Peter Lynch casually mentions Warren Buffett in all of his 3 books

When good people goes into searching for better ones, bad ones confine themselves to staying with bad ones.

Disclaimer:

This article is for informational purposes only and represents the author's own opinions. It is not a formal recommendation to buy or sell any stock, as the author is not a registered investment advisor. Please do your own due diligence and/or consult a financial professional prior to making investment decisions. All investments carry risk, including loss of principal.

Warren Buffett’s admonition that people who can’t tolerate seeing their stocks lose 50 percent of their value shouldn’t own stocks also applies to stock funds.

…

As I study these reports now, I realize that many stocks that I held for a few months I should have held a lot longer. This wouldn’t have been unconditional loyalty, it would have been sticking to companies that were getting more and more attractive. The seller’s remorse list includes Albertson’s, a great growth stock that became a 300-bagger; Toys “R” Us, ditto; Pic ’N’ Save, already mentioned; Warner Communications, which a technical analyst, of all things, talked me out of; and Federal Express, a stock I bought at $5 and promptly sold at $10, only to watch it soar to $70 in two years.

By abandoning these great companies for lesser issues, I became a victim of the all-too-common practice of “pulling out the flowers and watering the weeds,” one of my favorite expressions. Warren Buffett, renowned for his investing acumen as well as his skill as a writer, called me up one night seeking permission to use it in his annual report. I was thrilled to be quoted there. Some investors, the rumor goes, own a share of Buffett’s Berkshire Hathaway company (these cost $11,000 apiece) simply to get on the mailing list for Buffett’s reports. This makes Berkshire Hathaway the most expensive magazine subscription in history.

…

For years, the inspiration for all the Jimmy Stewart S&Ls has been Golden West, based in Oakland, California. Golden West owns and operates three S&L subsidiaries, all of them run by a delightful couple, Herb and Marion Sandler. They have the equanimity of Ozzie and Harriet and the smarts of Warren Buffett, which is the perfect combination to run a successful business. Like Ozzie and Harriet, they’ve managed to avoid a lot of unnecessary excitement. They avoided the excitement of investing in junk bonds that defaulted and commercial real-estate ventures that defaulted, both of which enabled them to avoid the excitement of getting taken over by the Resolution Trust Corporation.

…

I noted that great investor Warren Buffett owned 2.2 million shares in Fannie Mae.

…

If you invest $500 a year in stocks instead of putting it in the bank, the money gets a chance to do you an even bigger favor, while you’re off someplace living your life. On average, you will double your money every seven or eight years if you leave it in stocks. A lot of smart investors have learned to take advantage of this. They realize that capital (money) is as important to their future as their own jobs (labor).

Warren Buffett, America’s second-richest person at present count, got there by saving money and later putting it into stocks. He started out the way a lot of kids do, delivering newspapers. He held on to every dollar he could, and at an early age he understood the future value of money. To him, a $400 TV set he saw in the store wasn’t really a $400 purchase. He always thought about how much that $400 would be worth twenty years later, if he invested it instead of spending it. This sort of thinking kept him from wasting his money on items he didn’t need.

If you start saving and investing early enough, you’ll get to the point where your money is supporting you. It’s like having a rich aunt or uncle who sends you all the cash you’ll need for the rest of your life, and you never even have to send a thank-you note or visit them on their birthdays. This is what most people hope for, a chance to have financial independence where they’re free to go places and do what they want, while their money stays home and goes to work. But it will never happen unless you get in the habit of saving and investing and putting aside a certain amount every month, at a young age.

…

Without realizing it, they’ve fallen into the trap of trying to time the market. If you told them they were “market timers” they’d deny it, but anybody who sells stocks because the market is up or down is a market timer for sure.

A market timer tries to predict the short-term zigs and zags in stock prices, hoping to get out with a quick profit. Few people can make money at this, and nobody has come up with a foolproof method. In fact, if anybody had figured out how to consistently predict the market, his name (or her name) would already appear at the top of the list of richest people in the world, ahead of Warren Buffett and Bill Gates.

