Learning from Peter Lynch – Part I
Real Estate

Learning from Peter Lynch – Part I

Peter Lynch’s “One Up On Wall Street” wasn’t just talking about us generally being better real estate investors. It also talks about actions. However, before going deeper into explaining how he views stocks, he graciously shared in his book the four stages of stock market cycles that I found very, very helpful. He called it the cocktail theory.

stage one – Everyone avoids a mutual fund manager like the plague. When everyone is talking about anything other than stocks, this is the first sign that the market will rise significantly from there. That just tells you that there is doom and gloom in the news recently. That, according to Peter Lynch, is the best time to invest. Although he confessed that he is not a market timekeeper, this theory develops over the years.

stage two – People hang around a mutual fund manager a little longer. At this stage, when people meet a mutual fund manager at a cocktail party, they will briefly talk to the manager and tell him how risky the stock market is. And then, they’ll move on to talk to the dentist. By then, the market is already up about 15% from stage one, but not many people had noticed.

stage three – Everyone asks a mutual fund manager what to buy. When the market is up 30% from the lows, everyone starts to gather around the mutual fund manager and ask what stocks he should buy, completely ignoring the dentist.

stage oven – Everyone starts giving stock advice, even to a mutual fund manager. This is the sure sign of a market top. At a cocktail party, everyone will hang around the mutual fund manager to tell him which stocks to buy. That feeling is particularly true for me about the housing cap in 2004-2005. People start telling me and others how a house is a good investment and how their house has gone up in value and suggest I start investing in real estate.

Although Peter Lynch had brilliantly explained the cocktail theory, he does not believe in it to make his investment decision. Ultimately, he believes that undervalued stocks will rise while the most incredibly overvalued stocks will fall, regardless of where the market is.

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