I mean they can be sold for cash, or they can create more cash. Okay, my quote that I love that he said.

“All the math you need in the stock market you get in the fourth grade.”

So talk about like the whole theme of my entire website right I just the whole seven steps, the free ebook that I offer that whole concept and when I was coming up with this series of seven steps and the present you know looking at this thing where basically I was like okay there’s not really a guide a simple guide for people who know nothing about.

Let’s teach them a little bit about stocks let’s teach them a little bit about financials, let’s how can we absorb this in a really simple and easy way and so that’s where the seven steps came from, and it turned out that yeah actually all of these ratios you don’t need more than simple division, multiplication then you know arithmetic and subtraction.

If you’re even using those last two so all those ratios that we always talk about the common valuations at the time, sure you’ll hear us talk about some more nitty-gritty stuff.

Well, we talked about the dividend discount model, and that was obviously a little more involved. But for the most part the general theme this idea is you’re going to buy and you want to buy companies like Dave said when he looked at Trinity is companies that are cheap compared to their assets, cheap compared to their earnings and cheap compared to their cash.

There are simple metrics like we’ve talked about in the past like I talked about in the e-book. The price the book, prices the sales, price –cash, price to earnings all take just super simple math and use that to find these companies that are either cheaper expensive undervalue their overvalued and that was a big part of what Lynch did.

Something that came out of the whole Lynch movement if you want to call it that. Is this ratio called the p/e G which is a relation of price to earnings to earnings growth? And again that’s just a very simple ratio, it’s a simple metric, and it’s it was his way of finding value within a growth.

You know basically, a lot of the ratios we talked about our focus on finding value just on the on the sense of value comparing it to total how the business looks now. Whereas what Peter Lynch did is he looked at how this growth relates to the value and how can we assign the value based on how much the company is growing so if that kind of interests you then Peter Lynch is obviously a guy you’re going to want to follow, and at the very least read his books.

Not only did he say that you just need simple math he also proved it with the way he invested in the way he teaches now today. So again I just want to bring home that fact that I do have the value trap indicator and it is a very complicated formula.

But you know it’s that way so that it takes away all sorts of brainpower that would normally be needed take away the value trap indicator, and I can still look at a company’s 10k and I can still use fourth grade math and below to look at these code these companies and look at the financials and understand be able to make determinations whether I want to buy or sell them.

And it’s because that I’ve made a complex of may complexity out of simple concepts to make my life easier. That’s basically what it boils down to but the simple concepts were all I needed, and I think it’s all that any other investor needs or not you know. My products, some of them might be for people and a lot of people have enjoyed them, but I understand that’s not for everybody and so what is for everybody is a lot of the wisdom that we share and a lot of the wisdom that has kind of been passed down from the different investors who have been very successful.

And being intimidated or overwhelmed or just feeling like there’s just so much noise and information and all these things that get thrown at you as you try to pursue the stock market. Don’t let that discourage you and if you can’t figure out the simplicity find resources that focus on simplicity.

So like I said Peter Lynch very simple in his explanations, I highly recommend them, and if you can find other resources like that, then I think it will be beneficial to you, and it can help take you to that next step as an investor.

Dave: I agree, you know the theme of simplicity I think is so important and it’s something that’s sometimes overlooked, and I think that’s what scares people a lot about investing or makes them nervous about it or think that they can’t do this.

And you know when they start to dive into how some of these ratios are calculated or even some of these formulas that we’ve talked a little bit about the math in them in and of themselves is not difficult.

It’s not you know it’s not trigonometry, you don’t have to know calculus or you know all these higher forms of math to do this. It’s simple arithmetic, adding, subtracting, multiplying, division. But some of the concepts to get to that point can be a little more complicated. But they’re not overly complicated in the way Andrew and I try to teach you guys and talk to people about this is trying to take these ideas and concepts and make them relatable to the average everyday person. And I sometimes think Wall Street, and financial advisors kind of get wrapped up into the complexity of it and try to make it complicated, more complicated than it needs to be.

And you know if you go back and read any of Warren Buffett’s letters to his investors that he’s written over the last 50 years or so he never talks about higher math ever. And you know I do not doubt that he could do it, he’s obviously a brilliant man, but he never talks about it. I don’t think it enters into his investing philosophy and I know it doesn’t enter into Peter Lynch’s either.

You know just based on the writings and the talks that I’ve heard him give you know he’s just very good at taking complex ideas and making them simple for not just himself, but for other people to understand.

In relay too and I think that’s what makes him a great investor and what made him a great investor as he was able to look at like Andrew was talking about all the noise he’s able to look at all the noise and clarify everything for him so he understood it so you could go forward and do any deeds to do.

You know we’ve talked a lot about baseball in the past and you guys know I’m a big baseball fan as is Andrew and with the World Series looming here in a moment. You know there are two kinds of camps in a baseball world, there’s see ball hit ball. You know guys that just go up there with no plan of attack whatsoever, and they just go up there see the ball, and they hit the ball.

