Peter Lynch: Avoid These 10 Investment Mistakes

This is a very important rule. This is a very, it's one of the key rules: the stock doesn't know you own it. Remember that you could be a miserable person; you could have, uh, you know, never helped anybody, never done anything right, had 67 spouses, never done anything right. Have you owned Coca-Cola the last 50 years? It's gone up 300-fold.

Now what I'd like to talk about is what I call the 10 most dangerous things people say about stocks. Here's a good one: if it's gone down this much already, it can't go any lower. Everyone—Polaroid went from 140 to about 107. People said if you ever get Polaroid under 100, you've got to buy it! Just back up the truck; buy the stock! It's like you get 110 that rally; you know, fell 103. You've got 112, 105. He said gets under 100, bipolar Polaroid broke 100. People started buying it, and within nine months, the stock was 18.

I saw this with Avon Products, too. Just saying, you know, it's gone down this far. You know, how much lower? I mean, it's crazy, but you know it can keep going. In fact, I tried this out with Kaiser Industries. I was a new analyst at Fidelity, and we were about to buy the biggest block ever at Kaiser Industries. The stock had gone from 29 to 17. We're about to buy the largest block ever in the history of the American exchange. We bought, you know, 10 or 15 million shares at 50 and three quarters. I said, "My God, the stock's gone from 29 to 17! How much lower can it go?" So we bought this enormous block at 50 and three quarters.

So, I called my mother and I said, "Mom, I guess like Kaizen says, it's 10." So about three months later, I said, “You ought to buy this; it's going from 29 to 10. How much lower can it go?” Well, it went to nine. It went to eight. It went to seven. It went to six. It went to five. It went to four. Now fortunately, this happened very rapidly, or I'd be working at the Stop and Shop bagging behind the lines of the city Fidelity.

So fortunately, this was compressed in only about six months. So I had to go to the fundamentals and say I was a little bit early on this at fifteen and three quarters. But we call this premature in the business. It had a correction, which you know is a euphemism for losing a lot of money rapidly. So I said, "Let’s check this again." The stocks for they own 45 percent of Kaiser Aluminum, they own 59 percent of Kaiser Steel, they own 38 percent okay cement. They own all of Kaiser Electronics, all of Kaiser Broadcasting, which had seven TV sets. They own Jeep, the Kaiser fiberglass, said about Kaiser Santa Gravel, a bunch of other Kaisers, and they had no debt.

Now in this room, because I know Freeman Billings is very interested in financial stocks, no one's ever gone bankrupt without any debt. Now that would take a real—I think you have to get some kind of distinguished service award if somebody did that. Yeah, but they had no debt. I said, "It's not going to go to zero." You know, I was wrong when I said it can't go below 15. So we hung on, and within three years, they gave out the shares in Kaiser Steel and Aluminum and sold off all the businesses. You got 55 a share, but if you didn't know the story and the stock went from 15 to 11, and you're just saying how much lower can it go? When it went to 91.8, you would have gone.

So you can't just say you can't go any lower because I saw Taco Bell go from 14 to 1 in 1974, and they had no debt and were making 60 cents a share. There's a corollary to that that's even more dangerous: if it's gone this high already, how can it possibly go lower? Higher, sorry! That Philip Morris adjusted for splits sold for 12 cents in 1951, and then it goes to 60 cents in 1961. So it goes up fivefold, and you say to yourself, "How much—this never sold for that!" But just for splits to say, "How much higher can this go?" It's got a five-fold.

They missed the power of Marlboro. They missed that there are 220 countries in the world. They missed the cash flow of the company. They missed everything. This stock was a 100-bagger after going up fivefold, but people sold it just saying, "How much higher can it go? Can't go any higher." They did the same at Home Depot; they did the same with Toys R Us. I did the same thing with Toys R Us, just saying it can't go any higher. It's gone this much already! That's very dangerous, and don’t use that one. It's a very bad thing to do.

Eventually, they always come back. Here's another one that sucks. That's a technical stock market term we just use only in the stock market: the RCA just about got back to its 1929 price, backed out by G Manville. Never came back. International Harvester, even with its name changed and adjusted for splits, doesn’t get all the way back yet. Western Union, double knits—remember those wonderful things? Floppy disks—they don't have to come back. But they say eventually they always come back. Not true.

Here's a great one: it's three dollars; how much can I lose? This is a great one! You see, I get out this—I don't have a computer and I can't do high-level math, but just do this once: let’s say you buy—your neighbor buys ten thousand dollars of a stock at 50. The stock's now three, and you put twenty-five thousand dollars in at three. If it goes to zero, who loses the most? A lot of people cannot answer this question! You know, I mean, if you put a billion in at three, you can lose a billion. You know, they blow taps in lots of companies every year. You know, you just have—they can go to zero.

Here's a good one that helped me a lot: it's always darkest before the dawn. The business is terrible; it's awful. You ought to buy the group. This is not a good way of making money. Here’s one—you're probably talking about before lunch—freight car deliveries. In 1979, there were 96,000 freight cars delivered in the United States. Two years later, it fell to 45,000—the lowest in 23 years! It goes from 96,000 to 45; people say business is awful. It's horrible, pathetic! Then it falls to 25,000. They say just load up; there are about 15 opportunities to lose money.