Try to time the market and you invariably find yourself getting out of stocks at the moment they’ve hit bottom and are turning back up, and into stocks when they’ve gone up and are turning back down. People think this happens to them because they’re unlucky. In fact, it happens to them because they’re attempting the impossible. Nobody can outsmart the market.

…

Not all your stocks will go up—no stockpicker in history has ever had a 100 percent success rate. Warren Buffett has made mistakes, and Peter Lynch could fill several notebooks with the stories of his. But a few big winners a decade is all you need. If you own ten stocks, and three of them are big winners, they will more than make up for the one or two losers and the six or seven stocks that have done just OK.

If you can manage to find a few triples in your lifetime—stocks that have increased threefold over what you paid for them—you’ll never lack for spending money, no matter how many losers you pick along the way. And once you get the hang of how to follow a company’s progress, you can put more

money into the successful companies and reduce your stake in the flops.
You may not triple your money in a stock very often, but you only need a few triples in a lifetime to

build up a sizeable fortune. Here’s the math: if you start out with $10,000 and manage to triple it five times, you’ve got $2.4 million, and if you triple it ten times, you’ve got $590 million, and 13 times, you’re the richest person in America.

…

There weren’t as many old-money fortunes on the 1993 list as there were in the 1980s, which leads to a couple of conclusions about wealth in America. First, it’s not easy to hold on to money, even among billionaires. Inheritance taxes put a big dent in any large fortune that’s handed down from one generation to the next. Unless the heirs are careful and invest wisely, they can lose their millions as fast as their ancestors made them.

Second, America is still the land of opportunity where smart young people like Bill Gates of Microsoft can end up on the Forbes list ahead of the Rockefellers, Mellons, Gettys, and Carnegies.

Just ahead of Gates on the 1993 list is Warren Buffett, who made his $10 billion doing what you’re interested in doing (or you wouldn’t have gotten this far in the book)—picking stocks. Buffett is the first stockpicker in history to reach the top.

Buffett follows a simple strategy: no tricks, no gimmicks, no playing the market, just buying shares in good companies and holding on to them until it gets very boring. The results are far from boring: $10,000 invested with Buffett when he began his career forty years ago would be worth $80 million today. Most of the gains come from stocks in companies you’ve heard of and could buy for yourself, such as Coca-Cola, Gillette, and the Washington Post. If you ever begin to doubt that owning stocks is a smart thing to do, take another look at Buffett’s record.

…

It may be that, as F. Scott Fitzgerald once wrote, the rich “are different from you and me,” but you

couldn’t prove it by the Forbes list. It turns out there are all kinds of rich people: short, fat, tall, skinny, good-looking, homely, high IQ, not-so-high IQ, big spenders, penny-pinchers, tight-fisted, and generous. It’s amazing how many people keep up their frugal old habits after they’ve made it big. Sam Walton, the Wal-Mart billionaire, who died a couple of years ago, could have bought a fleet of limousines out of his pocket change, but instead, he continued to drive around in a beat-up Chevy with dog teeth marks on the steering wheel. He could have moved to Paris, London, Rome, and other places where they film episodes of Lifestyles of the Rich and Famous, but he stayed with his wife in his two-bedroom house in their hometown of Bentonville, Arkansas.

Warren Buffett is another person who hasn’t let financial success come between him and his hometown of Omaha, Nebraska, and who still enjoys the simple pleasures of a good book and a bridge game. Gordon Earle Moore, a founder of Fairchild Semiconductor and a cofounder of Intel, arrives at the office in his old pickup every day. There are many such stories of self-made millionaires and billionaires living modestly, avoiding publicity, and working long hours even though they can pay the bills without lifting a finger. “Lives quietly” and “avoids press” are phrases that appear frequently in the descriptions of the Forbes four hundred.

