one_up_on_wall_street

One Up On Wall Street:

How To Use What You Already Know To Make Money In The Market

On the road to $1M rating:

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This is one of those classics that every wannabe investor should read.

The book is best known for its proposition that small investors have an edge over professional ones. David Lynch’s viewpoint is that small investors are best placed to discover thriving businesses that become favourites of the public long before they show up on Wall Street’s radar.

Say you are a school teacher and notice that all the kids in your class have started talking about a new website that allows them to intereract and help each other while they do their homework. Thanks to the website, solving problems has become “cool”, and what’s more, even parents seem to be delighted that their kids are logging onto it every afternoon.

You realize that there can be thousands of kids around America talking about the same thing. The site is placing adds of carefully selected products, which you estimate must be generating generous revenues.

So you go home and do some research. You discover that the website belongs to some obscure IT company whose shares have been selling at around $1 since it became public 10 years ago. You find that the financial health of the firm is sound and, what’s more, you already know that they have stumbled across their big breakthrough with the new website.

At this point you can do two things:

You can wonder, “if this business is such a good prospect, why hasn’t Wall Street discovered it yet? How come its shares are still trading at such low prices?”. The answer, according to David Lynch, is that professional investors have innumerable restrictions on the types of stocks they can invest in. An emerging social network will be considered too risky a prospect in Wall Street until at least a couple of respected analysts have recommended it and several institutional investors have followed through and included it in their portfolios. By then, however, the share price of the firm will have risen to $5, so you’ll have missed an opportunity to grow your money fivefold.

The other thing you can do is, of course, buy shares on the company, sit down, and watch the share price rise.

This is the theory. Paradoxically, while this vindication of the power of the small investor is the main reason why I have seen the book recommended, it’s not the part of the book I found most useful.

Maybe it’s just me -I’m not known for being too perceptive of things happening around me-, but even in hindsight the only company I have come across in the past that had me thinking “wao, this is gonna be big” was Google when I first discovered the search engine in 2002. And whether this would have led me to buy shares when they became public in 2004 is anybody’s guess. (Google’s share price had risen sixfold by the end of 2007).

But even if, like me, you don’t find this part of the book so useful, you’d still be wrong to stop reading, as you’ll miss the best treatise on investing I’ve ever read, full of insights that led me to buy my first single stocks after a long period of investing exclusively through mutual funds. More on this in a later post.

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