Source: Cailian Press
The organizer of the event told me that I could talk about anything. I only know one thing—stocks. Therefore, I quickly made a decision: I should talk about stocks. I will try my best to review a few key points that are significant to me, and which I believe are also crucial for those attempting to make money in the stock market.
Peter Lynch's Four Rules for Stock Investment
Rule 1: Understand the stocks you hold
The first rule is that you must understand the stocks you hold. This may sound simple, but we know very few people can actually achieve this. You should be able to explain to a 12-year-old child within two minutes or less why you are buying a particular stock. If you cannot do this, and if the only reason you are buying the stock is because you think its price will rise, then you should not buy it.
Let me give you an example of a simple and common stock – the kind of stock that most people would buy. It’s a relatively ordinary company that produces straightforward products. The product features include a CMOS processor with 1M memory, bipolar RSC floating-point I/O interface, 16-bit dual-channel memory, Unix operating system, Whetstone silicon emitter capable of millions of floating-point operations per second, high bandwidth, and computational power of 15 microseconds.
If you hold this kind of junk stock, you will never make money – never. Understanding the stocks you hold is crucial. The companies you invest in should be simple. What has brought me excellent returns are simple companies that I can understand, such as Dunkin' Donuts and La Quinta Motels. These are the companies that deliver good returns.
Rule 2: Economic forecasting is futile
Forecasting the economy is entirely futile; don’t try to predict interest rates. Alan Greenspan was the head of the Federal Reserve. He couldn’t predict interest rates. He could raise or lower them, but he couldn’t tell you what the interest rate would be in 12 months or two years. You cannot predict the stock market.
I wish I could have access to such information. For me, knowing when a recession is about to happen would be very helpful. That would be great.
Most of you here should still remember the recession from 1980 to 1982, which was the worst since the Great Depression. At that time, our unemployment rate reached 15%, inflation hit 14%, and the base interest rate soared to 20%. Did any of you receive a phone call warning you about the upcoming recession? Do you remember any magazine you regularly read successfully predicting that situation? No one told me that such a dire scenario was coming.
You might not believe how much time people waste trying to forecast what will happen a year from now. Knowing what will happen a year ahead would indeed be fantastic. But you will never know. So don’t waste your energy on it. It does no good.
Rule 3: Don’t worry about the index.
“You must look for companies like McDonald's and Walmart. Don’t worry about the stock market. Take Avon, for example. Over the past 15 years, Avon’s stock has dropped from $160 to $35. Fifteen years ago, it was a great company. But now, all the Avon ladies are out of place. They knock on doors, but the housewives are either out working or playing with their children. What they sell is available in supermarkets or drugstores. Avon's profitability base has collapsed. This company was only great for about 20 years.”
“Today, the stock market closed at 2700 points. Even if it had closed at 9700 points today, Avon would still be a miserable company. Its stock price fell from $160 to $35. So no matter how the stock market performed over the past 15 years, your investment in Avon would have been dismal.”
“During the same period, McDonald’s performed exceptionally well. They entered overseas markets, introduced breakfast and takeout services, and did very well. During this time, their performance experienced a magical rise, with profits growing 12-fold and the stock price increasing 12 times. Even if the Dow Jones had closed at 700 points today instead of 2700 points, your investment in McDonald’s would still yield good returns. The stock price might be $20 instead of $30, but you would still gain 8 or 9 times in profits.” “Focus on individual stocks and forget about the big picture.”
Rule 4: Don’t rush; you have plenty of time.
“You have plenty of time. Don’t think that you must act on a concept as soon as you think of it. You have enough time to thoroughly research a company. The stocks that brought me substantial returns were those I purchased after following them for two, three, four, or even five years. Losing money in the stock market happens quickly, but making money takes time. There should be some balance between making and losing money, but in reality, there isn’t.”
“Let me tell you about Walmart. The company went public in 1970. At that time, it had 38 stores, an impressive historical operating record, and a solid balance sheet. After stock splits—of course, the popularity of Walmart’s stock was never due to splits—the share price adjusted to 8 cents per share. You might tell yourself, ‘If I don’t buy Walmart’s stock next month, I’ll miss the best investment opportunity of my lifetime.’”
