“The junior high schools and high schools of America have forgotten to teach one of the most important courses of all. Investing. This is a glaring omission. Home economics we teach: how to sew, how to cook a turkey, even how to stick to a budget and balance a checkbook. What’s often left out is how saving money from an early age is the key to future prosperity.” – Peter Lynch
When one starts on an Investment Safari, I recommend this Book as the Name, “Learn to Earn- A Beginner’s Guide to Basics of Investing and Business”.
Peter Lynch is an Investment Guru, one of the best Mutual Fund Manager of US based Fidelity Magellan Fund. Since the time he took over in 1977, till 1990 when he retired, that fund grew from $18 million in assets to $14 billion. The share of the Magellan fund increased 900% in value – a 29.2% annual return – and outperformed the stock market by 13.4% annually. This proves beyond doubt that Peter Lynch is an Investment Legend and hence is recommended as the First Book to read for “Financial Wellness”.
The opening chapter is a “Short History of Capitalism” and engrossed me. There are three stories which are very compelling. One is the Mississippi Company, which was initiated by a Scottish dealer, John Law. He started hobnobbing with the Royal Family and soon was trusted by King Louis XV of France, who gave complete control over the Royal Bank of France, along with the royal printing press. Soon he floated Missisipi Company. Its purpose was to bring back fantastic treasures of Gold and Silver deposits from the vicinity of the Mississippi River. There was hardly anyone in France, who had not bought the shares of Missisipi Co. Whenever crowds of people bet their life savings on a hopeless proposition, it’s called a “mania” or a “bubble.” French People lost their life’s savings, the French economy collapsed, and the banking system collapsed. A Similar version happened with a Company called South Sea, in 1720 when it promised to pay the lend the British government enough money to wipe out its entire national debt for 5%. There was so much demand for these South Sea shares that the price tripled overnight, before the British Parliament had approved the debt deal. When the bubble finally burst, the English suffered the same fate as the French. The price of South Sea shares took a nosedive, crowds of people lost their life savings, and the British financial system was on the brink of collapse. Sir Isaac Newton was caught in the bubble and lost a lot of money. “I can calculate the motions of heavenly bodies,” he said, “but not the madness of people.” Even today, the tenets of investing remain the same – Never invest in things that you don’t understand. Never just blindly repeat the investment strategy of the people at the country club.
Mention is also made of Adam Smith and his “Wealth of Nation” and the Invisible hand. “The Invisible Hand keeps the supply and demand of everything from bubblegum to bowling balls in balance. We don’t need a king, a Congress, or a Department of Things to decide what the country should make, and how many of each item, and who should be allowed to do the manufacturing. The market sorts this out, automatically.
He briefly also discusses the development of “Dow Jones Average” which started in 1884 and makes a very pertinent observation. “This is an important lesson for investors. Business is like sports, in that the winning teams and successful organizations don’t necessarily stay on top forever.”.
In the Chapter on the Basics of Investing, he makes an appeal to stay away from buying on Credit cards and the “Instant Gratification”. He talks about the good old days, when Diners had not invented the Credit Card, people used to save, used to talk about buying a TV and entertain themselves visualizing their purchase of a TV set. He gives a simple message, spend less than you earn, do it now, and invest the remainder. He also urges the youth to start their savings and investment journey early and see their wealth grow through the power of compounding. He also gives various options to invest in. He gives a very clear message, in the book, “Have you heard the old expression “Time is money”? It ought to be revised to “Time makes money.” It’s a winning combination. Let time and money do the work, while you sit back and await the results.
Further, he documents the journey of a company. It describes all the phases of the company from its formation, inside someone’s head until it’s a publicly traded “value” stock, subject to the cycles. Most people view stocks as a price prediction game and neglect the idea that stocks represent real companies that grow and mature and change. Take Apple, for instance. Once upon a time, it was two guys in a garage. In the early 1980s, it was growing like rock star after a huge IPO, clearly a growth stock. It stagnated in the late 1980s and 1990s, then turned back into a growth stock again recently. It was born, grew up, had a midlife crisis, and made some changes. At each stage of the company’s life, the risks and rewards of investing were different – it was a growing stock, a steady stock, a value stock, and a growth stock again at various points along the way. Lynch does a great job of explaining this relationship of a company to its stock, making the connection very clear.
He lists three kinds of companies: companies that have kept growing for decades like McDonald’s; companies that had lost their way before the hero arrived to turn them around like Chrysler; companies that were doing OK but then got a second wind and accomplished amazing things, for example IBM. Lynch believes that leadership is the single most important aspect of any company’s success and traces the growth of the company with its heroes.
Peter Lynch’s style is very lucid and simple at the same time very engaging and for a young executive or a college graduate who wants to make it big in the Investment world it is indeed the first book he/she must read.
Quintessential Indian 