June 13, 2009

Taking stock of the market

My friends no doubt think I'm crazy, reading Peter Lynch's 15-year-old investment book Beating the Street. Anything about the stock market that's printed on dead trees must be outdated, right?

Not entirely.

Certainly many of the individual stock recommendations are no longer applicable, because companies, industries, and most importantly, regulations have changed. This book predates Sarbanes-Oxley.

Nevertheless, the book is informative on two counts. First, as a sort of professional biography, in which Lynch recounts his experiences as a stockpicker. And second, as a manual describing how to research public companies.

One can always learn from history, and Lynch's observations about what he calls "The Great Correction of ’87" are instructive for those wondering how to invest in the current climate. Chapter nine is called "Prospecting in Bad News."

People, companies, and stock portfolios grow by learning from mistakes. But it's equally important to learn from other people's successes. The Great Correction of ’87 did not herald the end of civilization, nor did any of the 33 recessions identified by the National Bureau of Economic Research. The lessons on how Lynch and others prospected their way to success through the recessions of the ’80s and ’90s are still instructive to us today, even though we are no longer able to follow his suggestion to buy Chrysler. Even if we wanted to.

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