“Five years later, Walmart had 125 stores, and its profits grew 7 times compared to 5 years earlier. Guess what? The stock price rose 5 times, reaching 41 cents per share.” “By December 1980, Walmart had 275 stores, and profits increased 5 times again compared to 5 years earlier. Guess what? The stock price rose 5 times again, now at $1.89 per share.” “In December 1985, it had 859 stores, not counting Sam's Club. During this 5-year period, profits increased 6 times, and the stock price is now $15.94. So you might tell yourself, ‘This stock has risen from 80 cents to $15.94. I bought in too late. It’s crazy. I shouldn’t buy these bulky giant companies anymore.’ No, it’s not too late to buy now, not at all. Because today, Walmart’s closing price is $50. You have plenty of time to buy.”
“By 1980, Walmart had been listed for 10 years. Its revenue exceeded $1 billion, its balance sheet was impeccable, and it had an excellent operating record. What’s truly astonishing is that—investing in Walmart may not bring you massive profits, but if you had bought Walmart in 1980 and held it until now, you would still earn 25 times your investment, which would outperform the Magellan Fund during this period. By the way, I didn’t hold Walmart during this time. I thought its stock price was too high back then.”
Securing the job at Fidelity: “When I applied to work at Fidelity, the company had 80 employees. Today, our total number of employees is 7,200. Among the applicants at that time, 25 were from Harvard, and a total of 50 candidates competed for 3 positions. I graduated from Wharton, and we used to joke that Harvard was a second-rate school while Wharton was top-tier. Anyway, there were many candidates from Harvard. But I was the only applicant who had worked as a caddie for the president for 11 years, so I got one of the three positions.”
In my early days at Fidelity, we had a joke: the chance to work until the next Christmas was considered a great Christmas bonus. It was a terrible start.
The next topic is the ten most dangerous sayings commonly found in the stock market.
Dangerous saying 1: Since the stock price has already fallen so much, how much more can it fall?
Around the time I started working for Fidelity, I really liked Kaiser Industries. At that time, the share price of Kaiser dropped from $25 to $13. That's when I used Dangerous Saying 1. We executed the largest single transaction in the history of U.S. securities trading. We either bought 12.5 million shares or 14.5 million shares at $11.125 per share, which was $1.5 lower than the market price. I said, 'What a great investment we made in this stock! It has fallen to $13. From $25 down to this level, it can't possibly fall any lower. Now it’s at $11.125.'
When the share price of Kaiser fell to $9, I told my mother, 'Hurry up and buy, since the stock price has already fallen so much, it cannot fall any lower.' Fortunately, my mother did not follow my advice, as the stock price fell to $4 within the next three months.
Kaiser Company had no debt and held 50% of Kaiser Steel, 40% of Kaiser Aluminum, Kaiser Cement, Kaiser Machinery, and 30% of Kaiser Broadcasting—altogether holding stakes in 19 subsidiaries. At that point, with the share price falling to $4, the entire company could be acquired for $100 million.
Looking back, a Boeing 747 aircraft cost $24 million at the time. Today, I think that amount wouldn’t even buy you a toilet on a Boeing 747, perhaps only an engine. But at that time, the market capitalization of Kaiser Industries could purchase four Boeing 747s. The company had no debt. I wasn’t worried about it going bankrupt. However, I bought too early, and we couldn’t purchase more shares because we had already reached our limit.
Ultimately, four years later, they liquidated all their positions, and it turned out to be an excellent investment. The final value per share was $35 or $40. But simply buying a stock because its price has fallen significantly is not a good investment strategy.
Dangerous saying 2: How much higher can the stock price go?
Dangerous saying 2 is the opposite of the previous one, similar to the Walmart story, 'Since the stock price has risen so much, how could it possibly rise further?'
