[00:02:22] Kyle Grieve: Why is that? It’s practical. It gives plenty of detailed examples, and the information comes from a top notch source, Peter Lynch, who has one of the most enviable track records in investing history. It’s entertaining. Peter Lynch makes a traditionally dry subject like investing, and adds his own humor and personality to make the book highly readable, funny, and relatable.

[00:02:41] Kyle Grieve: And lastly, the advice is based on just sound and timeless investing principles. Even though the book was first published in 1989, it’s still just as relevant today in 2024 as it was then. Now, even though the book is less than 300 pages, it’s jam packed with different investing information. So I’ve separated it into multiple thematic sections, which I’ll share with you today.

[00:03:02] Kyle Grieve: The first section I want to discuss is the essence of the book, which is the importance of simplicity. Investing is not a game where being trendy and ahead of the curve is required in order to succeed. Peter Lynch points out that many great investors, including himself, are technophobes, just like Warren Buffett.

[00:03:18] Kyle Grieve: His advice is to buy what you know and understand. If you don’t know or understand it, just don’t buy it. You’ll note that many of the examples he gives are very simple businesses. He talks about businesses like Dunkin Donuts and Chrysler as businesses that he thinks that he can understand. When it comes to the internet back in the 90s, he admitted he didn’t bother playing that game because without any expert help from his wife or kids, he couldn’t even find the web.

[00:03:41] Kyle Grieve: Now this point about buying what you understand really is the essence of the book. I’ve shared this benefit before about being able to buy things that you really understand. And I’ve gotten some pushback from other people who say that everyday investors just can’t compete with billion dollar hedge funds who have access to billion dollar information, such as, you know, satellite imagery of retail parking lots.

[00:04:02] Kyle Grieve: The thought process here is that they can track foot traffic of their stores to get additional insights into a business that the general public just can’t access. Now, while this is an interesting analytical tool, I can think of a pretty easy caveat. What about retailers inside of a mall? How does this analysis help you determine where they are going?

[00:04:19] Kyle Grieve: An analyst in New York isn’t going to understand how busy a store inside of a mall is going to be on the West Coast. And even if they could determine that, there are other barriers for larger investors that don’t exist for retail investors, which we’ll cover a little bit more later in this episode.

[00:04:33] Kyle Grieve: Lynch takes further aim at Wall Street, saying that there is an unwritten rule on Wall Street. If you don’t understand it, then put your life savings into it, shun the enterprises around the corner, which can at least be observed, and seek out the one that manufactures an incomprehensible product. His point is that too many investors, whether on Wall Street or your next door neighbor, invest in businesses whose products they barely understand, and then they wonder why they lose so much money in investments.

[00:04:59] Kyle Grieve: This is one of the hard parts of investing. The interplay between fundamentals, price appreciation, momentum, and appraisal. For instance, you can have a business where the fundamentals can increase, price can skyrocket, generating even more momentum, but often, the appraisal of the business becomes just too euphoric.

[00:05:16] Kyle Grieve: Look at Zoom video. Revenue and operating income were exploding between 2020 and 2022. Revenue kegger during this time was 156 percent and operating income compounded annual growth rate at this time was a ridiculous 812%. So the fundamentals were increasing and so was the stock price. But how well did investors understand the business?

[00:05:37] Kyle Grieve: Were they buying it because they had insights into Zoom’s competitive advantage? Or were they buying it because the stock price was going up? My assumption is the latter. Since its all time high, it has been at a 90 percent drawdown. The market appraised this business at a 1600 times EV to EBIT multiple.

[00:05:53] Kyle Grieve: That’s right, 1600 times. Today, it’s 15. Now, this is a good segue into some cautionary advice for investing that Peter Lynch writes about. While you can like a product and even have intimate knowledge of a product, this isn’t really enough information just to own the stock. Lynch cautions to never invest in a business until you do your own homework on things, like company earnings.

[00:06:13] Kyle Grieve: Financial health, positioning versus competitors, plans for growth, management, and so forth. Returning to the Zoom example, many investors had used Zoom pretty extensively during the pandemic and probably had a great experience using the product. However, as Lynch said, that is insufficient information to buy the stock.

[00:06:30] Kyle Grieve: A quick analysis of Zoom may have identified competitors such as Google Meets, Microsoft Teams, or Webex, and failed to see the competitive advantage that Zoom had versus these tech giants. In that case, they may have simply taken a pass and avoided the 90 percent trip on the way down. Now there’s a mental model that I’ve been thinking about a lot lately that I’ve coined as covert cyclicality.

[00:06:49] Kyle Grieve: It just means that we fail to see the embedded cyclicality of a business and make mistakes because of it. Did investors really expect zoom to continue growing revenue at 156 percent per year for multiple years into the future? It’s just not a sustainable growth rate. But if you use that growth rate, perhaps you could have actually justified paying those nosebleed valuations for the business.

[00:07:10] Kyle Grieve: Another great example Lynch goes over is that of electronic data systems. This was a hot stock in the late 1960s. But when Peter saw a brokerage report on the business, his jaw dropped. It had a PE of 500. This meant it would take five centuries to make back your investment if EDS earnings remained constant.

[00:07:28] Kyle Grieve: The even crazier part about this was that the analysts writing about it suggested that the PE was actually cheap and that EDS deserved an even higher evaluation of 1000 times earnings. Now the interesting thing about EDS is that the business EDS continued flourishing. Lynch writes, In the years that followed, EDS the company performed very well.

[00:07:48] Kyle Grieve: The earnings and sales grew dramatically, and everything it did was a whopping success. EDS the stock was another story. In the following years, the price of the business declined from 40 to 3. And this was all during positive momentum with the business. But paying an infinite price will often end in misery.

[00:08:06] Kyle Grieve: Now, let’s be honest about investing. There are zero investors who make a profit on every single investment that they make. For every winner a good investor has, they have a dud that moves nowhere or loses money. But the fascinating part about investing is that even though you won’t be right 100 percent of the time, you can still be wildly successful.

[00:08:23] Kyle Grieve: Peter mentions that he’s observed that you only really need six out of 10 winners in a portfolio to produce satisfactory returns. Now, there are very few jobs in this world where you can be unsuccessful 40 percent of the time and still be considered competent, but investing is one of them. Now, the key here is to think of two profound words, which are frequency and magnitude.

[00:08:43] Kyle Grieve: You’ll have a frequency of how often you’re right or wrong, but the frequency isn’t actually what matters most. It’s the magnitude of what you make when you win and what you lose when you lose that matters the most. George Soros said, it’s not whether you’re right or wrong, but how much you make when you’re right and how much you lose when you’re wrong.

