Beating the Street [Paperback]

Great because

1) It is ideal to read for the casual to serious investor.
2) Some of Lynch's prominent themes like "Buy what you know" and investigating the companies that you buy are great strategies, especially for non-professionals.
3) He walks you through his thought process on numerous stocks in several industries, highlighting mistakes as well as successes. I found his various rules of thumb with respect to each industry (retail, restaurants, cyclicals) helpful

I say it is poor because Lynch himself used to buy and sell stocks frequently. So while he says "buy and hold" he did that, but he also traded the heck out of stocks he knew inside and out. When they got expensive, he would trim his position and when something got really cheap he would buy the heck out of it. This enabled him to compound his returns by a phenomenal amount

Lynch primarily invested in retail stocks. This was great as brand names and the "homogenization" of retail concepts via chain stores was sweeping the nation with the baby boom wave. However, most of that "easy money" was made along time ago. Current baby boom themes of biotech, health care, along with some financial service industry stuff is tougher to make money at and it doesn't grow as fast as retail. Well, biotech can but it is far riskier.

Lynch never talks about debt. The U.S. economy expanded in the 80's due to 1) heavy government spending, which created a huge national debt (2) consumer spending a ton of money and going into debt and (3) the entrepreneurial spirit. The government actually funded a lot of the developments we see today. The problem with this is that they have mortgaged the future to pay for past wealth creation. He never once mentions the impact of debt. It is great while you are charging the credit card up and enjoying the ride but eventually you have to pay the bills!

Lynch spends a lot of time telling the reader how he went about picking stocks for his Magellan Fund, but he has the ability to talk to CEO's and visit companies on site headquarters, something the average investor certainly does not have. I would say though that Reg FD has made the playing field more even, as now nobody gets a lot of information!

My thoughts on stock picking, having worked in the financial service industry for 3 years in research (got out because my values didn't correlate with the business) is that no one should expect to beat the pros unless they are 1) very observant and 2) willing to commit time to finding new investment concepts/vehicles.

Mr. Lynch starts the book by turning investing into a game. Although his method was subtle (using an example of grammar school kids picking stocks), the implications are profound. Investing does share some resemblance to many games we play in life, and one of the Great Money Masters, the fictitious 'Adam Smith' readily admits this in his classic book on investment, The Money Game.

However, Mr. Lynch takes things one step beyond the game, and as the book's title hints, he turns all investment activities into a competition. In so doing, he pits the small investor against the institutional Players, and as a result, sets up the naive reader to walk a well-trodden path littered with sorrow and the bones of many foolish investors.

Granted, 'Adam Smith' once said, "The Players aren't smarter than you. They just have more information", and there also is a certain level of truth to Lynch's assertion that the Little Guy can outperform the Big Boys. However, Lynch fails to disclose one important and critical difference.

I believe it was Hemmingway who said, in response to Fitzgerald's observation that the rich were not like the ordinary schmuck, that "Yes, I know. They have more money." Something frightfully similar can be said of the key difference between the Little Guy and The Players, but with one critical insight: The Players do not merely have more money, they have a lot more of Other People's Money. That in essence is the fundamental difference between The Players and the Little Guy, who must wager his (or her) own hard-won funds in order to play the Grand Game- the stock market.

Needless to say (but will be said anyway), the consequences of one's actions weigh heavily on one's shoulders when one's own money is at stake, but really aren't felt when Other People's Money is on the line. The Players play with Other People's Money, but you, dear investor, play with your own hard-won earnings. That said, the intelligent investor must ask herself, 'Do I really want to play with my money?'.

Beating the Street rests heavily on this undisclosed truism and a host of faulty assumptions. The book really is a sales pitch to buy stocks and to participate as much as possible in stock mutual funds. To that end, Mr. Lynch places before the reader a number of questionable arguments. Here are just two:

First, perhaps the most flawed argument of the book is that the small investor, upon retirement, will spend more than she earns in investment income. This is stated as a bona-fide fact when in reality, it is a generous assumption. From this assumption, Mr. Lynch then argues that one should invest in stocks and use some portion of the capital appreciation in addition to the dividend income for the purpose of meeting one's spending needs. He then fortifies his argument by citing inflation and emphasizing its ability to erode fixed income.

The facts are 1) how much investment income you will need is determined by how much you plan to spend, 2) many people choose to work either part-time or full-time after retirement (either out of necessity or desire), and thus have some supplemental income, 3) though the general historical trend for stock prices has been 'up', there is nothing that says that stocks have to go up, and finally 4) inflation can adversely affect stock prices (and have actually done so in the past). Lynch invokes the inflation argument when trashing bonds, and abandons it when touting stocks, even though inflation acts on both. Nor does his idealized comparison of stocks vs. bonds on pages 52-56 take into account taxes and transaction costs incidentally.

Second, on page 69, Mr. Lynch boldly says that, "If you plan to to stick with a fund for several years, the 2-5 percent you paid to get in will prove insignificant". This last statement may actually be worse than his first (of many) flawed arguments, for the following reason: the money lost to the load fails to compound at whatever investment rate of return, and over long periods of time, the difference between what you committed and what gets actually invested grows- and this is before we even consider the effect of annual expenses.

These and other flawed but superficial arguments for stock investing make for very difficult reading. Apart from the gross argumentative errors, the book presents many of Mr. Lynch's reminiscences of a stock market long gone. However, there are some useful hints in the book, most likely put there by Mr. Rothchild, but they are far outnumbered and over-shadowed by Mr. Lynch's deceptive pitch to buy stocks.