Although investors can learn from Lynch’s 13 stock selection criteria and the “six no-investment” principle of avoiding and not buying in practice, in any case, investment still “cannot be simply applied”, and multiple factors still need to be comprehensively judged. Impact.
Entering the fourth quarter, especially at the moment of standing at the 3,000-point position of A shares, investors’ stock pool has reached the time of “saying goodbye to the old and welcoming the new”. Compared with the strange investment logic in the market, Peter Lynch, the former head of Fidelity Magellan Funds, has an investment philosophy of “simplification from the big road” that investors should study hard. He believes that investors need to use the simplest way to invest. Do the most complex investments, “The best place to look for 10x stocks is to start near your home. If you can’t find it there, look for it in the big shopping malls, especially where you work.”
For investors In addition to learning from Lynch’s 13 stock selection criteria, there is also a list of “six do not vote” stocks that he avoids and does not buy, which can also be used as a reference for hedging. “It cannot be simply applied”, especially the principle of “six no investment” in the A-share market still needs to be applied in combination with the actual situation of the A-share market. Only by making comprehensive judgments based on the specific industry characteristics and market environment of the target company can it truly improve own investment accuracy.
Lynch’s “Six No Shots”
In Peter Lynch’s many years of investing career, there are six main categories of stocks not to watch or to be cautious of: the hottest stocks in the hottest industries, companies touted as “next”, companies with “diversity deterioration”, and whispers stock, supplier stock that relies too heavily on big customers, companies with fancy names.
The first category that Peter Lynch mentions is “the hottest stocks in the hottest industries.” Lynch believes that no matter where investors are in a car, on a train, when people are keen to talk about a stock, then the stock may have reached a very emotional stage. And just because of the serious emotions, investors don’t pay attention to the fundamentals of this company. At the same time, investors are also caught in the blind optimism that this stock “only rises and does not fall”, and the most popular stocks often become “” “Cut leeks” is the happiest stock.
Lynch believes that when popular stocks rise, they will quickly rush to amazing heights of value, but once they fall, they will never fall slowly, nor will they stay too much at a so-called support level, but will make people feel uncomfortable. Surprised plunge. In this process, investors who buy because of the stock fever will certainly not be wise to sell early, and even if there is a short-term profit, it will quickly turn into a loss.
Lynch has experienced the madness of the carpet, oil services and other industries, and some of these stocks were once enthusiastically sought after by investors, but after the decline they became worthless. Take an oil service company named Brown as an example. Its stock price once reached $50 per share. The company’s CEO also publicly mocked investors who were bearish about the company. But four years later, the company’s stock price finally fell to $1. Investors who were equally bullish suffered heavy losses.
Lynch came to the conclusion of Brown’s observation that it was just a shell company with a pile of useless drilling rigs, a staggering amount of debt, and a disastrous balance sheet. “If you’re going to make a living by investing in the hottest stocks in the hottest industries that pop up one after the other, you’re going to have to be on welfare very soon to survive.”
The second category that Peter Lynch doesn’t vote for is companies that are touted as “next”, such as the next IBM, the next McDonald’s, etc. In the current A-share market, the most common ones are the next Maotai, the next BYD, etc. This is because many investors tend to selectively ignore the background and conditions of the era in which the “previous” was born, while they are touting the “next”.
Peter Lynch also devoted a great deal of space to discussing companies with “diversified deterioration”. In the capital market, “diversification” is a very common development strategy that is valued by listed companies, but very few companies are truly “diversified” and successful, and most of them are telling stories. A “diversified deterioration” company is a category of “diversified” companies that have experienced a deterioration in their operations because they had previously acquired new companies that were overpriced and operated beyond their capabilities.
Lynch found that, basically every 10 years, companies with “diversity deterioration” will always do a “clock swing” between two extremes: one 10-year period is when a large number of acquisitions frantically carry out multiplex deterioration, and the next 10 years It is a crazy amount of stripping and weight-loss restructuring. Lynch said that such frequent acquisitions, regretted after failure, had to divest, and then acquired, regretted, and divested a series of tossing, apart from being warmly welcomed by the shareholders of the small company, it is not beneficial to the large company that initiated the acquisition. , even only bad.
As for “whisper stocks”, “supplier stocks that are too dependent on big customers”, and “companies with fancy names”, in short, “whisper stocks” are the kind of stocks that tell you a big dark horse like a woman talking in private. A very profitable big bull stock; “Supplier stocks that are too dependent on large customers” is “If a company sells 25% to 50% of its goods to the same customer, it shows that the company’s operations are very unstable. “In the state of being”; “companies with fancy names” are as long as the company’s name has words like “premium”, “major”, “micro”, or a mysterious acronym with initials that will make investors fall in love at first sight, but It’s just “a false sense of security”.
