At the end of the year, the stock pool of investors has come to "bid farewell to the old and welcome the new". Compared with the strange investment logic in the market, the "Avenue to Jane" investment concept of Peter Lynch, the former head of Fidelity Magellan Fund, is worth learning. Investors need to make the most complex investments in the simplest way. "the best place to find 10 times shares is to start near your home, and if you can't find it there, go to a large shopping mall, especially where you work. "

For investors, in addition to Lynch's 13 stock selection criteria, there is also a list of "six no investments" that he avoids and can also be used as a risk aversion reference. of course, both the stock selection criteria and the risk aversion list "cannot be simply applied". In particular, its "six no investment" principle still needs to be applied in the A-share market according to the actual situation of the A-share market. Only by combining the specific industry characteristics of the target company and the market environment to make a comprehensive judgment, can we really improve the accuracy of our investment.

Lynch's "six do not vote"

Over the years of Peter Lynch's investment career, there are six main types of stocks that do not look or remain cautious: the hottest stocks in the hottest industries, companies touted as "next", "diversified deterioration" companies, whispering stocks, supplier stocks that rely too much on big customers, and fancy names.

The first category mentioned by Peter Lynch is "the hottest stock in the hottest industry". Lynch believes that no matter where investors are in a car or on a train, when people are keen to talk about a stock, the stock may have reached a very emotional stage. It is precisely because of the serious emotional, investors do not pay attention to the fundamentals of the company, while investors are also caught in the blind optimism that the stock "only goes up, not down". Often the hottest stocks often become the happiest stocks of "cutting leeks".

Lynch believes that hot stocks will quickly rush to amazing value heights when they rise, but once they fall, they will never fall slowly or stay too much at one of the so-called support levels, but will plummet surprisingly. In this process, investors who buy stocks because of the craze will certainly not be smart enough to sell early, and even if they have made a profit for a short time, they will quickly turn into a loss.

Lynch has experienced the madness of industries such as carpets and oil services, some of which have been enthusiastically sought after by investors but have become worthless after falling. Take Brown, an oil services company, whose share price reached $50 at one point, and the company's CEO publicly laughed at investors who were bearish on the company, but four years later the company's share price finally fell to $1, and investors who were as optimistic as the company's CEO suffered heavy losses.

After observing Brown, Lynch concluded that it was just a shell company with a bunch of useless rigs, a staggering amount of debt and a miserable balance sheet. "if you have to make a living by investing in one of the hottest stocks in one hot industry after another, you will soon have to receive welfare to survive. "

The second category that Peter Lynch does not vote for is companies touted as "next", such as the next IBM, the next McDonald's Corp and so on. In the current A-share market, the most common is the next Maotai, the next BYD and so on. Because while many investors strive to promote the "next", they often selectively ignore the background and conditions of the birth of the "previous".

Peter Lynch also devoted a lot of space to the "pluralistic deterioration" of the company. In the capital market, "diversification" is a very common development strategy valued by listed companies, but the real "diversification" successful companies are very few, most of them are telling stories. "pluralistic deterioration" companies are one of the "diversified" companies, which have deteriorated because of the high price of acquiring new companies and operating business beyond their ability to do business.

Lynch found that basically every 10 years, "pluralistic deterioration" companies make a "clock swing" between two extremes: one decade is a mass acquisition frenzy for multivariate deterioration, and the next decade is a frenzied mass divestiture and slimming restructuring. Lynch said that this series of frequent acquisitions that regret failure and have to be spun off, followed by acquisitions, regrets, and divestitures, apart from being warmly welcomed by shareholders of small companies, is not good or even bad for large companies that initiate acquisitions.

For "whispering stocks", "over-reliance on suppliers' stocks with big customers" and "companies with fancy names", in a nutshell, "whispering stocks" is the kind of stocks that tell you a big dark horse and a very profitable stock like a woman talking private. "supplier stocks that rely too much on big customers" is "if a company sells 25% to 50% of its goods to the same customer, it shows that the company's operation is in a very unstable state." "A company with a fancy name" is that investors fall in love at first sight as long as there are words such as "advanced", "major" and "micro" in the company's name, or mysterious acronyms made up of initials, but this is just "the wrong sense of security".

