Peter Lynch is a Wall Street legend. He drove Fidelitys Magellan mutual fund to some incredible returns in the 1970s and 1980s, year after year. From 1977, when he took over the fund, to 1990, when he retired, that fund grew from $18 million in assets to $14 billion. In those thirteen years, a single share of the Magellan fund increased 900% in value a 29.2% annual return and outperformed the stock market by 13.4% annually. Thats anincrediblerun, without much question the best run of more than ten years ever by a mutual fund manager.

This book focuses on the idea that observations in your day to day life can help you identify individual stocks that you can make a killing on. What industries do you know well? What companies seem to be surging in that area, based on your observations? Right there, you have the beginnings of some great investing choices. Lets dig in and see how Lynch describes this all playing out.

Looking IntoOne Up On Wall StreetThe book opens with an impassioned argument from Lynch on behalf of seeking out tenbaggers, which refers to stocks that increase in value ten times from their initial investment buy a stock at 10, when it goes to 100 you have a tenbagger. Lynch makes the astute point that if you buy six stocks, five of them go to zero, and one is a tenbagger, your rate of return is still 66% an utter killing. Clearly, Lynchs argument for individual stock investing is that you can occasionally hit a grand slam and make up big time for a few strikeouts.

Preparing to InvestMost of this section focuses on one key point:ignore the analysts and experts.Instead of tuning into CNBC for the hot picks, do your own research and find the stocks that you understand and believe in. Also,dont try to time the market or predict the economy. Very few people can do that well if Ben Bernanke cant do it all the time, how can you? The economy is incredibly complex dont get egotistical and believe that you know how it works.Instead,focus on what you know. Look at companies and industries that youre familiar with. Listen to what people you know are talking about and follow that to your investments. I know personally that I strongly encouraged one investor to buy Google at the IPO because I knew the search engine business pretty well. A friend of mine swore up and down that Starbucks was going to be huge circa 1992. Just listen to what people say, do your own investigating, and follow up on what you find.Most important of all, Lynch offers three questions that you need to seriously answer before you start investing in individual stocks.1. Do I own a house?If you dont, buy a house first. It provides you a stable and permanent place to hang your hat. Some might argue with this advice, but the permanence and investment qualities of a home, the advice does make a lot of sense. That doesnt mean fully owning a house, but just to be in one and have a stable non-adjustable mortgage that is building equity.2. Do I need the money?Dont invest with money that will leave you feeling sick if you lose it. Use extra money, money that wont devastate you with each loss. You need to be able to stomach big losses with the money without breaking a sweat if youre going to swing for the fences.3. Do I have the personal qualities it takes to succeed?Lynch lists patience, self-reliance, common sense, a tolerance for pain, open-mindedness, detachment, persistence, humility, flexibility, a willingness to do independent research, an equal willingness to admit mistakes, and the ability to ignore general panic. Notice that among these traits, a high level of intelligence isnotfound you dont have to be a genius to succeed at investing..

Peter Lynch ran the Fidelity Magellan between 1977 and 1990. During this timehe created the most enviable US mutual fund track record by averaging returns of29% per year. To give you an idea of the compounding effect, he would haveturned $10,000 into just over $270,000 in 13 years.

General Market observations The advance versus decline number paint better picture then the performanceof the market than index movements. Do not make comparisons between current market trends and other points inhistory. For five years after July 1st 1994, $100,000 would have turned into $341,722.If you missed the best 30 days, would have been worth $153,792. "The bearish argument always sounds more intelligent" Superior companies succeed and mediocre companies will fail. Investors ineach will be rewarded accordingly. Investing in stocks is an art not a science. If seven out of ten stocks perform, then I am delighted, if six out of ten stocksperform, I am thankful. Six out of ten stocks is all it takes to create an enviablerecord on Wall Street. Stand by your stocks as long as the fundamental story of the company has notchanged. There was a 16 month recession between July 81 and Nov 82. This time wasthe scariest in memory. Sensible professionals wondered if they should takeup hunting and fishing, because soon we'd all be living in the woods, gatheringacorns. Unemployment was 14% and inflation was 15 %. A lot people saidthey were expecting this but nobody mentioned it before the fact. Thenmoment of greatest pessimism, when 8 out of 10 swore we where headinginto the 1930s the stock market rebounded with a vengeance and suddenly allwas right with the world. No matter how we arrive at the latest financial conclusions, we always prepareourselves for the last thing that happened. The day after the market crashed on Oct 19th 1987 people started worryingthat the market was going to crash. The great joke is that the next time is never like the last time. Not long ago people were worried that oil would drop to $5 and we would havea depression. Two years later the same people were worried that oil wouldrise to $100 and we would have a depression. When ten people would rather talk to a dentist about plaque then to a fundmanager about stocks, then it is likely the market is about to go up. The stock market doesn't exist, it is there as a reference to see of anybody isoffering to do anything foolish - Warren Buffett If you rely on the market to drag your stock along, then u might as well go toAtlantic City and bet on red or black. Investing without research is like playing stud poker without looking at thecards.

