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The Science of Hitting
The Science of Hitting
Articles (675) 

Peter Lynch - Stocks To Avoid

December 23, 2014 | About:

The last article I wrote discussed the key attributes that Peter Lynch looks for in the

About the author:

The Science of Hitting
I desire to own high-quality businesses for the long-term. In the words of Charlie Munger, my preferred approach is "patience followed by pretty aggressive conduct." I run a concentrated portfolio, with the top five positions accounting for the majority of its value. In the eyes of a businessman, I believe this is sufficient diversification.

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judi brockman
Judi brockman - 5 years ago    Report SPAM

It is Christmas Day at 10:00 est., and I have been "lucky" to hit on this article.

This is the" best article" I have ever read on investing and, even, business in general. As a female "baby-boomer", I own a small business in America and have been very successful...but, along the way, I have definitely made mistakes { luckily none major}.

Everything you quote and say is so true!!!

Like you said, I wish I had known all this when I started investing. You have related these thoughts in "perfect perspective", I have read it three times and I am going to try to copy it if it will let me. Thank You! Thank You! Thank You! judi...Merry Christmas!

jtdaniel
Jtdaniel premium member - 5 years ago

Hi Science, excellent article. Mr. Lynch's warning about buying the hottest stock in the hottest industry brought back memories of the late 1990s, when many acquaintances who had little prior interest in the stock market were suddenly throwing their savings at Dell, AOL, Cisco, etc. Ordinary people began taking early retirement from lucrative professions in order to trade such stocks. I was too skeptical for that, but I do remember buying Microsoft (MSFT) on a pullback in 1998 and getting a double in just a few weeks. It seemed too easy to be real life, so I sold my MSFT a bit early and watched it continue to ascend. And then in March 2000, the US government announced an anti-trust investigation of MSFT and the jig was up - for basically the entire NASDAQ. MSFT was dead money for more than a decade, despite delivering consistently great business results. Folks that had to retun to work found that a bear market is an excellent leading indicator of an economic recession (a good warning against over-confidence in this bull market - interest rates don't always fall and dividends don't always rise).

I think of Face Book (FB) as being somewhat similar to Microsoft and Cisco Systems in the late 1990s - a great business with an over-priced stock. GF numbers show Face Book trading at nearly 77 times earnings. This looks almost reasonable, considering that FB has tremendous margins and has grown free cash flow at 69% since 2010. The catch is that FCF just can't perpetually grow at anywhere near 69%, and this level of growth is already in the price. In other words, I find no margin of safety for an investment return and see today's Face Book investor at the mercy of Mr. Market's mood swings.

The Science of Hitting
The Science of Hitting - 5 years ago    Report SPAM

Judi: I'm glad you like the article! You're welcome, you're welcome, you're welcome! :) And feel free to do as you please with the article, as long as you reference back to GuruFocus - it's a great site that deserves mention for bringing together a unique group of value investors for discussions that are uncommon on other websites (in my experience). I hope to hear from you again on future articles!

The Science of Hitting
The Science of Hitting - 5 years ago    Report SPAM

Jtdaniel: Interesting perspective; I wasn't investing during that period so it's always great to hear the memories of someone who actually expereienced it first hand. I can't imagine friends quitting their jobs to trade stocks as I begged them to consider otherwise - then to watch their funds go up 2x or more in weeks / months; as you note, too easy to be real life. Here's something I just read in "Zero to One" (Peter Thiel's book): in the middle of March 2000, the Nasdaq peaked at 5,048; by the middle of April (a few weeks!), it was down to 3,321; by October 2002, it was all the way down to 1,114. More than twelve years later, we're still not back to the peak. I'm sure a lot of people learned a very tough lesson about how expensive it can be to gamble in the stock market in the ~30 months from March 2000 - October 2002. As always, thanks for the comment!

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