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Strategies for Stock Selection
Class Notes
PETER LYNCH
FORMER PORTFOLIO MANAGER FOR FIDELITY MAGELLAN FUND
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“During a lifetime of buying cars or cameras,
you develop a sense of what’s good, what’s
bad, what sells, and what doesn’t and you
know it before Wall Street does.”
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Cautions that you should do your homework… if
you don’t know what a company does, then you
shouldn’t buy it.
If you use the product, other people probably
do—this can mean it is a good investment
MARKETS: CURRENT AND FUTURE
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A project must have customers today and even
more tomorrow or it isn’t growing.
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Phase of Development
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Early: company that puts a product or service on the market
for the first time, its sales are expected to grow rapidly
Late: company whose product has been on the market for a
while, its sales are no longer expected to grow rapidly
Global markets: Can the product/service be sold
overseas?
Demographics: What percentage of the population
will want this product?
ECONOMIC CYCLES
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Is the economy expanding or slowing? The
performance of many stocks will be affected
by economic cycles.
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Good times: Most people who want to work are
employed. People and businesses are spending
money.
Not so good times: More people than usual are
out of work People and businesses are not
buying as much.
ECONOMIC CYCLES
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Defensive stocks: Stocks that are relatively unaffected
by the business cycle. Even in difficult times people
use medicine, food, and public utilities. Show less
decline during recession and less growth during
expansion.
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These products are known as “necessities”
Examples: food, medicine, electricity, water
Cyclical stocks: Consumer goods that are popular.
Consumer goods that are significantly affected by the
business cycle. They show more decline during
recessions and more growth during expansions.
AVOID OBVIOUS RISKS
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Front page companies and this year’s
highest profits? Why?
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Too much attention means too many people want
to buy it… this will drive price of stock up too high
AVOID OBVIOUS RISKS
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Current industry conditions—how is the industry to which this
company belongs performing? Will government regulation slow
the industry?
Changes in technology—example—introduction of the Compact
Disc resulted in large profits for the music industry as listeners
replaced their old tapes with CDs.
Specific condition of the company During the past few months,
British Petroleum has been experience a lot of negative
attention due to the Gulf oil spill. This might make the company
a greater risk. However, if you buy it now and the stock
rebounds, it might create a large return.
“Pay Attention to Depth”
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You need to take a deeper look at the products that consumers want
to purchase in our country. Everyone in our country seems to have
the goal of beating their neighbors to have the best and most current
TV, cell phone and car. Therefore, the stock market investor may
want to invest in the large television companies, right? Wrong. The
player who makes the best investment is the one who finds the
company that may be supplying the large televisions corporations.
The “depth” may be something like the plastic manufacturing company
that is sending out the plastic for the front of the televisions. Since all
of the flat screen TVs need to have a similar plastic screen, the plastic
manufacturer will do well, regardless of whether one particular
television maker is doing well of not. The plastic company sells to
many different television companies.