Categorising stocksWhen you buy into stocks you need to understand why you are buying. In doingthis, it helps to categorise the company in determining what sort of returns youcan expect. Catergorising also enforces some discipline into your investmentprocess and aids effective portfolio construction. Peter Lynch uses the sixcategories belowSluggards (Slow growers) Usually large companies in mature industrieswith earnings growth below or around GDP growth. Such companies areusually held for dividend rather than significant price appreciation.Stalwarts (Medium growth)- High quality companies such as Coca-Cola,P&G and Colgate that can still churn out high single digit/low teens growth.Earnings patterns are not cyclical meaning that these stocks will protectyou recession.Fast growers Companies whose earnings are growing at 20%+ and haveplenty of runway to attack e.g. think Google, Apple in their early days. Itdoesnt have to be a company as sexy as those mentioned.Cyclicals Companies whose fortunes are closely linked to the economiccycle e.g. automobiles, financials, airlines.Turn-arounds Companies coming out of a depressed phase as a result ofchange in management, strategy or corporate restructuring. Successfulturnarounds can deliver stunning returns.Asset plays Firm has hidden assets which are undervalued or notrecognized at all on the balance sheet or under appreciated by the markete.g. cash, land, property, holdings in other company.General observations about different types of stocks Wall Street does not look kindly on fast growers that run out of stamina andturn into slow growers and when that happens the stock is beaten downaccordingly.

Three phases of growth:Start-up phase:during which it works out kinks in the business model.Rapid expansion phase:moves into new locations and markets.Mature phase:begins to prepare for the fact there's no easy to continue toexpand. Each of these phases may last several years. The first phase of the riskiestfor the investor, because the success of enterprise isn't yet established.The second phase in safest, and also where the most money is made,because the company is going to think about duplicating it's successfulformula. The third phase is when challenges arise, because of companyruns into its limitations. Other ways must be found to increase earnings. You can lose more than 50 percent of your investment quickly if you buycyclicals in the wrong part of the cycle. You just have to be patient, keep up with the news and read it with dispassion. After it came out of bankruptcy, Penn Central had a huge tax loss to carryforward which meant when it had to start earning money it wouldn't have topay taxes. It was reborn with a 50% tax advantage. It's impossible to say anything about the value of personal experience inanalysing companies and trends. Companies don't stay in the same category forever. Things change. Thingsare always changing. It's simply impossible to find a generic formula that sensibly applies to all thedifferent kinds of stocks. Understand what you are expecting from the stock given its categorisation. Isit the sort of stock you let run, or do you sell for a 30-50% gain. Ask if any idiot can run this joint, because at some point an idiot will run it. If you discover an opportunity early enough, you will probably get a few dollarsoff its price for its dull name. A company that does boring things with a boring name is even better. High growth and hot industries attract a very smart crowd that want to get intothe business. That inevitably creates competition which means an excitingstory could quickly change. Try summarise the stock story in 2 minutes. Ask if the company is able to clone the idea. For companies that are meant to be depressed you will find surprises in oneout of ten of these could be a turnaround situation. So it always pays to lookbeyond the headlines of depressing companies to find out if there is any thingpotentially good about the stock.

Financial analysis When cash is increasing relative to debt that is an improving balance sheet.The other way around is a deteriorating balance sheet. When cash exceeds debt it's very favourable. Peter Lynch ignores short-term debt in his calculations. He assumes thecompany that other assets can cover short term debt. With turnarounds and troubled companies, I pay special attention to debt.Debt determines which companies survive and which will go bankrupt in acrisis. Young companies with heavy debts are always a risk.