Let me give you an example of a company that you might not consider to be a growth company. In 1950, the stock price of Philip Morris was 75 cents. Eleven years later, in 1961, the stock price rose to $2.5—tripling in value. You might say that for a company in a declining industry—with a terrible product and no prospects—such a rise is impressive enough. How much higher could it go? It has already reached $2.5. So you might have sold it in 1961.
Eleven years later, in 1972, the company’s stock price rose to $28. After you earned three times your money and sold it in 1961, the stock went on to increase by 11 times. In 1972, you might have said to yourself, ‘Since the stock has risen so high, how much further can it go?’ Then you sold after it increased 11 times, having missed out on the opportunity to make seven times your profit after it had already tripled and then quintupled.
Therefore, what I am saying is, do not get caught up in technical analysis of stock performance. Stock commentators use all kinds of terms, adjectives, and preambles. If a stock’s price rises, they keep adding new labels. They will say the stock price is inflated, then too high, significantly disconnected from intrinsic value, or even super-inflated. They have all the terminology to describe overvaluation.
If you like this company, this should not bother you. You should tell yourself, ‘I like this stock at $30.’ However, you can never escape the comments of stock analysts. But you must distance yourself from these remarks. Because you are right, you should say, ‘I like this stock at $30. These commentators are wrong.’
However, when the stock price rises to $50, the commentators' words may come back to your mind. You might say, ‘Wait a minute, when the stock was at $30, these people were certain that it was overvalued. Now that the stock has risen to $50, they must be right.’
So you really need to shield yourself from these comments. I once bought Subaru after its stock had risen 20-fold. I was lucky because after buying, I made seven times my investment. I’ve also bought stocks that fell from $20 to $12. I’ve purchased many such stocks. Now, you can’t buy a Hershey Bar for $5 anymore—they’re 5 cents each.
Thus, a stock’s past performance has no correlation with its future performance. A company’s operational performance is what correlates with future results.
Dangerous Statement 3: How much can I lose? The stock price is only $3.
This third dangerous statement is very important, and I always hear it: ‘The stock price is $3. How much can I lose? It’s only $3.’
Now let’s do some arithmetic and go back to our basic math knowledge. If you buy two stocks, one priced at $60 and the other at $6, and invest $10,000 in each, if both their prices fall to zero, the amount you lose will be exactly the same. This is obvious. That’s just how it works. People simply don’t believe it. Try calculating it at home—you’ll see.
Many people often say, 'Good heavens, how could these fools buy stocks priced at 60 dollars when the stock I bought was only 6 dollars. What a great investment I’ve made.'
However, observe those who make money by short-selling stocks carefully. They don’t short-sell a stock when its price reaches 60 or 70 dollars and is still in an upward trend. Instead, they jump in when the price is falling and short-sell when it drops to 3 dollars. So, who ends up buying these short-sold stocks? It’s those who say, 'The stock price is only 3 dollars now, how much lower can it go?'
Dangerous Statement 4: Eventually, everything that has fallen will rebound.
Take RCA Corporation as an example. It used to be a highly successful company. It took RCA 55 years for its stock price to rebound to the level it was at in 1929. This shows how overvalued it was back then. Therefore, holding onto a stock and believing it will eventually rebound to a certain price is completely unworkable. Remember companies like Johns Manville, mobile home manufacturers, double-knit clothing firms, floppy disk makers—Winchester Disk Drive Company. Their stock prices never rebounded after they fell. Don’t wait for these companies’ stocks to recover.
Dangerous Statement 5: Things can't get any worse, so I should buy.
Buying a company’s stock just because the company is in dire straits is dangerous. When things seem to have reached their worst point, it may not necessarily be the right time to buy.
In 1979, there were 96,000 railroad freight cars in the United States. By 1981, this number had dropped to 45,000, marking a 17-year low. You might tell yourself, 'Railroad freight car numbers have fallen from 96,000 to 45,000. This is the worst situation in 17 years; how much worse can it get?'
If this is your sole reason for buying, you’ll find in 1982 that the number of freight cars dropped further from 45,000 to 17,000, and by 1983, it decreased again to 5,700.
Investing heavily in an industry solely because its business conditions are deteriorating is very risky.
