Peter Lynch – Here’s How To Deal With A Falling Stock

Speaker 1: There’s a lot of times people buy on the basis the stock has gone down this much, you know, how much further going to go down? I remember when Polaroid went from 130 to 100 people said, here’s this great company, great record, but gets below 100, you know, just buy every share, you know, and it could get below 100 people bought on that basis saying, look, it’s got one hundred thirty five hundred. It’s not ninety five. What to buy within a year was 18 and this time with no debt. I mean it was just so overpriced it went down. I did the same thing in my think my first or second year Fidelity Kaiser Industries had gone from twenty six dollars a share to 16. I said, how much more can it go at 16? So I think we bought one of the biggest blocks ever in the New York on the American Stock Exchange of Qaiser Industries. At 14, I said, you know, it’s gone from 26 to 16 hours ago. What can I call my mother and said, Mom, you’re going to look at this guy’s registries. I mean, how much lower can it go? It’s gone from twenty six to ten. Well, I went to six. It went to five. I went to four and went to three. And I am fortunate to have rapidly I would probably be still caddying or working at the stop and shop, but it happened fast. I was able to compress that and at three I figured, you know, there’s something very wrong here because Cayzer Industries owns 40 percent of Kaiser Steel. They own 40 percent of Kaiser Aluminum. They own 32 percent of the cement Kaiser Broadcasting, Kaiser Standard Travel. Some engineers, they own their own business after business and they had no debt. Now, I learned this very early. This might be a breakthrough for some people. It’s very hard to go bankrupt if you don’t have any debt. It’s tricky. Some people can approach that. It’s a it’s a real achievement. They had no debt and the whole company at three was selling at about seventy five million. At that point, it was equal to buying one Boeing 747. I said there’s something wrong with this company selling for seventy five million. I was a little premature at sixteen, but I said everything’s fine. And eventually this work out and they, what they did is they gave away all their shares to the shareholders, a parcel of shares, a commitment to pass out shares, and they passed out the public shares. And Kaiser still they sold all the other businesses and you got about fifty dollars a share. And but if you didn’t understand the company, if you’re just buying on the fact the stock had gotten twenty six to sixteen and then again to ten, what would you do when it went to nine, what would you do want to eat. What would you do when went to seven. This is the problem that people have is they sell stocks because they don’t know why they bought it. Then it went down and they don’t know what to do. Now, do you flip a coin? Do you walk around the block? You know, what do you do? It’s psychiatrists haven’t worked so far. I’ve never seen them running into the psychological psychiatry fund. I’ve never seen before the with the S.E.C. to make it through as a mutual fund. So they haven’t seen the help. I’ve tried prayer that hasn’t worked. The the so if you don’t understand the company, you have this problem. When they go down, eventually they always come back. This one is this one doesn’t work either. People think RCA just about get back to its 1929 high when General Electric took it over double digits, never came back. None of those butties floppy disks. Western Union, the list goes on and on. People saying it’ll come back. Well, it doesn’t have to come back. Here’s another one you hear all the time. It’s three dollars. How much can I lose? I’ve had people call me up, so I’m going to buy the stock at three. How much if I lose? Well, again, you may need a piece of paper for this, but if you put if you and if you put twenty thousand dollars in stock at fifty or your neighbor put twenty thousand for at fifty to the stock and you put twenty thousand dollars in it three and it goes to zero, you lose exactly the same amount of money, everything. If people say it’s free, how much can I lose. Well if you put a million dollars on it you can lose a million dollars. Just the fact that this is the this may be a recent research based on the fact the stock is three down from one hundred doesn’t mean you should buy it. And in fact, short sellers really make money in stocks. They don’t shop at Wal-Mart. They don’t shop at Home Depot. They’re not sure. The great companies, Johnson Johnson, they short stocks down from eighty to seventy. They’d like to shorted at sixteen or twenty two, but they they figure it out at seven. This company is going to go to zero. They just haven’t blown Tapson. This thing, it’s gone to zero and they’re selling short seven. They’re selling short at six, five, four, three, two, one in the quarter. And you know, to sell something short you need a buyer to buy the damn thing. Anyone who’s buying these things, these people saying it’s three, how much lower can it go?

