My Best Investments — Peter Lynch: COMPLETE (all chapters)

Lynch's best-known idea is simple: the amateur sees the trends before the analysts do. You use products, shop in stores and notice when something suddenly becomes popular among friends and colleagues. That information is first-hand research — it costs nothing and nobody else has exactly your angle. A classic example from the book is the L'eggs pantyhose brand, which caught Lynch's eye because his wife bought them and found them superior to the competition. Professional analysts follow hundreds of companies at once and rarely stand in a store queue — you can be there.

But Lynch is careful to point out that knowledge of the product is only a head start, not a buying reason in itself. The head start must be confirmed in the numbers: is earnings growing, is the balance sheet strong, is the valuation reasonable? Without that check the principle becomes just an excuse for buying trendy companies without analysis. Everyday knowledge opens the door — the financial statements decide whether you walk through it.

Before you value a company you must know what type of company it is, because the category determines how you should read the numbers. Lynch distinguishes six types. Slow growers are mature giants that grow marginally and mainly reward owners with a dividend. Stalwarts are large, stable companies growing at roughly ten to twelve percent — they protect the portfolio in downturns. Fast growers are smaller, aggressive companies growing twenty to twenty-five percent a year — this is where the big winners are found, but also the risk that growth suddenly brakes.

Cyclicals such as steel, car and airline companies swing with the business cycle: profitability arrives in waves. Turnarounds are companies in crisis that can turn around — with no correlation to the stock exchange, but with the risk of losing everything looming large. Asset plays are companies with hidden assets — land, patents, cash, tax advantages — that the market has not priced in. The category determines what you should look at, how the valuation is done and when it is time to sell.