Consider another example from the oil drilling industry. In 1981, there were 4,520 onshore oil rigs in the United States. By 1984, this number had halved to 2,200. At this point, many people jumped into the market. Some believed it was time to buy into the oil services sector since the number of rigs had been cut in half. Two years later, the rig count had fallen by 70%, leaving only 686 rigs. Even now, the number remains below 1,000. Thus, buying a company's stock simply because its situation seems bleak is unwise.
I have seen companies in bad situations, and the next time you say their situation is unbelievably terrible, you will use words like dreadful, disappointing, or catastrophic to describe their condition.
Therefore, the best lesson I learned from the textile industry is that Burlington Industries is still a relatively new textile company because it was founded in 1908, while the textile industry has existed for a very long time. The textile industry has experienced bleak periods, and they know what that is like. They have witnessed times of decline.
People in the textile and garment exhibition businesses are different. The latter group tends to be relatively optimistic. If you ask them how the exhibition went, their answers are always positive—great, absolutely wonderful, fantastic, everyone loved it. They are always cheerful, much like people in the software industry.
However, people in the textile industry are calmer. They have experienced market downturns and tough conditions. There is an excellent saying in the textile industry: 'Things won’t get better after hitting rock bottom.'
Dangerous statement 6: I will sell when the stock price rebounds to $10.
Once you say that, the stock price will never rebound to $10—never.
How many times has this happened? You pick a price and say, 'I don’t like this stock; I’ll sell it when the price returns to $10.'
This attitude will cause you endless suffering. The stock price might rise to $9.625, but you may wait forever for it to return to $10. If you don’t like a company, regardless of whether your purchase price was $40 or $4, if the factors for the company’s success are gone, and if the fundamentals weaken, then you should forget about the previous price movements of the stock.
Hoping and praying for the stock price to rise is useless. I’ve tried doing that—it doesn’t work. Stocks don’t know who owns them.
Dangerous statement 7: Never sell Long Island Lighting Company.
The share price of ConEd dropped by 80% within 18 months and then rose to six times its original value. Each of these three companies—Indiana Public Service Company, Bay Municipal Company, and Long Island Lighting Company—experienced a decline of 75%, followed by significant increases. Some high-quality banks in Texas—with equity-to-asset ratios of 8% to 9%—saw their stock prices fall by 100%. Companies are dynamic entities. Their development is driven by various forces, and it's crucial to understand what those forces are.
One tragedy of life is that sometimes people inherit stocks. They inherit a stock without understanding what it represents, but their mother tells them, 'No matter what you do, never sell the shares of Long Island Lighting Company.' I'm not talking about reading the financial section of the newspaper. The company had a small plant called Shoreham, which was delayed by seven or eight years in construction and exceeded its budget by $50 billion to $70 billion. People simply didn't want it.
Dangerous Statement 8: Losing money because of not buying
The eighth dangerous statement is terrifying: 'Look how much money I've lost because I didn’t buy.' This idea has always troubled me. Remember: if you don’t own a stock that rises, quickly check your bank account—you haven’t lost a penny. If you see the share price of Home Shopping Network rise from $6 to $60 and you don’t own the stock, you haven’t lost $300,000. You only lose money when you hold a stock and its price falls from $60 to $6.
An incredible number of people are troubled by missing out on gains. In my imagination, if the stock market rises 50 points in a single day, someone might say, 'I just lost $28 billion.'
Therefore, remember this: if you didn’t buy a stock and its price subsequently increased, you haven’t actually lost any money. In the United States, the only way to lose money is to hold a stock whose price declines. I have experienced this many times. There is a common and fundamental truth: if you invest $1,000 in a stock, unless you are reckless enough to engage in margin trading, your maximum possible loss is $1,000.
Dangerous Statement 9: This is the next great company
Dangerous Statement 9 is important. Whenever you hear 'This is the next…,' immediately interrupt your train of thought and stop listening to the rest, because what follows will always be exciting. The next great company has never succeeded. The next Toys 'R' Us failed, the next Home Depot failed, the next Xerox failed—and even Xerox itself didn’t perform well. Similarly, the next McDonald’s also failed.