There's about 15 suppliers of freight cars—15 manufacturers. Business was awful, but last year we shipped 7,000 freight cars in the United States. The business just continued to be miserable. And I'll give you one that's even—a greater opportunity to lose money on: energy services industry. This, we all had a great opportunity to get our heads handed to us. In 1982, there were 11,000 of those oil rigs drilling left, you know, drilling those holes all over Oklahoma and Texas and Colorado.

We used to have the rig count every week, and the recount fell from 11,000 in '82 to 6,083. Then for a little bit lower in '84. There are hundreds and hundreds of companies here. Companies that made the muds and did the down hole stuff, the fracturing companies, the well companies, all the measuring companies, the championships, the bid companies. Lots of opportunities to lose money here. There's equal opportunity here for serious losses.

And people said listen, the business is terrible, let’s buy this group! Well, the recount was only a thousand three years ago! So it went from eleven thousand to six thousand, five thousand. Then eight years later, it was under a thousand. The industry really started turning about two years ago! So just saying the business can’t get worse—ahem—I was lucky enough in addition to the metals industry and started finally—I had the textile industry, which is a great group to follow because you follow companies like JP Stevens, which was founded in the 18th century, and West Point Pep Roll, was founded in the 18th century. Burlington's one of the new companies, was founded in 1904.

These people have been through recessions, depressions, were wars, they've seen it all. There's a great expression in the textiles industry: it's always darkest before pitch black! Yeah, now that's a good one to remember because business is terrible; it can get considerably terrible! You're terrible to the power of six!

And I love those numbers of fake cards to lose—you ever watch I love the show Jeopardy? I watch Jeopardy, and people come out, they will know those numbers! They'll know the numbers, and they'll know, you know, what, uh, what country, uh, Box, uh, took his first vacation in, and they'll know Phil Rizzuto's batting average and what his wife's first name was, and they'll know the stock symbols of Xerox before it was hallowed. Or you know, they know everything!

And you watch the show, you feel like an absolute idiot watching the show because they answer all these questions, but they're really smart. I almost—I’ve owned this stuff before King World right after they show Wheel of Fortune. What happens is they'll have this word up there, it'll be th, and there's a t, and it says that buy a vowel here! Should buy you, you know, Vanna spins the wheel and they buy the A!

And you know, you redeem by watching the Wheel of Fortune after feeling like an absolute jerk on the Jeopardy game. And it’s really smart!

When I rebound to 10, I'll sell. Here’s a great rule. Somebody buys a stock at 10, and it falls to six. Let’s say if it gets back to 10, I'll sell. Now, I think the math—four and six, I can handle this level math—I think that's about a 66 percent return! You ought to buy if you think it's going back to 10! Buy the hell out of the damn thing!

But they think if it gets back to 10, I'll sell. Now what you ought to do is never put down a round number. I think for the next 26 years, the stock's going to go between five and nine and a quarter. It'll never get to ten! So maybe put nine and eight or eight three-quarters, but just saying the stock, if it gets back what I paid for it is a very important rule.

This is a very—it's one of the key rules: the stock doesn't know you own it! Remember that you could be a miserable person; you could have, uh, you know, never helped anybody, never done anything right, had 67 spouses, never done anything right. If you owned Coca-Cola the last 50 years, it's gone up 300-fold.

You could be the greatest human in the world! Help Special Olympics, help the mentally challenged, help poor people, help AIDs people. If you own Bethlehem Steel, it's lower than it was 30 years ago! It's not your fault! Don't take this personal, you know! But people treat stocks sometimes like grandchildren or a puppy. I mean, they think—the stock thinks it knows who you are, you know, it doesn't work that way!

Let me worry, I own conservative stocks! I don't have to worry! I own conservative stocks. Iron Con Ed fell 80 percent, then tripled! Public Service Indiana went down 90! Gulf States Utilities! Long Island Lighting—this may be an oxymoron with quality! Texas banks went to zero. We had quality New England banks that went to zero. These are companies that have been around for 150 years, 120 years, saying, "I own conservative stocks; I don't have to worry!"

I've seen a lot of people don’t inherit a stock from somebody. They’ll say, "You know, my mother said on her deathbed, don’t sell the Long Island Lighting." You always wondered, you know, is she going to heaven or, hopefully, where she's going? Heaven! You know, they talk about a little game or a vacation or a game of hearts they had, or imagine talking on your deathbed about Long Island Lighting! And he said, "You know, but you get these stories all the time!"

And I think your mother would have noticed; she would have sold at 29! But she went—she would have noticed it! This little plant that was about 6 billion over budget no one wanted, and that wasn't working, and Long Island stopped growing. So maybe she would have turfed it at 22 or got up at 18. She wouldn't let it go to four, you know! So just because you inherit some stock and it's so-called conservative like Eastman Kodak fell 75, IBM fell 75 percent—don't tell anybody you own a conservative stock! Companies are very dynamic! I don't buy that argument.