Bank debt is the worst kind is due on demand. Commercial paper is loaned from one company to another for short periods oftime. It's due very soon and sometimes due on call. Creditors strip thecompany and there is nothing left for shareholders. Funded debt is the best kind from a shareholders point of view. It can never becalled no matter how bleak the situation is. Pay attention to the debt structure as well as amount of debt when looking atturnarounds. Work if the company has room for maneuver. Inventory - The closer you get to a finished product the less predictable theresale value. Overvalued assets on the left of the balance sheet are especially treacherouswhen there is a lot of debt on the right. Assets can easily fall in value whilstdebt is fixed. Keep a careful eye on inventories and think about what the value ofinventories should be. Finished goods are more likely to be subject tomarkdowns then raw materials. In the car industry new cars are not prone tosevere markdowns compared to say the clothes industry. Looks for situations where there is high cash flow and low earnings. This mayhappen because the company is depreciating a piece of old equipment whichdoesn't need to be replaced in the immediate future.

The final checklist P/E ratio. Is it high for this particular company other similar companies in thesame industry? The percentage of institutional ownership. The lower the better. The record of earnings to date and whether the earnings are sporadic orconsistent. The only category where earnings may not be important is in theasset play. Whether the company has a strong balance sheet or a weak balance sheetand how it's rated for financial strength

When to Sell Slow Grower I try sell when there's been a 30 to 50% appreciation or when thefundamentals have deteriorated, even if the stock has declined in price. The company has lost market share for two consecutive years and is hiringanother advertising agency. No new products are being developed, spending research and development iscurtailed, and the company appears to be resting on its laurels.Stalwart These are the stocks that I frequently replace for others in the category. Thereis no point expecting a quick tenbagger in stalwarts and if the stock price getabove the earnings line, or if the P/E strays to far beyond on the normal range,you might think about selling it and waiting to buy back later at a lower price orbuying something else as I do.Cyclicals Extended run in upturn means a downturn could be nearing. One of the sell signal is inventories are building up in the company and can'tget rid of them, which means low prices and low profits down the road.Fast grower If the company falls apart and the earnings shrink, and so will the P/E multiplethat investors have bid up on the stock. This is a very expensive doublewhammy for the loyal shareholders. The main thing to watch for is the end of the second phase of rapid growth.Turnaround The best time to sell a turnaround is after its turned - around. All troubles areover and everybody knows it. The company has become the old self that wasbefore it fell apart: growth companies or cyclical or whatever. you have to doreclassified stock.Asset Play When the stock price has risen to the estimated value of the assets.

Silliest things people say about stocks If it's gone down this much already it can't go much lower You can always tell when a stocks hit bottom If it's gone this high already, how can it possibly go higher? It's only three dollars a share: what can I lose? Eventually they always come back

Things I have seen and general advice Most of the money I make is in the third of fourth-year that I've held the stock. In most cases it is better to buy the original good company at the high-pricedthan it is to jump on the next Apple or Microsoft at a bargain price. Trying to predict the direction of the market over one year, or even two years,is impossible. You can make serious money by compounding a series of 20 to 30% gains instalwarts. Just because the price goes up doesn't mean you are right. Just because the price goes down doesn't mean you're wrong. Stalwarts with heavy institutional ownership and lots of Wall Street coveredthat outperform the market are due for arrest or a decline. Buying a company with mediocre prospects just because the stock is cheap isa losing technique. Selling an outstanding fast-growing because the stock seems slightlyoverpriced is a losing technique. Don't become so attached to a winner that complacency sets in and you stopmonitoring the story. By careful pruning and rotation based on fundamentals, you can improve yourresults. If stocks are out of line with reality and better alternatives exist, selland switch into something else There is always something to worry about. Stick around to see what happens as long as the original story continuesmake sense, or gets better and you'll be amazed at the result in severalyears. One of the biggest troubles with stock-market advice is that good or bad itsticks in your brain. You can't get it out of there, and someday, sometime, youmay find yourself reacting to it. I almost didn't buy La Quinta because in important insider had been sellingshares. Not buying because an insider have started selling can be as big amistake as selling because an outsider had stopped buying. In La Quinta'scase I ignored the nonsense, and I'm glad I did. You don't have to "kiss all the girls". I've missed my share of 10 baggers andhasn't kept me from beating the market.