Whenever you hear about the 'next' something, just ignore it.
Dangerous Statement 10: The stock price has risen, so my view must be correct.
"Dangerous Statement 10: The stock price has gone up, so my view must be correct; or the stock price has fallen, so my view must be wrong."
"These calls never cease to amaze me. Someone calls and says, 'I just bought a stock at $10 not long ago, and now it’s risen to $14. You should buy this stock.' What does he mean? He bought it at $10, and now it's at $14—why should I buy it? Just because the price rose from $10 to $14? Clearly, people believe that the fact the stock price has risen means they are right."
"This doesn’t mean they can give advice to others. It means nothing. I once bought a stock on the pink sheets market—it went from $10 to $14, then dropped to three cents. I’m not joking. I’ve also bought stocks that fell from $10 to $6, only for them to rise later to $60. I might have sold at $6.125."
Below are Peter Lynch’s ten pieces of advice.
1. Companies with only a distant vision won’t bring you returns.
"Avoid longshots. Every time someone recommends a stock to you, the recommendation is so exciting that they talk to you in a soft voice over the phone. I don’t know if it’s because they’re afraid the neighbor will overhear, or because they fear SEC surveillance. Or maybe if you call in a soft tone, you won’t go to jail—or you’ll only serve half the sentence."
"Anyway, they whisper, 'The company I’m recommending to you is amazing, unbelievably good, or it’s a very strong company,' etc. But they leave out something. There’s a highly technical term for these stocks—NNTE, meaning no near-term earnings. These companies have no profits. They have no track record (meaning they only have a distant vision—translator’s note). All they have is a good idea. In reality, the idea might work. But often, it doesn’t."
"Remember: If a stock rises from $2 to $300, you can still achieve high returns by buying at $8, or even entering at $12. When someone recommends such longshot companies to you, you can follow up a year later, write them down on paper, and put them in a drawer. Take them out again after a year, or even after three years. Evaluate their fundamentals after three years before making an investment decision."
"I once bought 25 longshot companies. I tracked them for five years. Not a single one made a breakthrough. I bought 25, and none succeeded."
2. Don’t confuse growth with profitability.
"Avoid high-growth, easily accessible industries. High-growth industries are a terrible field because everyone wants to enter them. How many people have heard of Crown Cork Seal Company? It's an amazing company. They manufacture cans and bottle caps for cans and bottles."
"Everyone present is influential. How many boards will meet this week to decide whether to enter the canning industry? How many last year? In the past seven years? In the past twenty years?"
"The company’s stock price rose to 50 times its initial value. They always maintained a technological edge. They were the industry leader. They didn’t change their company name to an acronym like Crocosco."
"The canning industry is a no-growth sector. Retail, where Sam Walton was active, is also a no-growth sector. This is good—you need to look for a growth company within a no-growth industry because no one wants to enter it. However, Winchester Disc Drive is different; everyone wants to enter that industry."
"The carpet industry in the 1950s was astonishingly good. The fastest growth period for the computer industry was also the 1950s. At that time, the carpet industry grew faster than computers."
"I lost count, but during the 1930s and 1940s, carpets seemed to sell for about $20 or $25 per square yard. All wealthy families had carpets, while others had bare floors."
"Later, someone invented a special manufacturing process. The price of carpets and rugs dropped to $2 per square yard. Carpets spread everywhere—airports, schools, offices, apartments, houses, etc. People first laid plywood and then covered it with carpet."
"Now, carpets are out of fashion. Hardwood flooring is preferred. People’s tastes are cyclical like this. However, the carpet industry experienced explosive growth in the 1950s. Unfortunately, the number of carpet manufacturers increased from four at the beginning of the 1950s to 195 by the end of the decade. As a result, none of the companies made money. Due to the industry’s growth, they all incurred losses. Therefore, don’t confuse growth with profitability. In fact, growth often leads to losses."
