One of the first books I ask new investors to read is Peter Lynch’s One Up on Wall Street.
The easy-going and simplistic stock-picking style discussed in this book brought Lynch great success in his profession as a fund manager at the US mutual fund company, Fidelity, where he generated an average annual return of 29% during 1977 to 1990.
Lynch wasn’t just a great investor, he had a wonderful way of getting across the secrets of his success in everyday language, exemplified by this warning of the perils of putting money into businesses that you don’t understand.
Another of his catchphrases was to “invest in what you know” and he believed everyone could use this advice to spot successful companies.
In fact, he got many of his best ideas at home or when wandering around shopping malls, rather than by poring over company accounts.
“I stumble on to the big winners in extracurricular situations,” he said. “Apple computers – my kids had one at home and then the systems manager bought several for the office. Dunkin’ Donuts – I loved the coffee.”
Now, he didn’t just go straight out and buy shares in the companies he spotted this way. Instead, he used these insights as a basis for further research. As he’s mentioned in his book, he was looking for shares that offered “growth at a reasonable price”. The idea was to avoid two common investment mistakes –
- Either paying too much for fast-growing companies;
- Or buying seemingly cheap firms without realising that they have stopped growing.
Lynch summarised his approach in 25 investing principles outlined as Peter’s Principles in his book Beating the Street.
Now, one of the Peter’s principles is – “Never invest in any idea you can’t illustrate with a crayon.”
He wrote in Beating the Street –
A class of seventh graders at an American primary school did a social studies project on stocks, the kids had to do their own research and dig up stocks for a paper portfolio. They sent their picks to Lynch, who later invited them to a pizza dinner at the Fidelity executive dining room, illustrating their portfolio with little drawings representing each stock. Lynch just loved this because it illustrates the principle that you should only invest in what you understand, the kids portfolio consisted of toy manufacturers, makers of baseball swap cards, clothing manufacturers and outlets, Playboy Enterprises (a couple of boys chose that one), Coke, and other stocks of that ilk.
With a portfolio notably lacking in glamorous technology ventures and entrepreneurial risk taking they went for solid stocks with excellent profits, their portfolio returned 69.6% against a background of a 26.08% gain in the S&P500 in 1990/91.
Now, this is a great idea – Never invest in any idea you can’t illustrate with a crayon – if you are searching for some great businesses to invest in for the long run. Of course, you must buy such businesses only after you research the ideas well, and only when they are available at reasonable prices as compared to the growth they promise.
Anyways, borrowing this idea from Lynch, I’ve tried to illustrate (through my poor drawing skills 😉 ) some great businesses you can find in your own living room, kitchen, and bathroom.
My list is in no way exhaustive, but it’s quite comprehensive as you can see in the two images below…
[Click here to open a larger image]
As you can see, most of us in India are connected to most of these businesses on a daily basis, and we also like the products/services of most of these companies.
So what stops you from researching them further if you are trying to search for those great investment ideas for your long-term portfolio?
Most of these are simple businesses, and have already created a lot of wealth in the past. But a lot of these businesses also have a great future potential, which you can identify only when you read about them, and understand them properly.
I find a lot of small, new investors complaining that they have a very small circle of competence. I’m sure this chart will erase all those complaints.
Knowing and researching 70+ stocks is, in no way, having a small circle of competence.
So go, find some great stock ideas by drawing things your understand, and then research them deeper. You never know when you paint a beauty! 😉
Yes-Yes!
Peter Lynch is great. Very Great!
Everybody, who wants invest in the stock market has to read Mr Lynch’s books. And not only once time!
Wow Vishal, Those drawings from u are a real eye opener. Its like one is sitting on a gold mine and he is searching it around the world. I will be taking print out of those drawings and pasting it in my “Diary of a Dumb Investor” as well as do my own drawings to get more ideas. Thank u for this simple yet powerful approach. Awaiting in anticipation for more simple ideas from ur side.
Thanks for your kind words, Prashant! 🙂
I’m a huge fan of Peter Lynch myself, but let me play the Devil’s advocate here. Some of the biggest successes in India like Reliance (the petrochemicals business before Reliance was a brand), Infosys and Sun Pharma are not household names at all. Among household names, it’s almost always survivor bias. Do you remember Kinetic scooters that everyone used to have? What happened of that? Or HMT watches? There are many similar examples.
In terms of getting ideas from household items, it’s not whether a product is good that matters, what matters is whether you are a representative sample of the target audience and whether the company is executing correctly. I know scores of people in India who hate apple products and love Samsung, yet it’s Apple which is delivering phenomenal results to it’s investors and Samsung is performing terribly.
I think Peter Lynch’s idea of getting ideas through places like malls is a dated one because in the pre-internet age, it was hard to figure our which company’s products are desirable and are doing well. Today, marketers are incredibly sophisticated and physical retail channels are themselves not representative of total sales at all. The local mall or your own house is not reflective of the market, it’s the entire world which is now the market.
Thanks Shan! Of course, just going by the brands one sees and remembers isn’t going to do him/her a good deed. One needs to research deeper, as I’ve mentioned in the post.
Very informative Sir!
I am currently reading “The Intelligent Investor”.Lynch`s book after i finish this up.
Thanks.
Thanks Jasmeet!
Love the images Vishal!! 🙂
Thanks Dev! 🙂
Great work ,Vishal..Maybe you could have shown the father or mother logging into HDFC Bank as well 😀
Thanks Nishanth! Banks are outside my circle of competence, you see 😉
Great images ! Very informative. Thanks for sharing.
Thanks Hardik!
forget peter, what i want to know is who did the images…
I did the images, Abdul. 🙂
This is super cool Vishal, if a picture is worth thousand words, than this picture and it’s words are worth a million.
Thank you so much, Ashish! 🙂
Superlative efforts vishal. I always wondered how to align the information from the books of great investors & most of them are based in U.S. This is really cool.
Have always wondered how to find different stocks and felt my circle of competence is always small. Your painting nailed it. Another wonderful post have become a fan of your simple.writing style in the last one year..your sketches are pretty unique. Great work .
One question – How do we find the companies like B2B and research since in this scenario we end up seeing only consumer goods and durables mostly?
Draw macro picture of your cub boards (shelfwise), bank pass books (financial, software for banks), booked cinema tickets (online advertising), online purchase bills (e-commerce companies), etc.,……… you will great ides.
Excellent!. Simply to say, the pictures can be used as a starting point to teach about, what is stock markets to growing children. Keep it up Mr. Vishal. Great work.
Hello, Sir
Those drawings are a great depiction of what Peter Lynch said when it comes to pick stocks. By the way your drawing is not poor, its very good 🙂
Thanks Sagar 🙂
outstanding blog .. really informative. I want to buy this book from amazon. But some of readers commented saying that it is outdated and most suitable for US markets. want to get clarity before buying. your advice is appreciated
Sudheer
Hi Vishal, Could you please update the links to the images?
The links do not seem to work.
Thanks,
KArtik
Hi Kartik, the images are opening fine at my end. Please try again. Regards.
Hello vishalbhai
I am working in stock market for last 15 years
I am not able to create wealth