[00:08:59] Kyle Grieve: He’s directly talking about frequency and magnitude here. If you had one big winner, it can really just carry your investing for almost an entire lifetime. But by the same token, if you put all your money into a stock that goes to zero, you have decimated your ability to make money into the future. So make sure that you are taking very good care of your winners and avoid making mistakes that can really sabotage your entire portfolio.

[00:09:22] Kyle Grieve: Now, what is one way to blow up your entire portfolio using leverage? Don’t bother. The risk is just too high. One of Lynch’s legendary quotes is dumb money is only dumb when it listens to the smart money. I love this quote for just so many reasons as I’ve gained more experience in investing. It makes just more and more sense.

[00:09:41] Kyle Grieve: One of the biggest investment problems is the lemming like behavior of retail investors who just go out and copy hedge funds. Now there are actions that hedge funds make that I personally think are pretty pointless and don’t bother copying myself. So here’s seven of them. One, trying to beat the index every single quarter.

[00:09:59] Kyle Grieve: Two, trying to time the market. Three, buying businesses with momentum. Four, going short. Five, using leverage. Six, pigeonholing yourself into exclusively buying into high market cap businesses. Seven, buying overly complicated financial derivatives. Now this is why one of my guardrails is to never watch financial news.

[00:10:22] Kyle Grieve: I know I’ll probably generate some type of bias if I do, and to combat this I just simply don’t take part by not watching it. And this isn’t just a saying, I literally never watch it. I couldn’t even tell you which channel it was on if you asked me. Now, investing is a game where you’re better off learning timeless principles from investors with worthy track records and putting those principles into action.

[00:10:42] Kyle Grieve: If you observe Wall Street long enough, you’ll realize very few follow the most common and valuable investing principles that have been around now for over a century. When I speak with other investors, I often find myself in awe of the number of mature businesses that they have in their portfolios, even when they seem to be telling me that they’re in growth mode.

[00:11:02] Kyle Grieve: As we’ll go over more later, slow growers or stalwarts are businesses that probably have the same chance of underperforming the market as they do overperforming it. So if you aim to make outsized returns, you are kind of misaligned if you own too many of these businesses. Now let’s get back to one of the primary mistakes investors try to clone from the smart money, which is trying to time the market.

[00:11:21] Kyle Grieve: Timing the market has existed since the inception of the market and will continue until the stock market ends. Speculation is simply a part of human to fight the folly of market timing. There are a few things that you must first understand. Lynch made the excellent point that investors tend to be pessimistic and optimistic at precisely the wrong times.

[00:11:40] Kyle Grieve: And because of this, it’s simply pointless to attempt to invest in good markets and exit bad ones. In a study called mind the gap, they basically had a 10 year sample size that ended in 2023. And what they show was that fund investors earned a 6. 3 percent per year dollar weighted return over 10 years and a December 31st, 2023, while their fund holdings earned about 7. 3%. Now, this was because they missed time buys and sells and they decreased their time in the market. Now, whether you own index funds or individual stocks, you’re better off having your cash invested rather than trying to buy in at a future price that you will hope will be cheaper than it is currently.

[00:12:18] Kyle Grieve: Now, doing this sounds good in practice, but as these 10 year studies show, it just doesn’t work in reality because you just have an inability to time them properly. And your emotions do things that make you do silly things at the wrong times. But Lynch shares some really good news about our inability to time the markets.

[00:12:36] Kyle Grieve: You don’t have to be able to predict the stock market to make money in stocks or else I wouldn’t have made any money. I’ve sat right there at my Quotron through some of the most terrible drops and I couldn’t have figured them out beforehand if my life depended on it. So what about the connections between the market and the general economy, economic booms and busts, and interest rates?

[00:12:58] Kyle Grieve: To this, Lynch would say there is definitely a correlation between something like interest rates, And the stock market. The problem is that nobody can predict what interest rates will be in the future. So any potential information that you get from attempting to predict that is going to be as useful as flipping a coin.

[00:13:14] Kyle Grieve: Lynch points out that there are 60, 000 economists in the US and that they could only forecast recessions and interest rates twice in a row. They’d all be millionaires, but they aren’t. And that should tell you something. Now, instead of market timing, Peter observed what people were talking about at dinner parties.

[00:13:31] Kyle Grieve: He mentioned that when 10 people were more interested in chatting with a dentist about plaque than Peter about stocks, that would probably be a really good sign that the market was about to turn up. People love to talk, and a lot of that is just that, talk. So how do we separate the noise from the facts we need in order to make better decisions?

[00:13:49] Kyle Grieve: Lynch says that logic really goes a long way to helping identify the illogic of Wall Street. Here he says, Wall Street thinks just as the Greeks did. The early Greeks used to sit around for days and debate how many teeth a horse had. They thought they could figure it out just by sitting there, instead of just going and checking the horse.

[00:14:07] Kyle Grieve: A lot of investors sit around and debate whether a stock is going up, as if the financial news will give them the answer, instead of just checking the company. Now to me, this just screams that you should be checking the fundamentals of the business regularly, much more often than you should be checking the stock price.

[00:14:22] Kyle Grieve: Instead of water cooler talk where people are talking about which industry is going to be the next hot sector to rotate into, look into a specific business and just find out if their products are flying off the shelf. Are they so busy that they now have to establish a backlog in order to meet customer demand?

[00:14:38] Kyle Grieve: Or maybe the business is forced to increase its capacity by expanding its manufacturing. These are all honest signals that a business is improving rather than just looking at the stock price. And these are really the signals that you want to be focusing on when thinking about new investments, rather than pontificating on what AI stocks are going to see the largest increase in a stock price, Peter had some other classic stories with a macro environment and how confusing it could be.

[00:15:01] Kyle Grieve: For instance, he mentioned that the Cuban Missile Crisis was the closest that the world ever got towards nuclear war. Peter was scared for his family, himself, and his country, and yet on the same day as the crisis, the stock market fell a mere 3%, a number that is a lot lower than you’d expect, given the real possibility of a nuclear event.

[00:15:20] Kyle Grieve: Then he notes that seven months later, President Kennedy forced the steel industry to roll back prices. Lynch didn’t have any fear for anyone’s life. And yet the market had one of the most precipitous drops in history at minus 7%. Lynch writes, I was mystified that the potential of a nuclear holocaust was less terrifying to Wall Street than the president’s meddling in business.

[00:15:42] Kyle Grieve: Now, I really like this insight because it shows that if we can even predict future events, we can never predict how the market will react to these events. And in our ever changing world, there’s always something to worry about. If every worry you have eats away at you and prevents you from staying invested, it’s yet another reason that you probably should not be invested in individual stocks as have a very, very hard time succeeding.