Here's a very dangerous one: look at all the money I've lost! I didn't buy it! People do this all the time. They say, "I didn’t own Blockbuster; I didn’t own Home Depot; I know Toys R Us!" Eric, it was very nice to say some nice things about when I came up here, and Manny has been nice to me. I laid in one of my books, listed on two pages, in the 13 years of Magellan, I listed I think about 200 stocks A through L on the New York Stock Exchange. They went up 10-fold or more that I didn’t know.

Well, I ran Magellan, I had on lots of stocks! I listed 200 stocks A forward; I stopped at the letter L and I didn’t own any shares! They went up tenfold or more, and I was able to do okay with Magellan. And people worry all the time about missing Microsoft, missing Western Digital, missing United Airlines. They spent all their time worrying about stocks they miss! You cannot lose money in a stock you don't own! That's a variable you have! The only way to lose money is to buy stock, have it go down, and sell it! That's the only way!

And I swear that people—that their spouse has to cut out the newspaper in the morning, cut out the sees, and the person will look at the amis, "Oh my God! Microsoft's up three! You know, I was gonna buy a thousand shares on Microsoft! I lost three thousand Microsoft last night while I was sleeping!" You know, I was gonna buy seven thousand shares of National Semiconductor at ten! It's now 17! I just lost 49,000 on National Semiconductor! They do this all the time! They may have to cut holes in the block!

Thank God, Blockbuster finally went away because that was early in the alphabet! People would always be looking: how much they lost in Blockbuster? I missed that one; I'll catch the next one! That usually does not work! Toys R Us—there're a lot of copycats of Toys R Us! There's Trial World, there's Lionel, there's copycats from Home Depot! Buying the next of something usually doesn’t work! It's very bad! It's like buying on dips!

I think it's always better to buy from dips! That was a better rule than bioentex. You may have to explain this to some other people; just another technical term they have to explain after hours where the dip is hit! But usually referred to as plural’s dip! So I've never heard dip! You know he's a dip because she's a dip; they usually only have a plural tense for it, and it's a gender non-specific; it's usually plural; it's never used.

Stock has gone up; I must be right. Stock has gone down; it must be wrong! I ain't convinced that people do this all the time! They buy a stock at 10; they buy a little bit of it—it goes to 13. Now they say they don’t know anything more about it than they knew when they were 10! They have no idea what this company does! It's gone 13! Now they take a second mortgage in the house and buy the 13!

The best thing could happen for us is the stock go directly from ten to four for these folks! You know it's gonna go to four eventually, but it goes to 13 in the middle, they're convinced now. They bought a hundred shares of ten, not only buy twenty thousand and thirteen! And uh, all the fact is the stock market from 10 to 13—mean, you know, it went up. The average movement of a stock in the New York Stock Exchange this century between its high and low has been 50 percent! The average stock nearest exchange, that means the stock of the year 20, sometimes during the year sold at 16, sometimes during the year sold at 24, might have finished the year 21! Might have finished at 19!

The average range of a stock in the stock change is 50 in 12 months between high and low! So stocks go up and down a lot within a year! And saying this stock is going up means you’re right doesn’t mean a damn thing, so don’t buy off an Allen! That is not a good one! The uh, avoid long shots! These are the companies that we have this very technical term for this, uh, called whisper stocks!

The, uh, everybody whisper stocks! They're great! Maybe play any golf, and they’ll say I want to talk to you about International Blivet; and the next one, they'll get a shorter term in those places where they have Nordic tracks and they put them away, and they don’t, they don’t, you know, have to make big rocks into small rocks—they just watch movies and they have Nordic tracks! But they won't—they will not catch these people if they whisper in the phone!

And these are always these long shots! These are stocks that are going to grow hair and make your kid have better spelling and your breasts can improve, and you won't have to iron your pants! You know, it's one of those stocks, and they always do everything for you! But they're missing; they don't have any sales yet! You know, that's the missing element of the story. The story is temptation; there's no prophecy, no sales yet! But my God, if this works, if this works, it’s going to be the next Xerox, you know, and it’s going to help murder in space and everything.

It's a very, very good deal! Now this is not a long shot; this is a no shot! You have to separate these out! I've tried 30 of these—I have never broken even on a long shot! Never! I've made 25, 30 times my money on some stocks I never thought about! Sally Mae, or MBIA, or Fannie Mae, or some of the banks or Stop and Shop—I've made 20 tons of money, 30 times my money! I had no idea! I thought the stocks were going north!

I had no idea you look back 10 years later; you say, "My God, I made a lot of money in this thing!" But once I went into thinking I could make four times my money, I've never broken even! So don’t do the long shot, guys! They don’t work! The, uh, they simply don’t work! And again, if a stock’s three and it has huge potential, write down the story! Take the stock symbol! If it's going to 300, it's okay to buy it at 15! Check in later! Check it a year later; see if it's still listed! You can still get a quote on it! See if they sell the orange yet! But if it's going, write the story down! Some of these work; I haven't heard yet, but maybe they will work! But it's worth tuning in six months later.