The very first book I read about investing in the market was One Up on Wall Street by Peter Lynch. I would honestly highly recommend this book to anyone who is new to the market and feels like a little shrimp lost in a huge ocean. Naturally, you want to listen to your friends and what companies they invest in, or take a look at what stocks are most talked about in the news. You may even feel like playing it safe would be to invest in the big name companies, but one thing Lynch says at the beginning of the book is that there are no real “experts” in the market.
“...rule number one, in my book is: stop listening to professionals!”
In fact, if you keep your eyes open while doing mundane tasks like grocery shopping, you already know more about the market than you think.
The common theme in the book is, stick to what you are most familiar with. If you’re a server at a restaurant, think about investing in stocks in the food and beverage industry.
In his book, Lynch said, "Only invest what you could afford to lose without that loss having any effect on your daily life in the foreseeable future."
Now you can breathe. You have some direction. You have an idea as to what type of industry you are interested in putting your bucks in and you also understand this isn’t like a slot machine in Las Vegas. Just because you put in a few pennies doesn’t mean you’ll instantly get a million bucks thrown your way (although it would be nice if that’s how it worked, right?).
One of the most helpful tools on our site is the Buffett-Munger Screener, which will help you find high quality companies at fair-valued or undervalued prices. There are four things on the checklist to determine whether or not the company passes. Although there is no such thing as a “sure thing” when you’re investing, you can get pretty close to being accurate about whether or not a company is going to generate a profit or not and is worth investing in. There are four things a company must have in order to make the Buffett-Munger cut:
The company must have a high predictability rank, meaning the company must be able to consistently grow in revenue and earnings.
The company must have a competitive advantage. It must be able to expand or maintain profit margin while expanding the business.
the company must incur a small amount of debt while the business is growing.
The company must either be fair-valued or undervalued. We can see this by taking the P/E ratio divided by the average growth rate of EBITDA over a 5-year span.
Depending on whether or not you are an international investor or not, you can narrow down which regions you want to look at, if your membership is with the U.S. and other regions. We recently added a new feature that allows you to look at the companies in Map View, which categorizes each company by industry, making it easier for you to determine what type of business you are most interested in and going from there. Lynch does suggest it is more beneficial for you, as an investor, to invest in an industry you are most familiar with.
Since I spent a lot of my teenage years and most of my 20's working in retail, I tend to gravitate toward stocks in that industry. My eyes automatically targeted "Retail" on the map. Underneath it was one stock: TJX Companies (TJX, Financial), which is a U.S. off-price apparel and home fashions retailer.
At the bottom of the summary page, I can look at the Lynch chart to see whether or not a stock is undervalued.
The green line on the chart indicates the actual price of the stock, which is $65.58 and the blue line is the Peter Lynch Earnings line, or what Lynch values the stock at, which is $63.30.
If you would like to find out how he values stocks, read the article "How to Construct Peter Lynchy's Valuation Charts with GuruFocus Financials Charts in Two Clicks" to gain a better understanding. You can also watch the tutorial video Interactive Charts.
When I am looking at a stock, I have a routine I settled into. First, I look at Guru Trades. I like to see what the gurus are doing, or if there is any guru activity with this stock at all.
You can even check to see whether or not the stock is held by your own personalized list of gurus. Some of the gurus that currently ownt his stock are: Joel Greenblatt (Trades, Portfolio), Mario Gabelli (Trades, Portfolio), jeremy Grantham, Paul Tudor Jones (Trades, Portfolio) and Jim Simons (Trades, Portfolio).
Next, it's good to look at insider trades. Although this doesn't give you any solid information on the company, it can be an indication to what may be going on in the company because keep in mind, the insiders have access to information we may not yet be aware of yet or have access to.
The chart tells us there has only been one insider sell lately, which was done by CFO and SEVP, Scott Goldenberg who sold 4,771 shares at $61.94. He now owsn 73,339 shares of this stock.
Speaking of what I like to look at in a company, we recently added a checklsit feature. Now, you can rate a company based on your own personalized research done. One of the checklists is the Peter Lynch Faster Grower checklist. For the sake of sticking with the Lynch theme, let's take a look.
I chose to look at the P/E ratio as an example, since the P/E ratio is one of the factors in deciding if a company's price is undervalued or at a fair value.
The P/E ratio is currenlty at 21.7. You can also find more information about the P/E ratio if you click on Definitions on a stock's page. The Definitions page will give you almsot any ratio, chart, or number you're looking for in a company. You can also see exactly how it's calculated and where the company is rated against its competitors in the same industry.
Here, for example, TJX is ranked higher than 75% of its competitors.
