This article is an excerpt from the Shortform book guide to "One Up On Wall Street" by Peter Lynch. Shortform has the world's best summaries and analyses of books you should be reading.
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Have you always wanted to invest but didn’t know where to start? How can you find strong investment opportunities?
According to Peter Lynch, the best investment opportunities are the companies that you are familiar with—perhaps you buy their products or understand the industry. Familiar companies are the greatest to invest in because you have the best odds of understanding them and how well they’ll perform.
Here’s why you should invest in companies you know, according to Lynch.
Finding Strong Investment Opportunities
Lynch believes you’ll find the best investment opportunities in the places most familiar to you: daily life and work. For instance, if you regularly order house plants from a great online plant store, you have a strong knowledge of that company, which might make its stocks worth investigating. Similarly, if at work, you deal often with a great printing company, you have inside knowledge of that company—an advantage in deciding if you should invest.
Conversely, Lynch strongly warns against investing in companies you don’t understand, trendy companies everyone else is investing in, companies that are diversifying, or companies that supply to only a single buyer. Such companies are likely to fail sooner or later.
(Shortform note: Not everyone agrees with Lynch about investing in companies you know. In Benjamin Graham’s The Intelligent Investor, financial journalist Jason Zweig writes in commentary that you must never buy stock in a company merely because you like its products. Instead, decide first if the stock is over- or undervalued and then buy or hold off accordingly. While Lynch doesn’t claim that you should buy stock in a company you like without looking into its financials (and in fact advises you to conduct three research steps, which we’ll examine next in this guide), he does think you should only research companies you already know and like. Zweig, on the other hand, seems to think personal preference should matter little or not at all.)
When on the lookout for good investments in your daily life and at work, pay particular attention to companies with the following positive attributes, writes Lynch:
Companies that are—or sound—mundane or unappealing: Unglamorous companies (like waste removal or pest control companies) often do well but don’t attract investor attention until stocks are high. For this reason, investigate companies with boring or unappealing names, as this may indicate the company is uninteresting to most investors and therefore attractive.
(Shortform note: This recommendation may no longer apply in today’s tech-saturated business world. Some argue that every company—no matter what it does—is now a tech company because tech has simply become a necessity for staying competitive. This means that companies that might once have seemed mundane or unappealing 1) can use tech to modernize their operations (like a plumbing company using the latest technology to complete jobs more effectively) and 2) can use tech to easily reach the eyes of more investors (a pest control company might create a flashy social media campaign).)
Companies that have branched off from larger companies: When a subsidiary becomes its own company, it’s often successful because the parent company ensures the subsidiary is in good financial standing beforehand.
(Shortform note: Why would a parent company spin off a new independent company in the first place? One reason may be that the parent company wants to dedicate its resources to only the highest-performing areas of its business and allow a subsidiary to take care of the other areas. Additionally, parent companies expect the spinoffs will be profitable, as these can narrowly focus on one service or product. This is in line with Lynch’s belief that parent companies set up spinoffs for success—parent companies want the spinoff to succeed.)
Companies in no-growth industries: Seek out companies in industries that seem not to be growing at all because this indicates there’s little competition in such industries, and strong companies can flourish.
(Shortform note: While it may seem difficult for any company to grow in a slow-growth industry, business experts agree with Lynch that savvy companies can find ways to excel in even the slowest industries. For instance, they might offer a product that’s superior to all others in quality, cost, or functionality.)
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Here's what you'll find in our full One Up On Wall Street summary:
- Why individuals fare better in the stock market than professionals and firms
- A no-nonsense approach to the stock market
- Why you shouldn't follow the complex predictions of so-called professionals
