Learn to Earn by Peter Lynch and John Rothchild

Alvin Chow
Alvin Chow

Learn to Earn touches on basic investment with a lot of explanations about capitalism, history of stock market and how should one approach investing. It is a good book to get one  thinking why invest in the first place and you would ask yourself a lot of fundamental questions. And the main message was to encourage people to invest in stocks.

Here’s the main points:

Shareholders do not get sued

Shareholders do not get sued, “It [a corporation] can be sued, as can its managers and directors, but the owners – the shareholders- are protected. They can’t be sued in the first place. In England, companies put the word “limited” after their names. This indicates that the liability of the owners is limited, just the way it is in U.S. companies… This is a crucial safeguard of our capitalist system, because shareholders could be sued whenever a company made a mistake, people like you and me would be afraid to buy shares and become investors.”

Do not get enticed into manias

Citing examples of Mississippi Company and South Sea Company, Lynch warns about getting into a mania. “Whenever crowds of people bet their life savings on a hopeless projection, it’s called a “mania” or a “bubble.” The pattern is always the same. Frantic investors pay ridiculous prices in order to get in on a spurious opportunity, and sooner or later, the prices come crashing down.

Companies should focus on business trends

Lynch stressed that it is the small things that kill businesses and not the big things like global warming, nuclear war, currency war, etc. he small things that he referred to was competitors changing their way of operations. He quoted the example of A&P grocery store company where it thrived during the Great Depression. The company actually expanded its operations. But the competition changed the operating concept to self service store where customers can roam around and pick up items from the shelves (it used to have a counter clerk to pick up items upon request from customers). A&P followed suit and open up big supermarkets and rode the boom after WWII. “Depressions they [companies] can handle, wars they can handle, the hole in the ozone layer doesn’t bother them, but competition can do them in.”

On U.S. debt

Lynch was already concern about the debt that U.S. government is accruing (the book was published in 1995). “That’s how the government congratulates itself for cutting the deficit while the deficit continues to grow. This year, it adds, say, $200 billion to the debt and calls it a “reduction” because last year it added, say, $250 billion to the debt. Really, it’s no reduction at all. It’s another $200 billion, plus interest, that our children and our children’s children will someday have to pay. The debt will continue to mount until the government stops using the credit card and spends only what it collects in taxes.”

Why bond with longer maturity pays higher interest?

“The longer it takes for bonds to pay off, the greater the risk that inflation will eat up the value of your money before you get it back. That’s why bonds pay a higher rate of interest than the short-term alternatives, such as CDs, savings accounts, or the money market. Investors demand to be rewarded for taking the greater risk.”

Why most people lose money in stocks?

“When people consistently lose money in stocks, it’s not the fault of the stocks. Stocks in general go up in value over time. In ninety-nine cases out of one hundred where investors are chronic losers, it’s because they don’t have a plan. They buy at a high price, then they get impatient or they panic, and they sell at a lower price during one of those inevitable periods when stocks are taking a dive. Their motto is “Buy high and sell low,” but you don’t have to follow it. Instead, you need a plan.”

Investment timeframe

Lynch is an advocate for long term investing and he felt most people held their investments for too short a period. “Twenty years or longer is the right time frame. That’s long enough for stocks to rebound from the nastiest corrections on record, and it’s long enough for the profits to pile up.”

Treat stocks investment as a marriage

I have heard the market adage “don’t fall in love with your stocks” but Lynch suggested you should stay in the marriage, “…this is a marriage we’re talking about, a marriage between your money and your investments. You can be a genius at analyzing which companies to buy, but unless you have the patience and the courage to hold on to the shares, you’re an odds-on favourite to become a mediocre investor. It’s not always brainpower that separates good investors from bad; often it’s discipline.” He emphasised again, “People are always looking around for the secret formula for winning on Wall Street, when all along, it’s staring them in the face: Buy shares in solid companies with earning power and don’t let go of them without a good reason. The stock price going down is not a good reason.”

Why buy and hold?

The reason why he emphasised on buy and hold is because most gains from the stock market were made during short periods of time and you do not want to miss such movements. “During a prosperous five-year stretch in the 1980s, stock prices gained 26.3 percent a year. Disciplined investors who stuck to the plan doubled their money and then some. But most of these gains occurred on forty days out of the 1,276 days the stock markets were open for business during those five years. If you were out of stocks on those forty key days, attempting to avoid the next correction, your 26.3 percent annual gain was reduced to 4.3 percent.”

It is okay to make mistakes

Do not expect every stock you buy to be a winner but you can still come out ahead. “Warren Buffett has made mistakes, and Peter Lynch could fill several notebooks with the stories of his. But a few big winners a decade is all you need. If you own ten stocks, and three of them are big winners, they will more than make up for the one or two losers and the six or seven stocks that have done just OK.”

It is not a zero-sum game

Is investing a zero-sum game such that one man’s gain is another man’s loss? Lynch explained, “[p]rofit is a sign of achievement. It means somebody has produced something of value that other people are willing to buy. The people who make the profit are motivated to repeat their success on a grander scale, which means more jobs and more profits for others.”

Stock price is determined by earnings

This simple point – that the price of a stock is directly related to a company’s earning power – is often overlooked, even by sophisticated investors…. This is the starting point for the successful stockpicker: Find companies that can grow their earnings over many years to come.”

A note on mergers and takeovers

“The most successful mergers and takeovers are those in which the parties involved are in the same line of work, or att least have something in common.” In other words, acquisition should fulfil strategic interests to the company.

Defining correction and bear market

“When stock prices fall 10 percent from their most recent peak, it’s called a “correction.” We’ve had fifty-three corrections in this century, or one every two years, on average. When stock prices fall 25 percent or more, it’s called a “bear market”. of the fifty-three corrections, fifteen have turned into bear markets. That’s one every six years, on average.”

Why you should not time the market

“Far more money has been lost by investors trying to anticipate corrections than has been lost in all the corrections combined.” “If you kept all your money in stocks throughout these four decades, your annual return on investment was 11.5 percent. Yet if you were out of stocks for the forty most profitable months during these forty years, your return on investment dropped to 2.7 percent.”

Do what you love

“Find something you enjoy doing and give it everything you’ve got, and the money will take care of itself. Eventually, you reach the point where you can afford to spend the rest of your life at the side of a swimming pool with a drink in your hand, but you probably won’t. You’ll be having too much fun at the office to stop working.”

I like the last point 😀

Free delivery to your house! Buy the book here.

Alvin Chow
Alvin Chow
CEO of Dr Wealth. Built a business to empower DIY investors to make better investments. A believer of the Factor-based Investing approach and runs a Multi-Factor Portfolio that taps on the Value, Size, and Profitability Factors. Conducts the flagship Intelligent Investor Immersive program under Dr Wealth. An author of Secrets of Singapore Trading Gurus and Singapore Permanent Portfolio. Featured on various media such as MoneyFM 89.3, Kiss92, Straits Times and Lianhe Zaobao. Given talks at events organised by SGX, DBS, CPF and many others.
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5 thoughts on “Learn to Earn by Peter Lynch and John Rothchild”

  1. I like the last point too!

    Strangely this very message came to me several times recently.
    I strongly believe in it and I want to accept and achieve it.
    But I’ve difficult paying the price for it again due to other commitments.

  2. There are a lot of books in the market that teaches about investment. Most of the books are junks. Books by Peter Lynch are rare gems to learn investment. One of the statement mentioned that if EPS is rising, stock prices should rise, in the long run. This statement is very important to my investment strategy now. And it works.

    But the book did not mention when to take profit. It does not tell us how to calculate the fair value of a stock.


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