Speaker 2: Yeah, Peter Lynch, he’s one of the smartest investors of all time. And this just gives you a glimpse into his genius investing mindset. And I don’t want to explain what Peter Lynch is getting at. For those who didn’t quite grasp it, you see all investors at some point in their life, they have to deal with the falling stock. I’m sure you have had to go through it. I’ve certainly gone through my fair share of drops and these drops of a two very important questions. The first one. Should we sell the second one? Should we buy more stock? So I want to explain a bit more detail, the answer to these questions as per Peter Lynch’s video. And we’ll start with an analogy. Let’s say I come to you and I ask you if you want to play a game of chess, will say the loser has to give the winner ten thousand dollars. Now, would you take this deal if you’ve never play chess before? Of course you wouldn’t, because you don’t understand the game and odds are you’re going to lose. However, if you Magnus Carlsen, the number one chess player in the world, of course, you take this deal because you understand the game and you know you’re good at it. It’s the same with investing. You need to understand the stocks and the underlying businesses before you buy anything. And importantly, you need to be good at this. If you lack the understanding, odds are you’re going to be the dummy who ends up losing their money. I want to give you two modern day examples of smart investing when a stock goes down and dumb investing. So let’s take Apple stock, for instance. Earlier this year, they had a big crash. They went down in terms of price by 31 percent, almost a third of the market value wiped out. Now, people during this time were panicking. How much further is the stock going to go down? Should I sell? What should I do? But it was those investors who actually understood the value of the business who didn’t panic at all and bought more. As you can see earlier on in twenty twenty after the crash, Apple was in my recommended list of stocks to buy. Now you can go and view that video, because at the end of the day, Apple was still a solid business with a strong business model. IPhones were being used throughout the world. The Mac books, the iPads, the watches, the iTunes, the services segments, they were still going strong. It was those that understood the fundamentals of the business who knew what to do and bought more. So that’s an example of wise buying when a stock goes down, why more? When a quality business goes below their intrinsic value, we can look at other examples that were not the smartest of buyers. Let’s look at General Electric. Halfway through 2016, it was selling for 32 dollars a share and everything looked rosy and then it started to drop and drop some more. At the start of 2018, it had dropped by half the original amounts to sixteen dollars a share. This left investors with burning questions. Hang on, isn’t General Electric a complete bargain right now? Because it’s dropped by 50 percent and once it was selling for 32 dollars a share, it must be a buyer. And this is the exact thing that Peter Lynch warns about. Don’t simply buy a stock because it’s dropped by dramatic amounts and price. If you do this purely because of that fact, most likely you’re going to lose. That’s why Warren Buffett says just looking at the price is not investing. At the end of the day, you need to be buying a quality business, one in which you understand the mechanics of and also where you got a decent idea of where the value is. You need to be able to judge whether it’s a falling knife or a gem that’s on sale. So I want to finish this video with some practical tips on how to tell if it’s a falling knife or an absolute bargain. Because the thing is, these massive price drops often offer huge opportunities. You just need to be able to distinguish the good from the bad. So step one is familiarize yourself with the business and the business model. How do they earn money? Has this been hindered in any way recently in the future? What is it likely to do? Are earnings going to increase, stabilized, decrease? And to be able to know this, you need to know the business well, like a business owner would start to do some digging and the balance sheet. So you can do this simply through a website like Yahoo! Finance and look at things like how much debt do they have? For example, Delta Airlines stock has a massive pile of debt, as you can see here. And another thing I’d look at is price to book value. This is what Peter Lynch was talking about with the industry stock back in the day. A fair price is ever cheaper than their book value. You’ve got to bargain on your hands. So have a look and see if the price to book is ever below one. Then you may want to consider buying. So those are just a couple of simple things that you can do to determine if a stock is a falling knife or a bargain gem, because at the end of the day, these massive price decreases often offer a major opportunity. But you need to be able to distinguish if it’s an opportunity to become rich or broke.

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