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A Beginner’s Guide to the Basics of Investing and Business
- 80 quotes from Peter Lynch: 'The trick is not to learn to trust your gut feelings, but rather to discipline yourself to ignore them. Stand by your stocks as long as the fundamental story of the company hasn’t changed.' , 'Know what you own, and know why you own it', and 'Whenever you invest in any company, you’re looking for its market cap to rise.
- Jan 09, 2021 Through his bestselling books One Up On Wall Street: How to Use What You Already Know to Make Money in the Market and Learn to Earn, Peter Lynch taught his successful investing strategy to the masses through his characteristically accessible approach.
Mutual-fund superstar Peter Lynch and author John Rothchild explain the basic principles of investing and business in a primer that will enlighten and entertain anyone who is high-school age or older.
Many investors, including some with substantial portfolios, have only the sketchiest idea of how the stock market works. The reason, say Lynch and Rothchild, is that the basics of investing — the fundamentals of our economic system and what they have to do with the stock market — aren’t taught in school. At a time when individuals have to make important decisions about saving for college and 401(k) retirement funds, this failure to provide a basic education in investing can have tragic consequences.
For those who know what to look for, investment opportunities are everywhere. The average high-school student is familiar with Nike, Reebok, McDonald’s, the Gap, and the Body Shop. Nearly every teenager in America drinks Coke or Pepsi, but only a very few own shares in either company or even understand how to buy them. Every student studies American history, but few realize that our country was settled by European colonists financed by public companies in England and Holland — and the basic principles behind public companies haven’t changed in more than 300 years.
In Learn to Earn, Lynch and Rothchild explain in a style accessible to anyone who is high-school age or older how to read a stock table in the daily newspaper, how to understand a company annual report, and why everyone should pay attention to the stock market. They explain not only how to invest, but also how to think like an investor.
Of the many things we’re taught in school, investing and saving is not one of them. The principles of finance are simple and easily grasped. One, Savings = Investment, as over the long term it’s not how much money you make. It’s how much of that money you put to work by saving and investing it. Though it doesn’t hurt to have a high starting point.
Invest Now — Enjoy Later
Learn from Joe Bigbelly’s mistakes:
Bigbelly is 23 — Good 😃 (Young)
Bigbelly works part-time at Wal-Mart — Good 😃 (Stable Job)
Bigbelly lives at home with his parents — Good 😃 (Low Expenses)
Bigbelly saves $2000 down payment on a $20,000 Camaro — Not Good😟 (Not an appreciating Asset)
Bigbelly takes out a car loan for the remaining $18,000 — Not Good 😟
It’s a 5-year loan at 11.67% interest, $400 monthly repayments — Not Good 😟 (Negative Return on Investment)
He forgets all about these payments when he’s driving around in the Camaro and his friends are telling him what a cool car it is. 😟 (Negative Reinforcement)
Over time, there are scratches on the door and stains on the carpet and nobody is “oohing” and “aahing” when the Camaro pulls into the parking lot. It’s just another car, but Bigbelly is stuck with the payments. 😟
To be able to afford the car and a date to ride in the car he works an extra night shift, which means he’s too busy to get many dates.😟
At this point, the Camaro has dents and stains and the engine sounds a bit rough. If he sold the thing he could get maybe $5,000 for it. So what he’s got to show for his $26,000 investment is a $5,000 car that he doesn’t even like anymore.😟
Learn from Sally Cartwheel’s Merit:
Cartwheel is also 23 😃
Cartwheel also lives at home 😃
Cartwheel also works at Wal-Mart 😃
Cartwheel took the $2,000 she’d saved up and bought a used Ford Escort. 😃
Sally actually paid cash for the car, so she didn’t have car payments to make every month. 😃
So instead of sending $400 a month to the finance company, she invested $400 a month in an S&P 500 Index Fund. 😃
Five years later, when Bigbelly was mailing out his last car payment, the value of Cartwheel’s index fund had doubled. Between the doubling of the fund itself and the steady stream of $400 contribution to the fund, Cartwheel has an asset of nearly $30,000. She also has the Escort, which gets her back and forth OK, and she never worries about the dents and stains because she never thought of her car as an investment. It’s only transportation.
As we leave this economic morality comparison, Cartwheel has enough money to make a down payment on her own house/apartment and move out 😃, whilst Bigbelly continues to mooch 😟.
Remember this, over the long term:
An A+ situation is you’re saving and investing a portion of your paycheck.
A C- situation is you’re don’t save and you spend the whole thing.
An F situation is you’re ringing up charges on your credit card and running up a tab, in which case it’s the credit card company that’s making the money on you.
When it comes to debt, it’s ok to pay interest on a house or an apartment, which will increase in value, but not on cars, appliances and groceries.
