Discover more from The Global Guru
Week #42 Peter Lynch’s 13 Rules; Is China the Next Japan?; YOLO Traders RIP
SBF’s “Infinite” Bullshit; Revisiting “Davie Daytrader”
Today at a Glance:
One Quote: Peter Lynch’s 13 Rules for a Perfect Stock
One Meltdown: Is China the next Japan
One Game Over: YOLO Traders RIP
One Book: “Infinite” Bullshit”
One Video: Revisiting Davie Daytrader
Peter Lynch’s 13 Ingredients for the Perfect Stock
“If you find a stock with little or no institutional ownership, you’ve found a potential winner. Find a company that no analyst has ever visited, or that no analyst would admit to knowing about, and you’ve got a double winner.”
Peter Lynch is one of the most highly respected investors of all time.
During his career at Fidelity Investments, Lynch was the firm's Magellan Fund manager from 1977 to 1990, averaging a 29.2% annualized return.
His successful 1989 book One Up on Wall Street reveals Peter Lynch’s 13 ingredients for the perfect stock.
1. It Sounds Dull – or Even Better, Ridiculous
Peter Lynch mentions Automatic Data Processing (ADP) and Bob Evans Farms as perfect companies because they sound boring. (Take a look how “boring” Warren Buffett’s privately held businesses are)
2. It Does Something Dull
Look for companies that do basic things—something you wouldn't be excited to brag about at a cocktail party.
3. It Does Something Disagreeable
Not many people want to brag about their investments in tobacco stocks. But historically, it's been a very profitable place to invest.
4. It’s a Spin-off
Lynch was a big fan of spin-offs as they historically outperform. This was Joel Greenblatt’s insight as well.
5. Institutions Don't Own It, and Analysts Don't Follow It
Lynch writes, "If you find a stock with little or no institutional ownership, you've found a potential winner. Find a company that no analyst has ever visited or would admit to knowing about, and you've got a double winner."
6. Rumors Abound: It’s Involved with Toxic Waste and/or the Mafia
The mafia has long dominated the waste management industry. This taint discouraged investors from investing in this profitable sector.
7. Something is Depressing About It
Best example? Funeral companies such as Service Corporation International (SCI). This stock is up over over 10x since going public.
8. It’s a No-Growth Industry
The last decade has been all about investing in high-growth industries. Investing in an industry such as bottle caps, coupon clipping, or motels is better.
9. It’s Got a Niche
It’s best to invest in companies with a niche or wide moat. Preferably one that’s difficult to cross
10. People Have to Keep Buying It
Gillette, acquired by Proctor & Gamble (PG) in 2005, is a money machine. Everyone has to shave.
11. It’s a User of Technology
Don’t buy a company that manufactures scanners. Buy the grocery stock that can utilize the scanner to save costs.
12. Insiders Are Buying
Generally, insiders sell 2.3 shares for every share that they buy, according to Peter Lynch. Don't be too concerned with insider selling. There is only one reason an insider will buy: they think the stock is undervalued.
13. The Company Is Buying Back Shares
When a company buys back its stock, it reduces its share count, increasing earnings per share.
As it turns out, most companies that meet these criteria are small or microcap stocks. These small stocks also made up the bulk of Fidelity Magellan’s portfolio during Lynch’s tenure.
They overlap with the stocks I will be recommending in my upcoming investment service Microcap Moonshots.
You can learn more about what it takes to be a successful microcap investor by downloading this free Special Report: The 10 Commandments of Microcap Moonshot Investing.
Is China the Next Japan?
When Japan's historic bubble went bust in 1989, the hangover lasted over a decade.
Share prices cratered by 60% in three years. The Nikkei's plunge wiped out nearly $3 trillion in wealth. Once-coveted golf club memberships crashed 94%.
With debts swelling, "zombie firms" clung to life by prioritizing minimizing debt over maximizing profits.
Companies had borrowed heavily to speculate on assets. However, soon, liabilities exceeded deflated asset values. Still, enough revenues flowed to service debts. This created zombie firms too alive to die yet too debt-laden to thrive.