These people are still doing whatever it was that led to their successes. There is a good lesson in this. Find something you enjoy doing and give it everything you’ve got, and the money will take care of itself. Eventually, you reach the point where you can afford to spend the rest of your life at the side of a swimming pool with a drink in your hand, but you probably won’t. You’ll be having too much fun at the office to stop working.

…

Today it’s the Internet, and so far the Internet has passed me by. All along I’ve been technophobic. My experience shows you don’t have to be trendy to succeed as an investor. In fact, most great investors I know (Warren Buffett, for starters) are technophobes. They don’t own what they don’t understand, and neither do I. I understand Dunkin’ Donuts and Chrysler, which is why both inhabited my portfolio. I understand banks, savings-and-loans, and their close relative, Fannie Mae. I don’t visit the Web. I’ve never surfed on it or chatted across it. Without expert help (from my wife or my children, for instance) I couldn’t find the Web.

…

And Warren Buffett, the greatest investor of them all, looks for the same sorts of opportunities I do, except that when he finds them, he buys the whole company.

…

The market ought to be irrelevant. If I could convince you of this one thing, I’d feel this book had done its job. And if you don’t believe me, believe Warren Buffett. “As far as I’m concerned,” Buffett has written, “the stock market doesn’t exist. It is there only as a reference to see if anybody is offering to do anything foolish.”

Buffett has turned his Berkshire Hathaway into an extraordinarily profitable enterprise. In the early 1960s it cost $7 to buy a share in his great company, and that same share is worth $4,900 today. A $2,000 investment in Berkshire Hathaway back then has resulted in a 700-bagger that’s worth $1.4 million today. That makes Buffett a wonderful investor. What makes him the greatest investor of all time is that during a certain period when he thought stocks were grossly overpriced, he sold everything and returned all the money to his partners at a sizable profit to them. The voluntary returning of money that others would gladly pay you to continue to manage is, in my experience, unique in the history of finance.

I’d love to be able to predict markets and anticipate recessions, but since that’s impossible, I’m as satisfied to search out profitable companies as Buffett is. I’ve made money even in lousy markets, and vice versa. Several of my favorite tenbaggers made their biggest moves during bad markets. Taco Bell soared through the last two recessions. The only down year in the stock market in the eighties was 1981, and yet it was the perfect time to buy Dreyfus, which began

its fantastic march from $2 to $40, the twentybagger that yours truly managed to miss.

Just for the sake of argument, let’s say you could predict the next economic boom with absolute certainty, and you wanted to profit from your foresight by picking a few high-flying stocks. You still have to pick the right stocks, just the same as if you had no foresight.

…

That’s not to say there isn’t such a thing as an overvalued market, but there’s no point worrying about it. The way you’ll know when the market is overvalued is when you can’t find a single company that’s reasonably priced or that meets your other criteria for investment. The reason Buffett returned his partners’ money was that he said he couldn’t find any stocks worth owning. He’d looked

over hundreds of individual companies and found not one he’d buy on the fundamental merits.

The only buy signal I need is to find a company I like. In that case, it’s never too soon nor too late to buy shares.

…

I always look for niches. The perfect company would have to have one. Warren Buffett started out by acquiring a textile mill in New Bedford,

Massachusetts, which he quickly realized was not a niche business. He did poorly in textiles but went on to make billions for his shareholders by investing in niches. He was one of the first to see the value in newspapers and TV stations that dominated major markets, beginning with the Washington Post. Thinking along the same lines, I bought as much stock as I could in Affiliated Publications, which owns the local Boston Globe. Since the Globe gets over 90 percent of the print ad revenues in Boston, how could the Globe lose?

…

U.S. Industries made 300 acquisitions in a single year. They should have called themselves one-a-day. Beatrice Foods expanded from edibles into inedibles, and after that anything was possible.