[00:16:09] Kyle Grieve: Now let’s take a short detour here and talk a little bit about what Peter Lynch thought about the efficient market hypothesis. As you may have already guessed, he was not a fan. Through all the experiences that Lynch had, he could see that the academic side of investing was really disconnected from reality, and therefore it had limited utility for him.

[00:16:26] Kyle Grieve: He made an observation that it’s hard to support academic theory that states the market is rational when you know someone who just made 20 times on a KFC investment and spelled out in advance before they made that money why the stock was likely to rise. Because of this, Lynch distrusted theorizers and prognosticators.

[00:16:44] Kyle Grieve: This point here about Lynch being a contrarian on Wall Street is worth discussing more. When he wrote this book, IBM was the equivalent of our Apple, I think, in 2024. Lynch said that there was an unwritten rule on Wall Street, that you’d never get fired from your job if you lost money investing in IBM.

[00:17:01] Kyle Grieve: If you bought IBM and its stock went down, your boss would call you into his office and ask, what’s wrong with IBM? But if you bought something like LaQuinta Motor Inns and it went down, your boss would ask, what’s wrong with you? Now, this fits in perfectly with a recent chat that I had with Scott Barbie on TIP 651.

[00:17:20] Kyle Grieve: In that episode, I referenced a quote that Scott wrote in one of his letters. As a deep value investor, if you get it wrong, you can get hit. It’s one thing to forecast Cisco earnings wrong in 1999 and lose money conventionally. But if a deep value investor loses money failing to spot an accounting scam on say a small mining stock, that can really damage their reputation.

[00:17:42] Kyle Grieve: Now, the primary lesson here is that investors on Wall Street don’t have the luxury of purely looking for businesses that will go up in value in the future. They have investors to appease. They have bosses looking over their shoulders. Some even have a legacy that they want to maintain. So fitting in the crowd and not doing anything overly exciting is often the easiest way to tick off all these boxes.

[00:18:02] Kyle Grieve: And act similarly and get similar results to all the other investors out there. But following the crowd isn’t the road map to finding outstanding investments. This is yet another reason to avoid following Wall Street blindly. On the other side of things, being a contrarian doesn’t mean you should also be shorting stocks that are currently popular on Wall Street, as Lynch outlines.

[00:18:23] Kyle Grieve: For him, a true contrarian is an investor who waits for those incredible companies until Wall Street and other investors no longer care about them. If you bring up a name that makes other investors yawn, you’re on the right track. Now, this has all sorts of second order effects. One, these businesses have very little institutional interest.

[00:18:41] Kyle Grieve: Two, they will tend to lack much, if any, institutional ownership. And three, Unloved investments often carry a heavily discounted price. The best part of all this is that these businesses often have incredible products that are in high demand. This can spell reasonable and sustainable growth that is heavily discounted by the market, but not necessarily discounted in heavily followed stocks.

[00:19:03] Kyle Grieve: I own a business that shall remain unnamed that does a great job of exemplifying some of this. I’ve owned it for a year now. When I bought it, it was selling out of trailing P of around eight, but it had just doubled its operating cashflow quarter over quarter. Now, not only were the fundamentals shown in the financial statements, but they also had some really big audacious goals and plans for the future that they released in their presentations.

[00:19:25] Kyle Grieve: And the thing that was really interesting was that up to that point, they were executing at a very high level. And even today, a year later, still haven’t sold any of my shares and the business continues to execute. The business is now trading at a forward P of about 20 times with the recurring revenue now making up 88 percent of its total revenue.

[00:19:42] Kyle Grieve: So you could say it’s much more fairly valued now, but even with the business growing almost 200 percent year to date, the business is only valued at a market cap of about 160 million. Now, if we took the same business that I’m talking about here, multiply this market cap by, you know, 10 or 20, and therefore would probably also have many, many people on wall street knowing about it.

[00:20:03] Kyle Grieve: There’s no chance that I ever would have been able to buy it at a P of eight. It might be at a P of something like 40 or maybe even more. Now, this is why the contrarian move is to look for businesses that barely anybody’s talking about. You’ll find hidden gems at wall street. We’ll once again, fall in love with that a later date, and then you’ll have your multi bagger returns.

[00:20:22] Kyle Grieve: The following section I want to discuss is investing in the types of business I listed above. It’s not for everyone. Small businesses definitely do have a bad reputation. For every winner you see in the microcap market, the expectation is that there will be a bunch of zeros. And I don’t necessarily disagree with this, although I think a lot of the negative bias is just that bias, whether a business is 10 million or 10 billion, a market cap doesn’t mean the business is much different.

[00:20:47] Kyle Grieve: It’s just operating at different scales. They still have management, production, offices, customers, suppliers, a board, capital allocation decisions and so forth. To say a smaller business is more dangerous than a bigger one is like saying a two seater car is more dangerous to drive than a minivan. Now the primary difference of investing in smaller businesses is the amount of easily and accessible information.

[00:21:09] Kyle Grieve: If you want to learn more about Google, you can access many years of conference calls and transcripts as well as analyst reports. Or if you have some decent connections, you can find a specialist in the industry to talk to, to learn more about the business, how it’s positioned versus competitors and the industry in general.

[00:21:25] Kyle Grieve: With smaller businesses, you don’t always have access to any of this information. They might not have quarterly calls because they have little or zero interest from analysts. There are zero analyst reports to learn information from and finding anyone who’s even heard of the business is going to be a challenge.

[00:21:40] Kyle Grieve: And often some of these businesses don’t even have IR sites or have any types of presentations. But, investing is a solitary game, where if you are willing to do the work and form your own opinion, you can find some insanely undiscovered gems. We should never strive to borrow conviction from others anyways, nor should we rely on the opinion of others to validate our own.

[00:22:02] Kyle Grieve: Ralph Waldo Emerson, who had a large influence on Buffett’s father, explained this better than I ever could. It is easy in the world to live after the world’s opinion. It is easy in solitude to live after our own. But the great man is he who in the midst of the crowd keeps with perfect sweetness the independence of solitude.

[00:22:20] Kyle Grieve: If you want to learn about any business, large or small, you should try to talk to people in the business. It’s customers, suppliers, former employees and competitors to best shape your own opinion. The final point here on smaller businesses that Lynch points out is why some of these businesses are under followed in the first place.

[00:22:38] Kyle Grieve: The simple reason is regulatory reasons. Institutions are mandated to be able to easily move in and out of a stock. And in order for that to happen, there often has to be market cap restrictions that must be met. until a business is available for purchase by institutions. Lynch mentions 100 million in market cap, which still seems like the magic number today in 2024.

