Peter Lynch Approach to Consumer Names - Confirmation Biases at Play?
"One Up On Wall Street" by Peter Lynch is a classic book on stock picking. His recommendation to retail investors is to buy what we know, based on our personal experiences. It is a tried-and-tested formula that every investor can implement in the consumer space. For example, early fans of Nike $NKE and Apple iPhones $AAPL would have done very well if they had bought shares in either company. Lynch does qualify his methodology with multiple outlines of valuation and financial analyses; investors are taught ways to avoid overpaying or investing in companies that do not have sufficient viability.

Personal preferences can be tricky though. When we fall in love with a product, we may end up looking for evidence to support our biases. Companies like GoPro $GPRO and Blackberry $BB were once popular hits, until they weren't. When I was in investment banking, Blackberries were EVERYTHING. I even bought Blackberries for personal use! Thank goodness I was not interested in equity investments back then.

By the same token, if we dislike something, we may end up writing off investment opportunities prematurely. There are people who dislike fast food, and that might have stopped them from investing in McDonald's $MCD.

As I reflect on this post, and the article I wrote below, I am also observing my own biases. Am I long Tesla $TSLA because - to quote the song from Queen - I'm In Love With My Car? Does my Amazon Prime membership (and growing spend on that platform) feed into my bullish take on the stock $AMZN?

No easy answers to the above questions. Elon Musk (am I in love with him too?) may, however, have something to offer with his physics approach of first principles thinking.

Read on via the article below and subscribe to my FREE weekly blog, Consume Your Own Tech Investing:

Alex Biestek's avatar
Interesting little write up, thank you for sharing!
Benjamin Tan's avatar
@acb123 cheers ! Saturday musings ;)
Rahul Setty's avatar
Great post, a wonderful product/service is not necessarily a great investment. I think when we fall in love with the product it’s very easy to overlook the financial and valuation profile. $DIS and $BA come to mind.
Benjamin Tan's avatar
@rahulsetty Thanks Rahul ! Our nervous system is so complex. I have not studied $BA but I wrote a long post on $DIS last month:

Jazzi Young's avatar
Excellent write up Benjamin. All retail investors need to read this article and give it the full attention it deserves.
I'm a disciple of Peter Lynch's teachings, learning my early investing principles from "One Up On Wall Street" and his follow up "Beating The Street".
Back in the late 80s and early 90s when those books were published, the Institutions had a definitive information and analytical advantage (edge) over the retail investor. There was no internet, there was only newspapers, magazines and books. By the time the retail investor got information about their stocks, it was a day, week or in the case of magazines, a month late. That information was already reflected in the stock prices. You generally saw the stock price movement in the paper a day after the trading session, then the explanation for that move would come later ! Investing in what you know and the products you engaged with every day was the most viable way of investing in an information constricted landscape. Most Gen-X of my age (or geriatric Millennials as we've been called) who survived 35+ years in the markets tend to have portfolios whose largest individual stock positions are in companies like Proctor & Gamble ($PG), Johnson & Johnson ($JNJ), McDonalds ($MCD), Coca Cola ($KO, Kellogg ($K), General Mills ($GIS), Colgate Palmolive ($CL) etc. These were companies whose products we engaged with every day, and the best way to keep track of these companies was by keeping tabs on the quality of their products and reading their annual reports once a year. Everyone's long-term portfolios tend to be a reflection of their generation, just like most young investor portfolios tend to be tech heavy because they are a product of a tech generation.
Confirmation bias was all part of the deal with our generation and it was a major hazard. There was no internet to search out contrary opinions. If you were lucky, you might find the odd article on Worth or maybe the Wall Street Journal (if you could afford the subscription) with a contrary opinion piece on a stock you owned.
Nowadays, it's so easy and cheap to find the bear case on any stock you hold or intend to buy. As your article intimates, it should be a mandatory step in your due diligence to seek the bear case, especially when that information is easily accessible today. Retail investors now have the means to plug up the blind spots that my generation couldn't easily avoid. Confirmation bias is easier to combat today than it ever was 30+ years ago. Retail investors should take advantage of that. Know what you own, know why you own it, but also know what can go wrong. That last piece of information might just save you a lot of money.
Benjamin Tan's avatar
@jazziyoung Thank you for the compliment. First principles thinking sounds good on paper but really hard to implement for sure. Musk even concedes that in the absence of invalidation after seeking refutation from others, "you’re probably right, but you’re not certainly right".

Portfolio diversification is still essential, in my view - that is the ultimate concession that we all can be wrong
Joshua Simka's avatar
@jazziyoung Thanks for providing this important context for Lynch's books. I'm a big fan of his writing too, but things were definitely different then! "Buy what you know" vastly oversimplifies his approach and doesn't really mean the same thing today.
Luis Pazmino's avatar
I’m addicted to Twitter and Spotify, but ultimately decided none of them was a good investment😞
Benjamin Tan's avatar
@lpaz Twitter might end up very different under Musk !
Alan's avatar
Uber is a service that I get a lot out of a consumer but have always felt as though was being subsidised by Uber investors (and so I’m not too keen on becoming one!)
Benjamin Tan's avatar
@prinzmyschkin They are pivoting towards subscriptions with Uber One, and no surprise, advertising, like so many retail facing companies

I am not invested in $UBER, but it is interesting to watch how they continue to evolve their business model
Alan's avatar
@consumeowntech maybe they’ll figure it out but Uber is the one company where from the beginning I have both enjoyed how convenient it is and found it difficult to see it could ever work as a business model.
Benjamin Tan's avatar
@prinzmyschkin it is very capital intensive and the service is commoditized to a meaningful extent for sure. Their North Star of a driverless future may be too far away. I can understand your hesitation on the business model
Karan Malhotra's avatar
Except he never actually said that :) Like all catchy quotes, it seems to be a modification of what he actually said
​Peter Lynch wants you to know that his ideas are being misquoted widely.

“I’ve never said, ‘If you go to a mall, see a Starbucks and say it’s good coffee, you should call Fidelity brokerage and buy the stock,’” Lynch says, some 25 years after his retirement from running Magellan Fund was front-page news.
Benjamin Tan's avatar
@karan10489 indeed - Lynch didn’t fill 304 pages with a simplistic eat-all-you-can buffet approach to investing! Thank you for sharing that article :)

There are multiple qualifications in his book. Confirmation biases - stemming from our emotional preferences or aversions - still play a big role, whether we possess specialized knowledge or have calculated all numbers to the nth degree.



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