Then there’s other guys that study film and have zones that they want to look for and they look for certain pitches, and they make it super complicated, and it works for some guys and some guys it doesn’t, and it’s just a matter of you figuring out what works best for you.

And you know if you like the complexity then you dive into learning as much about that stuff as you can. But if that stuff scares you and it overwhelms you then look at more of the simple ideas because you know the company that I was just talking about with Trinity Industries. I used simple math that to look at to evaluate that company what using the dividend discount model because the company does pay a dividend. Using the Ben Graham formula because it works and those are not complicated formulas, there’s not higher math and either one of those, and you can easily do any of those kinds of things to make yourself a better investor.

And you know the last quote that I wanted to talk about.

Andrew: so hard this was a video podcast, you can’t you cannot acknowledge who’s in the World Series. If you bring up baseball, who’s made it well you know, you got a dude that’s real.

Dave: I’m, so in case you guys don’t know this I am a die-hard San Francisco giant fan and Andrew is a die-hard Los Angeles Dodger fan, and historically the teams do not get along. Well, it’s a big rivalry, maybe not quite on the part of the Yankees & Red Sox but certainly, there’s been a lot of animosity through the years, and so Andrew and I have given ourselves a little good-natured ribbing and because my Giants had won three World Series in the last six years. Yeah but this year, of course, the Giants were one of the worst teams in the league, and they were horrible.

And the Dodgers congratulation is going to the World Series, starts on Tuesday Clayton Kershaw is going to pitch they’re probably going to win the whole thing so congratulations to him. And you know so yeah so I have to acknowledge that yes the Dodgers are going to the World Series so congratulations to Andrew.

Enough said, all right so moving on to Peter Lynch. The last thing I wanted to chat about what Peter Lynch real quick was a favorite quote of mine that he said, it was:

“He returns over the most rocks wins.”

And by that he meant you know doing your due diligence to find opportunities and not just going with the easy thing because it’s easy. So looking overlooking at as many companies as you can to find the best opportunities and that was one of the things that he talked about and I think that’s one of the reasons why I got out of the business was because I think he went crazy doing that.

But you know Andrew, and I’ve talked about stock screening we’ve talked about screeners we’ve talked about the different ratios that you can use to help you narrow the field. But the most important part of that is just to be continually looking for opportunities you know Monish Pabrai, which who I’ve talked about a lot in the podcast you know he’s happy if you can find two or three great investments a year.

But that doesn’t mean he’s only looking to three times a year he’s looking every single day you know that’s his job that’s what he does.

We don’t expect you to look every single day you can use Andrews tools to help you with this. You know it’s a great easy tool to use to help you find these great ideas, and you know, but it’s all about you know continuing to be on the hunt for something that may be a great investment for you so just keep your eyes open.

You know in other words when you’re dribbling the ball keep your head up you know looking around all the time and seeing what may you know spark an interest and give you a great investment idea.  Because you never know where they’re going to come from and you can’t rest on your laurels right I think that’s a good metaphor keep your head up and just look for the opportunity.

Andrew: yep I agree, yeah I don’t have much to add. I mean he those is just some fantastic quotes, and if you just focus your approach on those, I think you can do well, and there’s a reason why he was able to do so well in the market.

He just he’s like a natural it just really came really naturally to them he has this ability to understand a business model and understand the financial statements really and so if this is a skill that we can acquire we can pick up, and I truly believe you do and you know you can then why wouldn’t we be able to find similar success as well.

Obviously, there are no guarantees but try to find these different guys who have done it before and learned from them and so instead of having to you know learn from the school of hard knocks and make these costly mistakes yourself maybe shortcut that and find a resource and take off and run with it.

Dave: I agree that’s a great place to end. I guess the last little nugget I wanted to drop on everybody about this was you know he had he has a great writing style. He’s super easy to read as Andrew said and he says Lynch is one of those people that’s really good at relating difficult concepts or ideas and making them simple so that you can understand them, and he’s just a great teacher, and I would highly encourage you guys if you’ve not read either one of those books to go out and grab one of them at your local library or Amazon or wherever you get your books and read it.

You will not be disappointed. In the quote sent Andrew and I talked a little bit about use them as an inspiration use them as a guide to help you focus your either your stock you know checklist or just an inspiration to help you learn more about investing and I guess without any further ado I’m going to go ahead and wrap it up for us tonight.

I appreciate you guys taking the time to listen; we hope you enjoyed our conversation about Peter Lynch and some of his quotes and also congratulations to Andrew and the Dodgers making the World Series again boo and hard anyway. So congratulations to them and Andrew and you guys go out there find some great intrinsic value and invest with the margin of safety emphasis on safety, and we will guys see you guys next week and have a great week.