[00:22:59] Kyle Grieve: Now let’s say a business trades at a market cap of 50 million. Very few institutions will bother with this business as they can’t even own it in the fund if they wanted to. But now let’s say over a short period of time, the business appreciates in price to 100 million. Now funds can buy in. Lynch noted that this resulted in a strange phenomenon.

[00:23:19] Kyle Grieve: Large funds are allowed to buy shares in small companies only when the shares are no bargain. You have to decide if investing in smaller businesses is right for you. There are no shortcuts in investing, but no matter what market cap you want to eventually own, you’ll need some sort of framework to help you find the company in the first place.

[00:23:37] Kyle Grieve: And this is where One Up On Wall Street really shines. Peter bagger stocks, which are stocks that can double in price or more is close to home. You can literally start in your own home. A technique that Monish Pabrai shared at the Berkshire pathway annual this year was how college students with little life experience could find ideas.

[00:23:58] Kyle Grieve: His solution was simple. Look at your bank and credit card statements and observe where you’re spending money. Those are products and services that you have firsthand knowledge of and might have an edge over the market in. Another way I like to add to this is by asking friends and family. I know Peter Lynch got many of his ideas from his wife and children and learning where they shopped, which would lead him to his next area of mining for ideas, which was going to the mall.

[00:24:24] Kyle Grieve: A trip to your local mall is a simple way of finding new ideas that might also be undiscovered by Wall Street. For instance, Lynch says the customers in Central Ohio where KFC first opened up KFC. The mob down at pick and save all had a chance to say, wow, this is great. I wonder about the stock long before wall street got its original clue.

[00:24:44] Kyle Grieve: The other interesting piece of information that the average person can get on a business is to spot when a business is really starting to heat up. Lynch says that the grassroots observer can witness the power of a turnaround six to 12 months before a regular financial analyst can, and this can give a really good head start to investors that are anticipating increased earnings power.

[00:25:03] Kyle Grieve: Which is ultimately what makes a stock go up in price. We’ll be going over this a little more later in this episode. The primary lesson that he imparts here is that investors should put in at a minimum the same amount of work they do when shopping for groceries. Most people want a good deal when they go grocery shopping, and the same should be true for picking stocks.

[00:25:23] Kyle Grieve: Now the last great place to search for ideas is through your work. Your work offers incredibly good insights into products and services that a business simply cannot run without. I was recently chatting with a member of the TIP Mastermind Community who specializes in the food industry, who is privately owned partial ownership of a local food manufacturer.

[00:25:42] Kyle Grieve: He has come to gain excellent insights and contacts into things like products that are flying off the shelf and other retail locations, distribution, sales strategies and observations on margins of different companies in that arena and their competitors. Now, all this information he uses to help him generate ideas for investing in public businesses.

[00:26:01] Kyle Grieve: If you look at stick through his extensive work, managing the investors, podcast network, he’s gained excellent insights into podcast distribution and advertising, which is a significant reason why, as far as I know, he still owns Spotify and alphabet. So, you know, the simple reasons with Spotify is it’s the biggest podcast distributor in the world.

[00:26:20] Kyle Grieve: And he has worked with them now for quite a few years and has some decent insights into how they operate and the lead that they have over competitors. Then when you look at Google, you know, YouTube is another great video distributor, and even though TIP, you know, you’re probably listening to this maybe as a podcast, but you might also be just throwing this on YouTube and not even watching me speak, but just listening to it.

[00:26:42] Kyle Grieve: So because of that ability of YouTube to work both on video and audio, it’s a very powerful platform and Sig realizes the power of that, which is why you’ll see all of our episodes on YouTube as well. Now, Lynch makes it very clear that simply using a business’s product is not enough reason to buy the stock.

[00:26:59] Kyle Grieve: There are three things you must do to find out if a product or a service that you’re using is also a publicly traded business worth owning. So the first thing you have to do is do the proper analysis on the business to understand if, you know, it has the right metrics. Is it a business that’s not growing at all?

[00:27:18] Kyle Grieve: Is it losing money? Is it piling up debt? Is management involved in some sort of fraud or has management not have any track record of success? In previous endeavors. These are all things that you need to take into account. The second one is that if you think a business is good in your location, you should actually wait and see if it’s good in another location as well.

[00:27:40] Kyle Grieve: And the third one here is if you love a specific product, you must ensure that the parent company will earn meaningful revenue from its sales growth. Now I already covered some of the tenets of proper analysis, but in case you need a quick refresher, they are things like analyzing a company’s earnings, financial health, positioning versus competitors, plans for growth, management skills, capital allocation, et cetera.

[00:28:01] Kyle Grieve: The second point here about a business that is testing new geographies is very important. Lynch writes, successful cloning is what turns a local taco joint into a Taco Bell or a local clothing store into the limited. But there’s no point buying the stock until the company has proven that the cloning actually works.

[00:28:19] Kyle Grieve: Now, this is a very good cautionary warning to ensuring that a business will take off in other states where preferences can be different. The beginning of the quote I said above actually references a business that Lynch didn’t buy, which was called Buildners, which at the time Lynch thought was a mistake.

[00:28:36] Kyle Grieve: But fast forward a few years and Buildner’s excessively aggressive growth actually spelled the demise of the business that it ended up filing for chapter 11 bankruptcy. While it was great in Lynch’s home state of Massachusetts, it just didn’t fare well in other locations. Now many of you will be familiar with See’s Candies, the low hanging fruit example.

[00:28:55] Kyle Grieve: Buffett and Munger had a heck of a time attempting to expand the business outside of the state of California before ultimately giving up for a time. But they clearly didn’t give up fully as I went on See’s website and I can see that they’re selling their products in many different states as well as internationally, albeit on a much smaller scale than in the US now if you find a product you use and like and the company is looking to expand, it might be worth waiting a while to observe how busy locations are in other states or countries. One example that I like to use this on is Aritzia. I’ve been traveling pretty regularly to the US in places like New York, Washington state or Hawaii.

[00:29:34] Kyle Grieve: And whenever I’m there, I love going to the local Aritzia store to see how busy the locations are. And I usually see that they’re packed and I love seeing that. So the final point here before you decide to buy a stock of the product you like is to make sure that the product produces a meaningful amount of revenue for the parent company.

[00:29:51] Kyle Grieve: Lynch gives a really good example of a skin cream that was made by Johnson Johnson, which was called Retin A. The product was originally intended for use as a treatment for acne, but then doctors discovered that it could also be used to fight skin blots and blemishes that were caused by the sun. The product picked up a news headline and took off as an anti aging wrinkle fighter.