This great acquisitive era ended in the market collapse of 1973–74, when Wall Street finally realized that the best and the brightest were not as ingenious as expected, and even the most charming of corporate directors could not turn all those toads they bought into princes.

That’s not to say it’s always foolish to make acquisitions. It’s a very good strategy in situations where the basic business is terrible. We would never have heard of Warren Buffett or his Berkshire Hathaway if Buffett had stuck to textiles.

…

Why did Melville succeed while Genesco failed? The answer has a lot to do with a concept called synergy. “Synergy” is a fancy name for the two-plus-two- equals-five theory of putting together related businesses and making the whole thing work.

The synergy theory suggests, for example, that since Marriott already operates hotels and restaurants, it made sense for them to acquire the Big Boy restaurant chain, and also to acquire the subsidiary that provides meal service to prisons and colleges. (College students will tell you there’s a lot of synergy between prison food and college food.) But what would Marriott know about auto parts or video games?

In practice, sometimes acquisitions produce synergy, and sometimes they don’t. Gillette, the leading manufacturer of razor blades, got some synergy when it acquired the Foamy shaving cream line. However, that didn’t extend to shampoo, lotion, and all the other toiletry items that Gillette brought under its control. Buffett’s Berkshire Hathaway has bought everything from candy stores

to furniture stores to newspapers, with spectacular results. Then again, Buffett’s company is devoted to acquisitions.

If a company must acquire something, I’d prefer it to be a related business, but acquisitions in general make me nervous. There’s a strong tendency for companies that are flush with cash and feeling powerful to overpay for acquisitions, expect too much from them, and then mismanage them. I’d rather see a vigorous buyback of shares, which is the purest synergy of all.

…

A textile company may have a warehouse full of fabric that nobody wants, carried on the books at $4 a yard. In reality, they couldn’t give the stuff away for 10 cents. There’s another unwritten rule here: The closer you get to a finished product, the less predictable the resale value. You know how much cotton is worth, but who can be sure about an orange cotton shirt? You know what you can get for a bar of metal, but what is it worth as a floor lamp?

Look what happened a few years ago when Warren Buffett, the savviest of investors, decided to close down the New Bedford textile plant that was one of his earliest acquisitions. Management hoped to get something out of selling the loom machinery, which had a book value of $866,000. But at a public auction, looms that were purchased for $5,000 just a few years earlier were sold for $26 each—below the cost of having them hauled away. What was worth $866,000 in book value brought in only $163,000 in actual cash.

If textiles had been all there was to Buffett’s company, Berkshire Hathaway, it would have been exactly the sort of situation that attracts the attention of the book-value sleuths. “Look at this balance sheet, Harry. The looms alone are worth $5 a share, and the stock is selling for $2. How can we miss?” They could miss, all right, because the stock would drop to 20 cents as soon as the looms were carted off to the nearest landfill.

…

With Handy and Harman stock selling for around $17 per share, less than the value of the metals alone, is this a good asset play? Our friend Buffett thought so. He’s held a large position in Handy and Harman for several years, but the stock hasn’t gone anywhere, the company’s earnings are spotty, and the diversification program hasn’t been a rousing success, either. (You already know about diversification programs.)

Recently it was announced that Buffett is cutting back his interest in the company. So far, Handy and Harman looks like the only bad investment he’s ever made, in spite of its hidden asset potential. But if gold and silver prices rise dramatically, so will this stock.

…

Like the alcoholic enticed back into the gin bottle by the innocent tasting of beer, the stockpicker who invests in options as insurance often cannot help himself, and soon enough he’s buying options for their own sake, and from there it’s on to hedges, combinations, and straddles. He forgets that stocks ever interested him in the first place. Instead of researching companies, he spends all his waking hours reading market-timer digests and worrying about head-and- shoulder patterns or zigzag reversals. Worse, he loses all his money.

Warren Buffett thinks that stock futures and options ought to be outlawed,

and I agree with him.

…