Do You Have An Advantage Over Wall Street?

Hey, The Investor’s Podcast Network Community!

In Peter Lynch’s book One Up On Wall Street, he talks about “how to use what you already know to make money in the market”.

There are three pieces to the title and subtitle of this book.

First, using the title, Lynch is stating that there is a way for investors to have an “up” on, or an edge over, Wall Street, without directly saying what it is.

Then, the subtitle gives us a bit more of a clue on how, but doesn’t quite give us the whole picture. The subtitle says there is a way for investors to use their pre-existing knowledge to make money in the market.

Putting these two concepts together, linking “the market”, which Lynch did not clearly define, with “Wall Street”, we can derive that he is referring to the stock market and how individual investors can achieve better returns than professional money managers.

Now, the lingering question is “how?”

Lynch explains, “average investors can become experts in their own field and can pick winning stocks as effectively as Wall Street professionals by doing just a little research.” He goes on to say, “by simply observing business developments and taking notice of your immediate world — from the mall to the workplace — you can discover potentially successful companies before professional analysts do.”

One Up On Wall Street was originally published in 1989, so it’s a bit of an older book, but that doesn’t diminish Lynch’s credibility. He was the portfolio manager of the best performing fund in the world, the Fidelity Magellan Fund, for 13 years, averaging double the S&P 500 index at the time — a 29.2% annual return. When Lynch took over management of the fund in 1977, it had assets under management (“AUM”) of about $20 million. By the end of his tenure, it grew to $14 billion in AUM.

Commonly referred to today as “buy what you know”, how do we actually apply this approach?

Think back to your first iPhone — when was it? If I recall correctly, mine was the iPhone 4 in the summer of 2010.

In the summer of 2010, Apple’s stock was trading at about $9 per share. What Lynch is advocating is that I could have seen how many people were buying the iPhone in my everyday life, which could’ve led to me investing in the company. Today, Apple is trading at about $128 per share. Had I invested in Apple stock based on Lynch’s approach in 2010 (I ended up investing in 2013, but sold too early — that’s another story), I would’ve 14x my original investment — a 27.3% annual return.

Others who have implemented this strategy have talked about massively successful investments in software companies, such as Salesforce, because they used its tools in their day-to-day work.

The same could be said for Amazon, if you were an early online book store shopper, or Netflix, if you were an early online content consumer.

However, the strategy does not always work like this.

You could’ve known Blackberry, Kodak, Blockbuster or Circuit City well, leading you to invest, and you’d be in a much different position today than you would have been in the Apple, Salesforce, Amazon, or Netflix situations above.

There’s a lot more that goes into an investment thesis and decision than just knowing, or liking, a company’s products and services. There is a business behind each product and service that you must also understand.

However, Lynch’s point holds true. If you find a company like those above before it hits mainstream Wall Street, or if you can understand a business so well that you see value in a piece of the business that most people are missing, you may have a great investing opportunity on your hands.

Before I started writing this week’s Intrinsic Value Assessment, I wasn’t sure which company I was going to analyze. I was going through the Filter feature in the TIP Finance tool when I came across a company that I felt I knew quite well, at least as a consumer.

My background before finance was, surprisingly, in racing motocross. My dad owns a small business as a mechanic and has been doing it for nearly 30 years. Having been around this industry my whole life, when I saw this company in the TIP Finance tool, trading at what appeared to be an attractive valuation on the surface, I instantly thought of Lynch’s strategy and knew I had to dive in deeper.

The company is AutoZone, Inc.

Not only does AutoZone fit into Lynch’s strategy for many people, but it also likely satisfies Buffett’s requirement of only investing in companies within your circle of competence.

It has consistent and growing cash flows, a great management team, and a positive momentum indicator in the TIP Finance tool.

Now the question is, at today’s price, is AutoZone’s stock undervalued?

P.S. The Investor’s Podcast is HIRING! Are you a fan of We Study Billionaires, have a great network, and love sales? Then apply today for our Advertising Sales Manager position. Please submit your resume to stig@theinvestorspodcast.com with “Sales + Your Name” in the subject line. We can’t wait to hear from you!