[00:30:12] Kyle Grieve: Investors clearly loved all the positive news as well. Johnson Johnson stock jumped 8 per share in 1988 in the two days after the article was released. This added a whopping 1. 4 billion in market capitalization to Johnson and Johnson. Now this sounds great and all. But it’s a pretty clear example of how irrational markets can be.

[00:30:33] Kyle Grieve: When looking at the previous year’s sales of retinae, they were readily available and the product only brought in 30 million of revenue and to boot Johnson and Johnson was still under review from the FDA on the new claims that were featured in this news article. So when it came down to it, retinae product was really a nothing burger for the overall movement of Johnson and Johnson’s intrinsic value.

[00:30:58] Kyle Grieve: Unfortunately, many of the great brands that you probably use on a daily basis are just a small part of large conglomerates. The deodorant I use is part of Procter Gamble. My toothpaste is part of Halion PLC, which also owns Advil and Centrum. One of my favorite condiments, Heinz Ketchup, is owned by the Kraft Heinz Company.

[00:31:18] Kyle Grieve: So because of that reason, not everything that you use on a daily basis will actually make a rational investment, but, you know, keep searching because there definitely are many winners out there that can move the needle. Now, Peter mentions something significant in how investors should think about the stock market.

[00:31:36] Kyle Grieve: Judging performance based on short term results from the market is going to cause all sorts of just poor decision making. You’ll think you’re a genius when you’re lucky, and you’ll think you’re an idiot when you’re unlucky. Which is why thinking of the stock market as an abstraction is so important.

[00:31:53] Kyle Grieve: Lynch shares a wonderful point that Warren made about the stock market. The gist of it being that Warren doesn’t believe that the stock market exists. The only reason it’s there is as a reference to see if anybody is offering to do anything foolish. This helps him make the market his servant, and not his master.

[00:32:12] Kyle Grieve: In the Warren Buffett way, Robert Hagstrom shares some more information on this. For Buffett, stocks are an abstraction. He doesn’t think in terms of market theories, macroeconomic concepts, or even sector trends. He makes investment decisions based only on how a business operates. And this is really just a beautiful way to invest and think about the stock market.

[00:32:33] Kyle Grieve: It helps you focus on the business and eliminates a large amount of noise out there. That’s just screaming at you to make poor decisions. Now on the topic of poor decisions, many investors are overweighting stock tips. Luckily, Peter Lynch has some excellent advice on how we should treat this type of advice.

[00:32:49] Kyle Grieve: He has two primary pieces of advice. One, you can listen to stock tips. But treat them as anonymous pitches that are delivered to your mailbox and to avoid the opinions of others on the stocks that you already own. Now he lists some very good reasons to treat advice and opinions this way for stock tips.

[00:33:08] Kyle Grieve: People will be biased towards the people that are giving them a tip. He gives two really good examples. One being when a hypothetical family member you have who is buying a specific stock, shares the name with you and also happens to be rich. When you associate the two, you may erroneously assume that the stock they’re sharing with you will also make you rich.

[00:33:30] Kyle Grieve: And the second one here is if you were to get a tip from the same family member that maybe sometime in the past had given you a name that doubled in a very short time, you’ll give them a much higher weighting. In future ideas, but the problem with that is one person can have one stock double and have 50 stocks that go in half so that unfortunately you can’t really use that information in that sense.

[00:34:00] Kyle Grieve: Second, is if you were to get a tip from someone in the past that had a double in a short time now, let’s say that person is buying another stock, which prompts you to believe that a similar result is going to happen with this new idea. Now you can obviously tell there’s going to be tons of problems with this.

[00:34:15] Kyle Grieve: One person could have a stock that doubled and they could have 50 that went down 50%. So this just is not a good way of taking stock tips. So treat stock tips like you would treat a new product that you’re really enjoying. Make it a lead to allow you to do your own research and due diligence, but never a justification to blindly buy a stock.

[00:34:36] Kyle Grieve: Now, equally as painful as stock tips is relying on the opinions of others on businesses that you already own that can just cause you to do just some very silly things. Lynch gives a really good example on Warner. So Lynch received a call from a technical analyst on Warner. Now Peter was not a technical based investor at any point of his career that I’m aware of.

[00:34:56] Kyle Grieve: But out of curiosity, he asked this analyst his opinion on Warner. The analyst told him the technicals were showing that the stock price was extremely overextended. And Lynch did nothing with his advice for six months, which was probably the right move. But during that time, Warner had continued to increase in price going from 26 all the way up to 32.

[00:35:16] Kyle Grieve: The little voice in Peter Lynch’s head was telling him that if the business had been extended at 26. Then 32 was likely to be extremely overextended. Lynch checked the fundamentals of the business and nothing had changed to erode his conviction. He held on. Then the stock went up to 38. And then he writes here, For no conscious reason, I began a major sell program.

[00:35:38] Kyle Grieve: I must have decided that whatever was extended at 26 and hyper extended at 32 had surely been stretched into three prefixes at 38. Now, luckily, this is a type two error where you aren’t necessarily hurt by the decision in terms of losing money, but you’re definitely pained by what could have been. And after Peter had sold Warner, it marched up to over 180.

[00:36:01] Kyle Grieve: Now, this is a lesson in self reliance and really making your own decisions. The more you talk about your ideas with others, the more opinions you’re likely to run into. While some opinions may agree with you, there will be ones that disagree with you as well. I personally find the opinions of people that disagree with me to be highly valuable, as sometimes others have a different perspective than I do regarding a business, and I think it’s up to me to find out if I could be wrong about my current assumptions.

[00:36:28] Kyle Grieve: The key is to be open about being wrong and attempting to really get to the truth. Just understand that there may be times when everyone thinks you’re wrong when you’re actually right, and in those times is where the best investing opportunities lie. But you can see the difficulty in being one of the very few people who is thinking completely different than everyone else.

[00:36:48] Kyle Grieve: This is why it’s vital to come up with your own views. And then adjust them based on your own findings and not on the biases of other people. One of my favorite aspects about investing is that if you find the right business, the decision to sell becomes very difficult. Let’s go over 13 of the characteristics of stocks that are worth holding onto for long periods, according to Peter Lynch.

[00:37:09] Kyle Grieve: One, it sounds dull, or even better, ridiculous. Two, it does something dull. Three, it does something disagreeable. Four, it’s a spin off. Five, institutions don’t own it, and analysts don’t follow it. Look for low institutional ownership. Now, I’ve covered this already, but I will add that Lynch felt the dream of a great investment would be where the business has never had an analyst inquire about it, or if analysts would deny even knowing about it.