"pluralistic deterioration" companies also have investment opportunities.

Although Peter Lynch believes that staying away from the above six types of stocks is the best choice for ordinary investors to ensure the safety of their funds, he also points out that if there is in-depth research, there will be some opportunities.

Berkshire Hathaway is the successful minority among "diversified" companies. Berkshire was originally a textile factory, and Buffett insisted on working in the textile industry when he first bought it, but the declining competitiveness of the US textile industry made Berkshire increasingly embarrassed and had to cut back on its business again and again and eventually quit the textile industry completely. In the process of this exit, Berkshire has also transformed itself into a cross-border multi-industry conglomerate through mergers and acquisitions, with businesses or assets such as candy stores, furniture stores, newspapers and so on. the transformation to Berkshire has brought amazing performance. Lynch said Buffett's Berkshire Hathaway is focused on acquisitions.

Apart from the "minority", there are actually investment opportunities in some "pluralistic and deteriorating" enterprises. Lynch pointed out that the only two benefits of "multiple deterioration" are: first, holding shares in the acquired companies; and second, from those companies that have decided to downsize and restructure because of the difficulties of "multiple deterioration". Look for investment opportunities for troubled reverse transformation companies.

Applying Lynch's ideas to the A-share market, we can indeed find that there are cases in the market that first encounter the plight of diversification, and then rely on the divestiture of non-main business to achieve a reversal of the predicament, such as Changan Automobile in the automobile industry, Nord shares in the lithium electricity industry, and so on. Of course, the reversal of the predicament may just mean that the company is back on track, and how to develop in the future is another topic.

Lynch believes that if companies must diversify, "it is best to acquire companies related to their main business." But even so, Lynch is actually not a diversified company. "I would rather see a strong share buyback, because such a buyback would have the purest synergy with the stock price." "

Perhaps because he is good at grasping the state of the company's development, Peter Lynch has twice bought shares in Apple Inc: once, when Apple Inc issued shares in Massachusetts in 1980, it was determined by regulators that it was too risky for investors to buy, and only experienced investment institutions could buy its shares; the other was after Apple Inc's business collapsed and turned into a troubled and transformative company.

A dialectical view of the index of "major customer dependence"

Peter Lynch believes that companies with "big customer dependence" are risky: if a company sells 25% to 50% of its products to the same customer, the company is less stable. Lynch worried, "if losing an important customer would be a devastating disaster for a supplier company, then I would be very cautious in deciding whether to buy this stock." "

From Lynch's investment point of view and his economic environment, Lynch's worries are well-founded, but if they are simply applied in the A-share market, there may be investment deviations, because the operating environment of A-share companies is different from that of overseas companies, and many companies that big customers rely on are not very risky. Some even complement each other with the downstream and create a sound development of the industry. For example, among the current A-share companies (companies that disclose the 2021 report), many of the 18 companies with the largest customers contributing more than 90% of sales (see table) maintain a healthy trend. The data from 2019 to 2022 (excluding biomedical companies) show that the net profits of these companies are relatively stable, but there are some fluctuations in the growth rate.

According to public data, 10 of the 18 companies belong to the public utilities industry, 4 to the national defense and military industry, and 4 to the computer, pharmaceutical and biological, petrochemical and non-ferrous metals industries. Further combing through the largest downstream customers of these companies, we can see that most of them are large groups with huge scale, strong financial strength and state-owned capital background. For example, Qianyuan Power's biggest customer is Guizhou Power Grid Co., Ltd., which is a subsidiary of state-owned giant Southern Power Grid. It is these big customers who have huge financial strength and the credibility of the government to endorse, so that the relevant "big customers rely on" the situation of companies to achieve sustainable development.

Of course, in addition to the above 18 companies, there are 641 companies with the largest customers contributing to sales accounting for more than 25% and less than 90%, and the largest customers of these companies do not necessarily have strong financial strength and government background. therefore, once the business environment of major customers deteriorates, it is inevitable that there will be the risk of default of major customers reminded by Lynch. And the risk of major customers forcing suppliers to cut prices and provide other concessions, and once these risks occur, the performance will inevitably change face.

In short, investors need to comprehensively judge many factors in the investment, and can not simply make the final investment decision based on a single index.