One Up On Wall Street

Any normal person using the customary three percent of the brain can pick stocks just as well, if not better, than the average Wall Street expert. - Peter Lynch, One Up On Wall Street

My all time favourite book on investing is Peter Lynch's One Up On Wall Street. It is my favourite book, not just because it provides a valuable insight into the market from one of the greatest investors of all time, but because of its main takeaway: that anyone can gain pick stocks better than Wall Street simply by observing the world around them.

One of the biggest misconceptions about the stock market is that it is too complex for the average person to understand. Other fields, like medicine or law, require years of study and experience to understand. So you can save a bunch of time and effort on your part, and almost certainly get a better outcome, by outsourcing important decisions to a professional.

The beauty of the stock market is that it is (mostly) an even playing field. You have as much of a chance at beating the market as the professionals.

How? Every day we interact with or are exposed to the products and services of countless public companies. In doing so, we gain a sense of which products or services are useful, cost effective, entertaining, unique, or fashionable, and which ones are not.

At the end of the day, product is the single greatest indicator of a company's success. Specifically, having a product that satisfies a need, makes people's lives better, and will continue to do so year after year into the future, is the biggest positive driver of share price over the long-term.

As the people who actually consume these products, you and I have a huge advantage when it comes to predicting business success.

It could be something as simple as noticing a few more Teslas on the road than you used to, or noticing how your workplace became so much more efficient when it switched to a new CRM. The little details like this are what distinguishes great investors from everyone else.

An obvious example of a successful company is Apple, largely because of its iPhone. Former Microsoft CEO, Steve Ballmer, famously laughed at Apple's iPhone, saying it is "the most expensive phone in the world, and it doesn't appeal to business customers because it doesn't have a keyboard." (This quote also shows that CEOs are not necessarily as smart as they are made out to be). If, when you bought your first iPhone back in 2007, you had also bought Apple stock, you would have made over 4,000% versus the S&P 500's 300%.

Another example of corporate short-sightedness is Netflix. Blockbuster rejected a deal to buy Netflix in 2000 for $50 million. Today, Netflix is worth $300 billion and Blockbuster no longer exists.

Keep It Simple, Stupid

Know what you own, and know why you own it. - Peter Lynch, One Up On Wall Street

Some of Peter Lynch's most successful investments were Dunkin Donuts, Taco Bell, La Quinta Motors (a holiday inn company), Volvo, and Service Corporation International (a funeral homes and services company). All these businesses came to Lynch's attention from his personal interactions with them.

So many investors, amateurs and professionals alike, are adamant on buying stocks in businesses they know nothing about: companies with the latest cutting-edge technology, patent-pending medical research startups, or mineral exploration companies on the verge of discovering the next Olympic Dam.

Peter Lynch likens this to playing stud poker without knowing the cards you hold. Yes, you can get lucky and make a lot of money with stocks like these. But that's all it is - luck. The problem with investing in these stocks is that you are no longer in control. If the stock goes up 20% how will you know what to do? Should you sell because this is as far as the stock has to go? Or should you buy more because whatever the company is doing must be working and the stock has much further to go?

Yes you can rely on analysts to tell you what to do, but then you forfeit your advantage and have no better chance of beating the market than anyone else.

Find Your Circle and Stick To It

Everybody's got a different circle of competence. The important thing is not how big the circle is. The important is staying inside the circle. - Warren Buffett

Some of Warren Buffett's best investments during his career have been Coca Cola, Bank of America, and Kraft Heinz (they make Baked Beans). Again, not complicated.

Warren Buffett didn't invest in tech stocks for much of his career simply because be didn't understand them (Buffett was born in 1930), and completely avoided them through the dot-com bubble. For two years from 1998 to 2000, Berkshire Hathaway significantly underperformed the market. Barron's published an article in December 1999 titled "What's Wrong, Warren?", suggesting Buffett "may be losing his magic touch." Of course, the bubble eventually burst and Berkshire Hathaway remains one of the top performing funds to this day.

Your circle of competence should be the arena that you compete in because it is the arena that gives you the greatest competitive advantage. It was not necessary for Warren Buffett to deviate from his circle of competence, and neither should it be for you.

Find the products that you and your friends use in your personal lives. Ask yourself why you use them, and then find out who makes them. Consider the problems you encounter or inconveniences you face in your life, and then find out whether there is a business out there with a product that solves it.

And if you are studying or working in one of the aforementioned industries (technology, medicine, mineral exploration, etc.), even better! Whatever industry it is, you are most likely way more informed than your competition, and you should apply that advantage to its fullest extent.

Combatting the Fear of Missing Out (FOMO)

Your circle of competence should act both as a source of investment ideas and an exclusion criteria for avoiding the stocks you know little to nothing about.

One of the most common pitfalls for all investors, amateurs and professionals alike, is the fear of missing out (FOMO). On your investing journey, you will inevitably hear about other stocks (or cryptocurrencies, or NFTs, or whatever other asset class it is) making a lot of people very wealthy. At these times, it is only natural to feel jealous. You imagine how much money you could have made if only you had bought it earlier, only to see it continue going up and up. You perceive your own wealth as getting less and less in comparison to the alternate reality in which you bought the stock. Eventually you decide enough is enough and buy the stock on nothing but hope, only for it to came crashing down. I have seen this happen to everyone, including investment professionals (seriously, it happens to everyone).

A simple solution to the fear of missing out is to simply stick to your circle of competence and ignore any stock that is outside of it. Just stop reading about them. Stop looking at the price chart, and remove them from your watchlist if you have to. Out of sight, out of mind.

By sticking to your circle of competence, you are able to rely on your existing knowledge and experience to make informed and objective investment decisions. Limiting the bias that your emotions have on your decision-making process puts you miles ahead of the average investor. Don't believe me? Who better to explain than Peter Lynch himself?

Expanding Your Circle of Competence

The best part about all this is that your circle of competence is not fixed. It expands as we progress professionally or in our personal lives.

Even if you don't work in a particular industry, it doesn't mean you can't go out of your way to learn about it. Read books, watch videos, talk to people. Having real world experience in anything, really, is so valuable that putting time into your career, your hobbies, or your personal interests is just as important to being a good investor as studying the market.