[00:37:37] Kyle Grieve: He said, When I talk to a company that tells me the last analyst showed up three years ago, I can hardly contain my enthusiasm. Six, the rumors abound. It’s involved in things such as toxic waste, dirty things like garbage, and or the mafia. Seven, there’s something depressing about it. Eight, it’s in a no growth industry.

[00:37:57] Kyle Grieve: Nine, it’s got a niche. Ten, people have to keep buying it. Eleven, it’s a user of technology. Twelve, the insiders are buyers. And thirteen, the company is buying back shares. Now, instead of breaking down each of these points individually, I thought I’d go over a business I’ve recently been researching and own a small stake in.

[00:38:17] Kyle Grieve: This is Natural Resource Partners. Using the characteristics above, it takes many of these qualities. The simple name natural resource partners is pretty dull and boring sounding to me. Now, it’s a royalty business on mineral rights and has a partnership on a soda ash mine. So it kind of takes that dull in terms of the business model.

[00:38:38] Kyle Grieve: It has mineral rights that are primarily involved in coal, which has a very negative association these days due to the carbon footprint of coal. It does have institutional ownership, but the coal exposure is a major turnoff for many other institutions. They are in the coal industry, which is unlikely to see significant growth due to all these different renewable initiatives out there and coal is cyclical as the royalty payments are based on things like coal volumes and coal pricing.

[00:39:06] Kyle Grieve: Now, the business definitely has some niche characteristics, especially in terms of their carbon neutral initiatives. Now, this is kind of a future call option on carbon sequestration. NRPs property is permitted to store the carbon, which is very powerful as you can’t just put it anywhere that you want.

[00:39:22] Kyle Grieve: Now, in terms of having a product that is needed, I think thermal coal will eventually be phased out, but that’s going to be in many, many decades from now. But METCOOL is required for the manufacturing of steel, which is very unlikely to disappear anytime soon because steel is very important into infrastructure.

[00:39:40] Kyle Grieve: And as countries like China and India grow their infrastructure out, the need for steel is going to be continued to be there. In terms of insider buying, NRP has had insiders buying and as late as 2023 at prices that are just about 14 percent below the prices as of August 22nd, 2024. Now the business isn’t currently buying back shares because their primary goal right now is to pay down debt and retire the preferred shares.

[00:40:05] Kyle Grieve: But after that point, they have signaled that they will have significant free cash flows and buybacks will be one way that they can return that cash flow back to shareholders. So this business has many characteristics of a good business, which is what got me interested in it in the first place. Time will tell how that plays out.

[00:40:24] Kyle Grieve: Now, another point Peter points out to avoid buying the wrong socks are threefold one avoid buying the hottest stock in the hottest industry to avoid buying businesses that are getting the most publicity and three avoid stocks that everyone is talking about, such as your family, friends, colleagues, Uber drivers, shoe shiners, et cetera.

[00:40:46] Kyle Grieve: Now that we know some of the attributes of a good stock, the next step is to understand why a stock changes in price. Now I’ve seen push back on the emphasis that I personally place on earnings for stocks that go up in price, but I’ll stick with my guns. And I know Lynch agrees that it does all come down to earnings throughout the books.

[00:41:05] Kyle Grieve: He gives plenty of charts that show stock price and earnings. And while the price does fluctuate in short periods over the longterm, if a business is earning more money per share in say five years than it is today, The stock price will reflect it. Sure. If you look at shorter periods, you will see earnings go up and the price go down for various reasons, but it’s very infrequent to see a business with much higher earnings that doesn’t also get an increased stock price.

[00:41:33] Kyle Grieve: When looking at the price of stocks, Peter Lynch generally will give preference to businesses that are trading at a higher P with higher growth than a lower P with low growth. Let’s go over an example of why this is. Let’s say we have two companies, which we’ll call just Company A and Company B. They both start with a dollar in earnings per share, EPS.

[00:41:52] Kyle Grieve: Company A is growing EPS at 20 percent and starts with a P. E. multiple of 20 times, while Company B is growing EPS at 10 percent and has a P. E. multiple of 10 times. Now let’s assume these businesses continue growing at these historical rates into the future. Which one would you choose? The value investor in you might choose the 10 times P just because it’s cheaper.

[00:42:14] Kyle Grieve: But if you were looking to maximize your returns, this would actually be the wrong answer you’d want company A. By the end of 10 years, Company A now has an EPS of 6.19 versus an EPS of 2.59 for Company B. At the same P. E., Company A is worth 123. 80 versus an original price of 20. And Company B is now worth 25.90 versus the original price of 10. Now you don’t need to be a mathematician here to see that Company A is a superior investment. Now this is just the magic of compounding. If you find a business that can plow its earnings back into his business at high rates of return, you can expect it to continue to rise in value faster than a different business with lower rates of return.

[00:42:58] Kyle Grieve: Peter Lynch gave Walmart as an example of a successful compounder where Walmart could plow all of its money back into the business and just open new Walmart stores. Now, part of investing is knowing what not to invest in as well as what you should be investing in. So let’s look at some other red flags and potential investments that might immediately let you skip an investment and conserve your time.

[00:43:20] Kyle Grieve: So the first thing here is the next something, for instance, many tech stocks in Lynch’s time were touted as the next IBM. And most of these businesses failed miserably as did IBM due to increased competition. The next is to avoid diversification. So you’ll probably know the diversification concept from Peter Lynch, where he said that You don’t want to make your portfolio worse by selling your really good stocks to buy more of your really bad stocks.

[00:43:50] Kyle Grieve: But in this sense, he’s actually looking at it in terms of the business level. And he says that a lot of businesses will use their cash to engage in M&A. And unfortunately, a lot of businesses engage in M&A the wrong way where they’re buying businesses that are outside of their core competencies. The next error here is whisper stocks.

[00:44:12] Kyle Grieve: So these are stocks that reportedly can solve big problems, but they just come with too much hair. As Lynch points out, the solution is often overly complicated and very imaginative. I assume he called these the whisper stocks because they’re stocks that people didn’t want to necessarily talk about out loud because maybe they were just too speculative.

[00:44:31] Kyle Grieve: Beware of over concentration. This can be heavily concentrated on suppliers or customers. So This really reminds me of the early days of Nike when they had to rely on basically one supplier and they ended up having a lot of issues with this one supplier, which almost ended the business before it even took off.

[00:44:49] Kyle Grieve: But they ended up getting through and diversifying their suppliers. And then another recent example, When you look at customers is micron and Huawei. So Micron was no longer able to sell to Huawei because of their relationship with the Chinese government. But Huawei actually made up 10 percent of Micron’s revenue.