Pros and Cons of five basic investment methods
Savings accounts, Money-Market Funds, Treasury Bills, and Certificates of Deposit (CDs)
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All of the above are known as short-term investments and they pay you interest, whilst you get your money back in a relatively short time.
Short-term investments have one big disadvantage. They pay you a low rate of interest. Right now in many countries, the interest on savings is just over the inflation rate and in some cases, it yields negative returns. So, you’re paying to have your money stored at a bank.
Inflation is when the buying power of your currency goes down, therefore needing more to buy less.
The first goal of saving and investing is to keep ahead of inflation. Professionally, this is generally the lowest benchmark for investors.
The biggest disadvantage of these investments is the taxes you pay on top of the interest you’ve accumulated. So, when putting this all together with rising inflation, stagnant savings & money market rates and paying taxes on top, it’s a definite losing proposition and something you don’t want to be a part of over the long term.
But these accounts have their place, which is being able to access them quickly for paying bills or when you’ve got a big enough pile to invest elsewhere.
2. Collectibles
Collectibles can be anything from antique cars to stamps, NFTs, old coins, baseball, Yu-gi-oh or Pokémon cards. When you invest your money in such things, you are hoping to sell them at a profit in the future. There are two reasons this might happen: The things become more desirable as they get older as there are few in circulation; and inflation of cash raises prices across the board.
Collecting is a very specialized business, and successful collectors are experts not only in the item they collect but also in the market and the prices. So much like anything else, there is a lot to learn and requires a lot of patience.
3. House or Apartments
Buying a house or an apartment is the most profitable purchase most people ever make. A house has two big advantages over other types of investments. You can live in it while you wait for the price to go up, and you buy it on borrowed money. Let’s review the math.
Houses often increase value at the same rate as inflation. Therefore, you’re breaking even. But you don’t pay for the house all at once. Typically, you pay 20% upfront and a bank lends you the other 80%. You pay interest on this mortgage for as long as it takes you to pay back the loan.
As you’re living in this house, you won’t get scared to sell if the housing market crashes, the way you might get scared out of stocks when the stock market has a crash. As long as you stay there the house price on average goes up and you’re only paying any 0–50% marginal taxes on the gains.
If you buy a $100,000 house that increases in value by 3% a year, after the first year it will be worth $103,000. At first glance, you’d say that’s a 3% return, the same as you might get from a saving account or term deposit (CDs). But since you actually only paid $20,000 and borrowed the rest, you’re return is $3,000 on $20,000, therefore, giving you a 15% return.
Along the way, you have to pay interest on the mortgage, but you get a tax break for that and so as long as you pay off the mortgage to you’re increasing your investment in the house. This gets even better if it’s an investment property, where the loan is being paid off by the tenant.
4. Bonds
You’ve probably heard reporters talk about “the bond market”, “Yields rising” and “Rally in the bonds”. But what is a Bond?
A bond is a glorified IOU. Even though it’s called “buying a bond”, when you purchase a bond, you aren’t really buying. You’re simply making a loan.
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Basically, a bond is quite similar to the CDs and treasury bills. You buy them for the interest you’ll get, and you know in advance how much interest you’ll be paid and how often and when you’ll get your original investment back.
The longer it takes for bonds to pay off, the greater the risk that inflation will eat up the value of your money before you get it back. That’s why bonds pay a higher rate of interest than short-term alternatives.
There are 3 ways you can hurt by a bond.
The 1st occurs if you sell the bond before the due date, when the issuer of the bond must repay you in full. By selling early, you take your chances in the bond market, where the prices of bonds go up and down daily, the same as stocks. So, if you get out of a bond prematurely, you might get less than you paid for it.
The 2nd occurs when the issuer of the bond goes bankrupt and can’t pay you back. The U.S. government, for example, probably will never go bankrupt. Therefore, the buyers of U.S. government bonds are repaid in full, for the time being.
The biggest risk in owning a bond is the 3rd: inflation. With stocks, over the very long term, you can keep up with inflation. With bonds, you can’t.
5. Stocks
Stocks are likely to be the best investment you’ll ever make, outside of the real estate market. When you buy a bond, you’re only making a loan, but when you invest in a stock, you’re buying a piece of a company.
When people consistently lost money in stocks, it’s not the fault of the stocks. Stocks in general go up and down in value over time. People lose money because they don’t have a plan. They buy at a high, then panic or get impatient, and they sell at a low when the stocks have a correction or a crash.
The rest of this series is devoted to understanding stocks and the companies that issue them. Hopefully, this will lay the groundwork for a lifetime of investing.
A link to the book:
and others by Peter Lynch:
Plus, further readings: