Strategies for Stock Selection Class Notes

PETER LYNCH FORMER PORTFOLIO MANAGER FOR FIDELITY MAGELLAN FUND “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.” 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 A project must have customers today and even more tomorrow or it isn’t growing. Phase of Development 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 Is the economy expanding or slowing? The performance of many stocks will be affected by economic cycles. 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 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. 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 Front page companies and this year’s highest profits? Why? Too much attention means too many people want to buy it… this will drive price of stock up too high

AVOID OBVIOUS RISKS 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 When Steve Jobs passed away, people were concerned about Apple’s ability to innovate without one of their best creative minds.

“Pay Attention to Depth” 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.