"Today’s market enthusiasm for biotech companies is surprising. Most of these companies have 102 PhDs and 102 microscopes. People are buying their stocks like crazy. What makes me money is Dunkin’ Donuts. I don’t need to worry about imports from South Korea or money supply data. When you hold Dunkin’ Donuts, you don’t need to worry about those things."
Third-grade and fifth-grade math is sufficient for investment needs.
It is essential to examine the balance sheet. This is extremely important. If you have received a fifth-grade mathematics education, that is sufficient for investing. I was good at math—until calculus appeared in the curriculum. I excelled in mathematics and still remember problems like this: two trains depart, one from St. Louis and the other from Dallas; how long will it take for them to meet? I enjoyed solving such problems.
But suddenly, quadratic equations and calculus entered the picture. Do you remember? Calculus was all about finding the area under a curve. Did anyone in history truly understand this? They kept saying that calculus was about finding the area under a curve. I could never grasp what exactly was meant by 'area under the curve.'
However, the beauty of the stock market is that you don't need to deal with any of these concepts. If you've studied fifth-grade math, you can perform well in the stock market. The math involved in the stock market is quite straightforward.
You don't need to use a computer. Some say the computer age has ruined the stock market. I mean, if computers could determine which stocks to buy and which to avoid, all you'd need to do is spend some time on a Cray supercomputer.
Fourth, spend 15 seconds reviewing the balance sheet.
But you must scrutinize the balance sheet. Almost every company I have invested in and profited from had solid financials. It only takes 15 seconds to assess a company’s financial health. You look at the left side of the balance sheet, then the right side. If the right side is a mess and the left side looks questionable, it won’t take long to realize that the company isn’t worth your investment. If there is no debt in sight, you know the company is fairly reliable.
When I first entered this field, quarterly balance sheets were unavailable. Now, you can obtain a balance sheet for each quarter. Previously, companies didn’t disclose the maturity dates of their debts. Now they are required to list all debt maturities, allowing you to see how much they owe to banks.
I assume there are a few bankers here today. There’s a vast difference between having money for 30 years and a 30-year bank loan. You know how banks operate—they only support you when things are going well. When business is thriving, they wine and dine you and offer all kinds of loans, but as soon as you experience several quarters of poor performance, they want to call in their loans, never offering help during tough times.
However, you can read the balance sheet. You can analyze whether a company carries debt. Or perhaps you discover the company does have $30 million in debt, but it doesn’t mature for another 30 years.
Fifth, study the stocks you plan to purchase just as you would research a microwave oven.
When I was fortunate enough to buy Chrysler, the company had $1 billion in cash and no debt maturing within three years. They were breaking even and generating positive cash flow. Therefore, even for cyclical companies, it's worth taking a minute to examine the balance sheet.
I find it astonishing that people will compare ten refrigerators before making a final purchase. They check reviews of different refrigerators in Consumer Reports, and visit fifteen stores. But for some reason, they find the stock market so mysterious that they don't realize there is no chance of making money by following a taxi driver's tip and investing $10,000 in a biotech stock.
The worst-case scenario is that the stock price rises by 30% after they buy it, prompting them to invest an additional $20,000; the best-case scenario is that the stock price falls by 30% over the next three months.
This situation is truly surprising. When people lose money on stocks, they blame program trading and attribute their losses to institutions: 'It's those damn institutions that made me lose money.' But if you buy a refrigerator and later discover it's defective, you'd say, 'I'm such an idiot. I should have done more research. The refrigerator I bought was substandard.'
Two days later, these same people spent an hour and a half buying round-trip tickets to Hawaii to save $98. People are very careful about these things, but when it comes to stocks, they become extremely careless.
Research the stocks you plan to buy as thoroughly as you would study a microwave oven. This approach to investment will yield better returns in the stock market.
Sixth, you can only know which stocks are great in hindsight.
Great stocks are always unexpected. There is no doubt about it. If anyone who bought Walmart knew they could make 500 times their investment, I would think they were an alien. It is impossible to know in advance which company will be great.
You buy a good company, look back at the stock’s performance over the past eight, ten, or even twelve years, and say, 'Wow, look how much money I've made.' But you'll never know in advance how much you'll earn or lose. You can only know your gains or losses after the fact.