Economist Richard Koo famously dubbed this a “balance sheet recession.”
Japanese companies focused on deleveraging balance sheets rather than expanding business. The collective belt-tightening consigned Japan to an era of deflationary decay.
Today, fears are that China may enter a "balance sheet recession" trap that condemned the Japanese economy to decades of stagnation.
According to Koo, Chinese firms face an even heavier debt overhang than Japan. Meanwhile, as property prices sink, anxious households are slashing debts. This drains vitality from China's financial system just as it did in Japan.
Yet China could still escape Japan's fate, says Koo. Unlike decentralized Japan, Beijing retains more significant control over companies. It can orchestrate orderly debt workouts. It won't allow companies to fall like dominos.
To sidestep the crisis, Koo prescribes strong fiscal medicine. Beijing must flood stimulus fast before households and firms. It must not retreat into Japan's "self-defeating cycle of minimizing debts rather than maximizing profits."
In sum, China may still have a chance to break free of the "balance sheet recession" that entrapped Japan for a generation.
I see little reason to bet on either outcome. I’m far more comfortable betting in companies in America’s industrial heartland.
One Game Over
YOLO Traders RIP
The thrill of the stock market bull run has faded for many retail investors in 2022.
Three crucial factors explain why retail traders have kicked the stock market habit.
First, searing losses from the 2022 downturn have chastened "YOLO" traders. Speculators who gorged on risky bets during the pandemic rally are nursing massive wounds. Many a meme stock or Cathie Woods’ Arkinvest Investor’s euphoria turned to pain as their overleveraged portfolio cratered.
Second, trading is far more problematic in a falling market. What worked in a bull run flounders in choppy seas. Trading isn't the easy livelihood it once seemed to be. Yes, traders made a mint as stocks marched higher almost daily during the rally. But chasing dips in 2023 has repeatedly has crushed the bank accounts and egos of trading newbies..
Third, high-interest rates have pushed small investors toward cash. Traders pivoted from betting on stocks to capital preservation. Inflows into treasuries have exploded. Trading volumes are plunging at leading retail brokerages. Burned speculators now crave the stability of fixed income over meme stocks' stomach-churning volatility.
Together, chastening losses...vanishing trading gains....and a newfound love of cash put a damper on individuals' risk appetite.
The thrills and easy winnings of the bull market mania have evaporated for now.
Yet, as John Kenneth Galbraith noted: "The financial memory is very short."
It may take a few years. But small retail investors will be back.
I'm halfway through Michael Lewis's new book- “Going Infinite: The Rise and Fall of a New Tycoon”- on crypto exchange FTX's spectacular collapse and the enigmatic founder, Sam-Bankman Fried (SBF)
At his peak, SBF was the world’s youngest billionaire. CEOs, celebrities, and leaders of small countries all vied for his attention. He catapulted, practically overnight, onto the Forbes billionaire list.
I have three short takeaways.
First, socially dysfunctional, SBF is just a weirdo. From his gaming addiction to his hate of books to his unrelenting solipsism, there’s not much redeeming about this deluded man-child.
Second, it boggles my mind how leading Silicon Valley VC investors bought into his BS. Some even predicted he would become the world’s first trillionaire. Shame on them.
Third, the whole affair is a terrific fable of how money corrupts. Even “effective altruists” are motivated by money.
The whole saga is an age-old reprise of a familiar tale of boom and bust.
John Law, the father of the Mississippi Bubble in France in 1720, lived out his days in poverty in Venice.
SBF will meet the same fate. Except he will expire playing a video game in a Brooklyn prison.
Meanwhile, enjoy this video from Kevin O’Leary (“Mr. Wonderful”) defending his $10 million loss in FTX.
Revisiting “Davie Daytrader”
“Never confuse brains with a bull market.”
Dave Portnoy - founder of Barstool Sports- may be a successful businessman.
However, business success does not translate into market success.
This video tracks his evolution from self-proclaimed market genius to throwing in the towel on trading.
This compilation has gathered a shockingly low 3.2K viewers on YouTube.
When in fact, as one commentator put it: “This should be in a museum.”