[00:45:06] Kyle Grieve: So losing that one client was pretty painful in the short term. Next one here is beware of the exciting name. So. com in the tech bubble is just a really good example. So in 1999 there was a business called MIS international. Now this business basically didn’t have any customers and didn’t have any profits.

[00:45:26] Kyle Grieve: Its stock was trading below 50 cents a share. The firm then decided to change its name to jump on the internet bandwagon and they settled on Cosmos. com. The stock almost immediately soared to five dollars. So here are a few more red flags focused on a business’s financial health that can be easily analyzed to better understand whether a business you are looking at is healthy or not.

[00:45:47] Kyle Grieve: Using book value to determine whether a business is valuable. Lynch gave an example of Penn Central, which had a book value of 60 and then immediately went bankrupt. He also gave the example of a business called Allenwood Steel, which had a stated book value of 40 per share. Within six months, it ended up filing for chapter 11 bankruptcy.

[00:46:06] Kyle Grieve: But unfortunately, its assets were overstated and in a mess, and they ended up selling for only 5 million. So the point being that book value isn’t always very valuable, especially in these bankruptcy situations where the assets may be heavily marked up. Another one he talks about here is buying businesses whose inventories are growing faster than sales growth.

[00:46:26] Kyle Grieve: This is a really, really good metric to track if you own retail businesses, groceries type businesses, or Any business that requires inventory that it needs to sell in order to generate sales. He gave a really good example of a company that he visited where they had such a buildup in inventory that they had to store their inventory in the parking lot.

[00:46:46] Kyle Grieve: And this was a really giant red flag that the business was unable to sell its inventory. And it was probably a pass. And then the last one here is just to do with pension plans. So vested pension plan benefits should hopefully be lower than pension plan assets. But if it’s in the reverse, then if bankruptcy was to happen, those pension plans need to be continued to be paid.

[00:47:09] Kyle Grieve: So you as a shareholder are going to get further punishment in that case. So now that we have a better idea of characteristics to look for in winning and losing stocks, how do we manage them inside of a portfolio? Lynch had some really interesting takes here that were not necessarily information that he followed himself while running the Magellan fund.

[00:47:29] Kyle Grieve: He said that you shouldn’t focus on a fixed number of stocks, but investigate how many good stocks you know about on a case by case basis. He writes. In my view, it’s best to own as many stocks as there are situations in which A, you’ve got an edge, and B, you’ve uncovered an exciting prospect that passes all of the tests of research.

[00:47:51] Kyle Grieve: Maybe that’s a single stock, or maybe it’s a dozen stocks. Maybe you’ve decided to specialize in turnarounds or asset plays and you buy several of those. Perhaps you happen to know something special about a single turnaround or a single asset play. There’s no use diversifying into unknown companies just for the sake of diversity.

[00:48:10] Kyle Grieve: A foolish diversity is a hobgoblin of small investors. Now I like this thoughtful view here on diversity. But I also think if you were to follow this advice closely, you’d realize that you’d have very few ideas that satisfy his two points on having an edge and where the business passes all research tests for the average person with a lot of time, even 20 ideas seems like it’s probably pushing it, but it’s probably doable.

[00:48:35] Kyle Grieve: But when you factor in a full time job, I think 20 becomes a pretty tough number to handle. Now, you might have an edge in many different businesses in a specific industry, but the time needed to best understand each of those businesses is finite. So it’s up to the individual investor to determine how much time is required for the reachers process and then to allocate time to potential and current positions.

[00:48:59] Kyle Grieve: The more positions you have, the less time you can spend on each one. So just keep that in mind when thinking about your own diversification. If you truly don’t have time or don’t want to bother understanding businesses at the depth that I’ve discussed in this episode, I think you’re probably best off indexing.

[00:49:14] Kyle Grieve: And there’s nothing wrong with it. All the work that I just mentioned throughout this episode can be ignored while you get to make market like returns. Additionally, since our audience is wide in terms of age and experience, it’s worth mentioning how diversification changes as you get older. Lynch points out that younger investors with a lifetime of wage earning potential can afford to take more chances on multibaggers because any potential losses can be made up through savings going on into the future.

[00:49:41] Kyle Grieve: But, as you age. And your wage earning years get closer and closer to zero. That same strategy becomes overly risky. Additionally, older investors who are no longer earning a wage may require income from the portfolio to pay for their living expenses. As we will discuss here shortly, dividend paying stocks have certain qualities that could be positive for some investors and negative for others.

[00:50:05] Kyle Grieve: Now that we have a better understanding of how to manage our portfolios based on our time preferences and age, Let’s discuss one of the most difficult parts of investing, which is selling. Lynch says that many investors follow selling adages that have been set by short term thinkers. He mentions platitudes like take profits when you can and a sure gain is always better than a possible loss.

[00:50:28] Kyle Grieve: But he points out that if you’ve done the necessary work, bought the right stock and have the business’s fundamentals improving, it’s really a shame if you sell it. Now, there’s always this tug between understanding when a business’s growth story ends, slows down for good, temporarily slows down, or hopefully accelerates.

[00:50:46] Kyle Grieve: And if you can properly designate your business into one of those buckets, you’ll be able You can best understand which business is worth selling or keeping, or even buying more of. Long term investors should be concerned with businesses where growth is accelerating. But, a true value investor should look for temporary slowdowns in an otherwise great growth story.

[00:51:05] Kyle Grieve: These temporary hiccups in growth can often scare away many investors who fear that growth is permanently decreased. When this happens, many investors will panic sell, offering wonderful opportunities to long term investors who have a good understanding of the temporary nature of concentrated periods of slow growth.

[00:51:22] Kyle Grieve: Lynch also discusses two examples of people who sell for completely irrational reasons. One are people who sell a stock because it’s cheap and they can’t lose much. Now let’s say we have two people that have 10, 000 to spend on one stock. One person spends it on a stock that’s 100 a share, and another person spends it on a stock that’s 1 a share.

[00:51:42] Kyle Grieve: Now if each of these stocks go to zero, you’re still losing 10, 000. So this information is nonsensical. Now the second irrational reason for selling is in regards to when you use somebody else’s gain and compare it as a personal loss to yourself. Now, investing is a game where nobody, and I mean, nobody will pick every single winner.

[00:52:05] Kyle Grieve: So you don’t want to be FOMOing into a business where future success is heavily baked into the price just because you weren’t early enough. There will always be another opportunity out there that is the right fit for you. If you’re comparing yourself to others, you’re just constantly going to be letting yourself down.