There are also investment opportunities in “diversified and deteriorating” companies
Although Peter Lynch believes that staying away from the above six categories of stocks is the best choice for ordinary investors to ensure the safety of funds, he also pointed out that if there is in-depth research, some opportunities can also be obtained.
Berkshire Hathaway is a successful minority among companies operating in “diversification.” Berkshire was originally a textile factory, and Buffett insisted on doing the textile industry when he first bought it. However, the continuous decline in the competitiveness of the US textile industry made Berkshire increasingly embarrassed. Industry. During this exit process, Berkshire also transformed itself into a cross-border multi-industry group enterprise through mergers and acquisitions, with businesses or assets such as candy stores, furniture stores, and newspapers, and transformed into Berkshire. It brings amazing performance. Lynch said Buffett’s Berkshire Hathaway is mainly in the business of acquisitions.
In addition to the “minority”, some “diversified and deteriorating” companies actually have investment opportunities. Lynch pointed out that the only two benefits that “diversity deterioration” can bring are: one is to hold the stock of the acquired company; Investment opportunities in distressed companies.
Applying Lynch’s ideas to the A-share market, we can indeed find that there are cases in the market where diversification is first encountered, and then the diversification is achieved by divesting non-main business, such as Changan Automobile in the automotive industry and Nord in the lithium battery industry. shares, etc. Of course, the reversal of predicament may only mean that the company is back on the right track in operations, and how to develop in the future is another topic.
Lynch believes that if a company must diversify, “it is best to acquire companies related to its main business.” But even so, Lynch actually doesn’t like diversified companies. “I would prefer to see a strong share repurchase move, because such a repurchase will have the purest synergy for the stock price.”
Perhaps because he was good at grasping the company’s development status, Peter Lynch bought Apple’s stock twice: once in 1980, Apple issued stock in Massachusetts, which was deemed too risky by regulators to be unsuitable for investors to buy. Sophisticated investors can buy its shares; another time after Apple’s business collapsed into a troubled reversal company.
A dialectical view of the indicator of “dependence on major customers”
Peter Lynch believes that companies with “large customer dependence” are risky: if a company sells 25% to 50% of its products to the same customer, then the company’s business stability is poor. Lynch worries, “If the loss of an important customer will bring devastating disaster to a supplier company, then I will be very cautious when deciding whether to buy this stock.” From
Lynch’s investment perspective and his position From the perspective of the current economic environment, Lynch’s concerns are well-founded, but if it is simply applied to the A-share market, there may be investment deviations, because the operating environment of A-share companies is still different from that of overseas companies. Many companies relying on large customers have little business risk, and some even create a healthy development of the industry due to complementation with the downstream. For example, among the current A-share companies (companies that disclose their 2021 annual reports), many of the 18 companies (see the attached table) whose largest customer contributes more than 90% of their sales are maintaining a healthy development trend, from 2019 to 2022. The data in the mid-year report shows that (excluding biopharmaceutical companies), the net profit attributable to the parent company of these companies is relatively stable, but there are certain fluctuations in the growth rate of each period.
Companies with the largest customer accounting for more than 90% of sales in the Schedule A-share market
Data source: Wind
According to public information, 10 of the 18 companies belong to the public utility industry, 4 belong to the national defense and military industry, and the other 4 belong to the computer, pharmaceutical and biological, petroleum and petrochemical and non-ferrous metal industries. Further sorting out the largest downstream customers of these companies, it can be seen that most of them are large groups with huge scale, strong financial strength, and a background of state-owned assets. For example, the largest customer of Qianyuan Power is Guizhou Power Grid Co., Ltd., a subsidiary of state-owned giant China Southern Power Grid. And it is these large customers who have huge financial strength and government credibility to endorse, so that companies with “dependence on large customers” have obtained sustainable development capabilities.
Of course, in addition to the above-mentioned 18 companies, there are 641 companies whose largest customers contribute more than 25% to less than 90% of sales. The largest customers in these companies do not necessarily have strong financial strength and government Therefore, once the operating environment of major customers deteriorates, there will inevitably be the risk of default by major customers as reminded by Lynch, as well as the risk of major customers forcing suppliers to reduce prices and provide other discounts. Once these risks occur, performance will change Inevitably.
In short, investors need to comprehensively judge various factors in investment, and cannot simply base their final investment decisions on a single indicator.