Peter's Principle #12
A sure cure for taking a stock for granted is a big drop in the price.
Like many people who trade shares with great initial success, Lynch had attained something of a
God complex thinking he was immune to the lumps and bumps of the market. He is referring to
the shocks of 1978 and 1987, where big falls provided the necessary kick in the pants to remind
him of who the real boss is. This point should be made to everyone who just got a Sanford
account in the middle of the last bull market, sometimes good luck can mask bad skill.
Peter's Principle #13
Never bet on comeback while they're playing "Taps".
For those that don't get it, "Taps" is the name of that bugle tune they play at military funerals. This
point deals with the idea of buying something just because the share price has fallen. Carefully
investigate each purchase as if it were a new stock, ignore the history if the situation has
obviously changed. As Lynch says, there is no shame in losing money on a stock. Everybody
does it. What is shameful is to hold on to a stock, or worse, to buy more of it, when the
fundamentals are deteriorating.
Peter's Principle #14
If you like the store, chances are you'll love the stock.
One of Lynch's favorite stock picking techniques is to take his wife and kids shopping at a large
shopping centre. There you can see for yourself what chains are doing well, before the annual
report. Many shops that are starting out as franchises have not yet been noticed by the stock
market, even if they are listed. To do this kind of research he'd give his daughters some pocket
money and see where they spend it, which usually led him to a discount clothing store like the
Gap (an American jeans store turned popular general clothing store), which was always packed
with kids making big purchases. What better operation could there be than an extremely
profitable store just going franchise that is about to expand all over the country? Lynch loves
these stocks, retail operations that go absolutely wild after a few years listing producing what
Lynch aptly names "Ten-Baggers" - stocks with a 1000% price increase or better! His kids also
help him by telling him what drinks are popular these days, leading him often to some small
operation making a niche range of products that gains similarly. Of course once he gets back to
the office he always checks up on the PE ratio and debt levels, which is what stopped him
investing in "The Body Shop", on a 40+ PE which was too rich for his tastes even with such rapid
expansion. Clearly investing in this sort of thing beats buying some riverboat casino or
speculative technology issue recommended by a generic Uncle Harry.
Peter's Principle #15
When insiders are buying, it's a good sign - unless they happen to be New England
bankers.
When management people make large purchases of their own stock with private funds, you know
that the insiders feel the company is undervalued, or that something big is about to happen. The
bankers comment refers to the silliness of the management of a number of Texas and New
England banks who violated principle #13, buying substantial holdings almost right up to the day
the banks closed their doors for good.