[00:52:21] Kyle Grieve: It’s also worth noting that Lynch found that many of his big winners languished in the unknown for multiple years before eventually becoming multi beggars. So just realize that even while a business is improving, the market may not see it as quickly as you do be patient because once the business starts generating higher and higher profits.

[00:52:39] Kyle Grieve: It will reward the shareholders of that business with a higher share price, more in line with the intrinsic value of the business. Now, the final section I want to discuss on Lynch’s book here is a categories for his six types of investments. They are one slow growers, two stalwarts, three cyclicals, four fast growers, five turnarounds and six asset place.

[00:53:04] Kyle Grieve: The reason he separated the stocks into these categories. It’s because he understood that you can’t treat investments that are completely different in terms of value and growth the same. He wrote, there’s no point in treating a young company with the potential of a Walmart like a stalwart and selling for a 50 percent gain when there’s a really good chance that your fast grower will give you a 1000 percent gain.

[00:53:25] Kyle Grieve: On the other hand, if Ralston Purina already has doubled and the fundamentals look unexciting, you’re probably pretty crazy to hold on to it with the same hope. But if you buy Bristol Myers for a good price, it’s reasonable to think that you might put it away and forget about it for 20 years. But you wouldn’t want to forget about Texas Air.

[00:53:42] Kyle Grieve: Shaky companies and cyclical industries are not the ones you sleep on through recessions. Now, let’s go over each category. Slow growers are businesses that are likely to grow a little faster than GDP growth. Think of businesses today like Ford, Procter and Gamble, utilities, and you’re definitely on the right track.

[00:53:59] Kyle Grieve: These are businesses that many investors like because they pay a steady and growing dividend and have pretty stable earnings and you know, they do have competitive advantages. Peter noted that he liked businesses in slow growing industries because you could still find some quality growth businesses in these industries that would have very, very little competition.

[00:54:15] Kyle Grieve: Now the next category is stalwarts, which I see as businesses with. A lot of similar qualities to the slow growers, but have a few additional percentage points of growth. He says you can expect stalwarts to grow earnings in the 10 to 12 percent range. A few American businesses that fit this model would be ResMed, TriPoint Homes, Wesco International, United Health Group, and American Tower.

[00:54:36] Kyle Grieve: Stalwarts will also tend to pay a dividend. But there are downsides to paying a dividend. The less money a business can invest into itself, the lower the compounding will be. So if you are looking to maximize compounding, a low dividend is preferred. Another argument for dividends is that dividend paying stocks have less downside during market corrections.

[00:54:55] Kyle Grieve: At least during a correction, you will still get paid to hold the stock versus a business that pays no dividend. And another potential benefit Peter outlines is that it prevents the wrong business from spending money poorly on bad acquisitions. Lynch also makes a point on slow growers and stalwarts that they are unlikely to deliver multi bagger results in a shorter period of time.

[00:55:14] Kyle Grieve: They are now mature businesses, so you shouldn’t expect to generate massive returns from these types of investments, but they are stable and that is why he saw a place for them in his portfolio. The next type of investment was cyclicals. These are businesses where sales and profits could rise and fall in regular if not predictable fashion.

[00:55:32] Kyle Grieve: Think of commodities and you’re on the right track. The point being here is that if you understood a cyclical well, you could buy it at the bottom of the cycle and sell it at the top of the cycle. Now, some investors have made a career out of this and some fail miserably. I would add that if you don’t have very good insights and the ability to understand the nuances of when the cycle is going to turn, you can get very burnt.

[00:55:54] Kyle Grieve: But if you do understand the cycles, you can ride the twin engines of growth in earnings growth and multiple expansion that Chris Mayer has gone over. Now, the next category is fast growers. This was Lynch’s favorite and mine. These are among my favorite investments, small, aggressive, new enterprises that grow at 20 to 25 percent per year.

[00:56:12] Kyle Grieve: If you choose wisely, this is our land of 10 to 40 beggars and even 200 beggars. With a small portfolio, one or two of these can make a career. He also mentions here that fast growers do not have to belong in a fast growing industry. Lynch actually preferred businesses growing fast in slow growing industries because it protected it from competition.

[00:56:32] Kyle Grieve: A much discussed stock that we discuss here on TIP is Dino Polska. Despite the Polish grocery industry growing at a kegger of only 6 percent from 2016 to 2022, Dino Polska’s share price grew at a compounded annual growth rate of around 60 percent during that time period. Now there are three keys on fast growers.

[00:56:49] Kyle Grieve: One, don’t overpay. Two, don’t forecast impossibly high growth for long periods of time to the future. And three, understand the competitive landscape and why the business has advantages. If you ace those three things, you can identify some incredibly good investments. The next category are turnarounds, which are truly putrid businesses.

[00:57:08] Kyle Grieve: Lynch writes, turnaround candidates have been battered, depressed, and often can barely drag themselves into chapter 11. These aren’t slow growers. These are no growers. These aren’t cyclicals that rebound. These are potential fatalities. Now, in order to profit from these types of businesses, you must understand what catalyst is going to bring the business back from the debt.

[00:57:27] Kyle Grieve: Being acquired is often a good solution as the acquirer may have the resources to right the ship and improve the financial health of the acquired. I personally don’t bother with these types of businesses, but I do see the attraction. Many of these businesses will trade at very low single digit P multiples.

[00:57:43] Kyle Grieve: And if they can turn things around in short order, you’ll often profit just from multiple expansion alone. The final category are the asset place. These are businesses where a company is sitting on a valuable asset that you know about, but maybe wall street is overlooking. Well, it doesn’t happen very often with wall street, having their army of analysts with great resources, it does still happen.

[00:58:02] Kyle Grieve: If you look close enough, Lynch points out that the local edge can be utilized to a high degree on asset place. Asset plays require the investor to have a good understanding of a business’s balance sheet. The key is to look at the assets on the balance sheet and determine if the assets are at cost or current value.

[00:58:18] Kyle Grieve: Many businesses are not required to list their assets at current value. So you can find businesses where they may have assets on the books that they bought 30 years ago, such as land that have appreciated by multiples since that time period. If you live in an area where you know the land is being developed and you have some insider knowledge about the value, you can really see where the local edge can play its advantage.

[00:58:42] Kyle Grieve: That’s all for today. Thanks for tuning into this episode. If you’d like to connect on X, follow me @Irrationalmrkts or feel free to add me on LinkedIn. I’m constantly working to enhance the quality and value of each episode for you, so I’d love to hear your feedback, whether it’s positive or constructive, so I can continue to improve your listening experience. Have a great day!

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