It's the same with houses. Many people bought homes in the 1960s. Caroline and I bought a house for $40,000 at that time. Later, housing prices soared. When we bought it, no one told us we’d make a lot of money. Looking back at the 1960s, no one said, 'Buy a house, it’s a great investment, and you'll make a fortune.' See, fifteen years passed, and housing prices surged significantly. It was completely unexpected.
However, over the past four to five years, people have been aggressively purchasing real estate—their second homes—believing they would make a fortune from it. That approach does not work.
The same goes for stocks. I bought a retail company in Massachusetts called Stop & Shop. When I purchased it, its dividend yield was 7%. The stock's performance was mediocre, and at the time, I thought I might make a 30% return.
Four months later, after conducting more research, I found that the company performed exceptionally well after acquiring Bradlees. At this point, Walmart still could not compete with Bradlees.
Bradlees began entering Walmart’s markets. However, the entire northeastern market belonged to them. Bradlees is a discount warehouse store and is currently performing very well. They transformed Stop & Shop’s business model by introducing Super Stop & Shop. They did an excellent job. Over 11 years, the stock price rose to 15 times its original value.
For me, this was completely unexpected. However, as the company continued to improve, I kept holding onto the stock.
Seven: Retail investors have significant advantages.
In terms of stock investment, retail investors absolutely possess incredible advantages. Some retail investors work in the chemical industry, while others are employed in the papermaking sector. They will learn about changes in the chemical industry’s conditions nine months ahead of me. They are the first to know when there is a shortage of chlorine. They can be the first to know when corrosive agents are out of stock. They are the first to know when inventories are sold out. Yet they go and buy biotechnology stocks.
They also know that it takes five to six years to build a chlorine plant. Nowadays, in the United States, obtaining environmental approval for even a bowling alley is challenging, let alone a corrosive chlorine plant. People can access a lot of information about the industries they are involved in.
One of my favorite examples is SmithKline Beckman. It is a relatively small pharmaceutical company that invented the ulcer treatment drug Tagamet. Until then, surgery was the only option for treating ulcers.
A drug like Tagamet is extremely beneficial for a company. A bad drug is one where you take it, your illness goes away, you say thank you, and pay a $4 diagnostic fee, and that’s it. But with Tagamet, you have to keep taking it; otherwise, the ulcer returns.
The stock price of this company rose to 15 times its original value. Before they acquired Bicheng Instruments, it was called Sike.
You didn’t need to buy this company when Tegamet was still in clinical trials. You didn’t even need to buy it when it first went public. However, when your relatives and friends used this drug and found it effective for treating ulcers, that’s when you should have bought it. Just imagine all doctors prescribing this drug and all pharmacists dispensing it, and you’ll know how good this investment is.
How many people here have ever received stock tips about pharmaceutical companies from a doctor? How many have received tips about oil or electronics companies from a doctor?
I once received an excellent tip from the vice chairman of Holiday Inn. About 12 or 13 years ago, he told me about a motel company in Texas called LaQuinta. He said, 'They beat us. Their product is great. Their operations have expanded beyond San Antonio, and they’re doing well.' It turned out to be an excellent stock.
Every few years, you only need to invest in a few stocks with which you have extensive information to achieve good returns. You just need to focus on a specific area and buy familiar local companies.
There was a firefighter in Wilbraham, Massachusetts, who didn’t know much about the stock market. But he had a good theory. He noticed two companies in their town continuously expanding their factories, so he invested $1,000 annually in these two companies’ stocks for five consecutive years. As a result, he became a millionaire.
He didn’t read The Wall Street Journal, nor did he read Barron's, and he didn’t have a Cray computer. He simply observed that the companies were growing and concluded that they must be performing well. They were remarkable local companies.
Retail investors have certain advantages, and I really want to emphasize this point. Retail investors often feel like amateur basketball players competing against the Los Angeles Lakers, thus having no hope of winning. This is entirely wrong. Retail investors have many specific advantages.
8. Professional Investors – An Incredible Contradiction
I know you’ve heard the often-quoted oxymoron 'jumbo shrimp.' I’ve always liked that one. Since I served in the military for two years, another oxymoron I like is 'military intelligence.'
However, the term 'professional investor' is itself a classic oxymoron. Professional investors are subject to all sorts of biases—they only buy large-cap stocks, they only invest in companies with long histories, and they avoid companies with unions.
I once held shares in companies with unions, and they brought me substantial returns. They also avoid stocks in no-growth industries, but we have achieved excellent returns in such sectors. I have bought shares of bankrupt companies and those on the verge of bankruptcy. These investments were not pleasant experiences. You might find it hard to believe the biases of professional investors—some won't even buy companies whose names start with the letter Y, and so on.
Moreover, there is one crucial rule that professional investors adhere to. If you are a professional investor, you will be fine if you lose money on universally recognized blue-chip stocks, but if you incur losses on other stocks, you could face serious trouble.
For instance, if you lose money on IBM, everyone will ask, 'What's wrong with IBM?' But if you lose money on Taco Bell or LaQuinta Motels, they will say, 'What’s wrong with you?' If you lose money on companies like the latter, you’ll be shown the door. However, you can keep losing money on IBM, Minnesota Mining, or Kodak without facing consequences.
9. There will always be something to worry about.
The last factor to consider is that there will always be something to worry about. You must ask yourself, 'What is my tolerance for pain?' If you plan to enter the stock market, you must be prepared to endure discomfort. There will always be significant issues causing concern.
I grew up during the 1940s and 1950s when the stock market performed poorly in the 1940s. People were genuinely afraid of another depression. The more serious and concerned individuals were the nation’s leaders, who believed the only reason we emerged from the Great Depression was World War II. They felt the country was so unstable that if another depression occurred, society would collapse entirely.
Later, there was the fear of nuclear war. In the 1950s, people went crazy building fallout shelters and stockpiling canned goods. Tens of thousands of fallout shelters were constructed.
During the 1950s, people were reluctant to buy stocks because they feared nuclear war and the return of economic depression. Although the 1950s were not particularly glorious years, the Dow Jones Industrial Average still tripled. Ordinary stocks also rose threefold despite widespread concerns about major issues during this period.
More than a decade ago, I vividly remember oil prices surging from $4/barrel or $5/barrel to $30/barrel. Everyone predicted that oil would reach $100/barrel, triggering an economic depression and global collapse.
Three years later, the price of oil fell to $12 per barrel. At that time, people were saying that oil prices would drop to $2 per barrel and that we would face a depression. I’m not joking; it was the same group of people saying this. People were worried that the decline in oil prices would lead to large-scale defaults on oil-related loans.
Later, what people worried about was the growth of the money supply. Do you remember? The data on the money supply was usually released on Thursday afternoons. We all waited to see the latest figures. No one really knew what these figures meant. But they would say things like the growth of M3 is flat, and the growth of M2 is declining, etc. Everyone was extremely concerned about the growth of the money supply.
But this had nothing to do with Melville Company. Melville Company's profits increased for 42 consecutive years, HJHeinz’s profits rose for 58 consecutive years, and Bristol Meyers’ profits grew for 36 consecutive years without any debt. Do you think these companies care about the money supply? People were worrying unnecessarily.
Now people are starting to worry about the ozone layer and global warming. If this is the reason stopping you from buying good companies, then you have a problem. In fact, if you read the Sunday newspaper, the news is so depressing that you probably wouldn’t want to go to work on Monday.
You have to listen to me—this is a great country. Over the past 10 years, we have added 25 million jobs despite large corporations cutting 1 million jobs. After World War II, we experienced eight recessions. There will be more recessions ahead. Over the past 70 years, the stock market has fallen by more than 10% on 40 occasions. We will experience more declines.
But if you are going to keep worrying about these things, then you should keep your money in a bank or a money market account.
Ten, investing is really simple.
Therefore, you need to find some companies about which you have a lot of information and can understand, and then just stick with those companies. That’s all there is to it.
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Editor/jayden