Appendix I: One Up on Wall Street [Part 3]

Purpose: To show students how attention to detail and looking at the right numbers can be rewarding for the successful investor.

by Peter Lynch with John Rothchild

Questions from Reading Selected Chapters

(Each student will be prepared to discuss the answers to each of the following questions in class.)


Chapter 9: Stocks I’d Avoid


1.      Complete the following: “Hot stocks can go ___ _____, usually out of sight of any of the known landmarks of value, but since there’s ____ __ ______ and thin air to support them, they fall just as quickly.”


2.      Complete the following: “In my experience the _____ ___ _________ almost never is---on Broadway.”


3.      What does diworseification mean?


4.      Complete the following: “The trick is that you have to know how to make the _____ _________ and then manage them successfully.”


5.      What does “Synergy” mean in acquisitions?


6.      Complete the following: “If a company must acquire something, I’d prefer it be __ _______ ________.”


7.      What is a “Whisper stock” and what does it lack?


8.      Complete the following: “The company the sells 25 to 50 percent of its wares ot a ________ __________ is in a precarious situation.”


Chapter 10: Earnings, Earnings, Earnings


1.      Lynch says that what makes a company valuable and even more valuable in the future comes down to what two things?


2.      How does Lynch define “Book Value” or “Net Economic Worth?”


3.      Why is the capacity to earn income so important?


4.      Which of the six categories of companies, as they relate to people, would you fall in?


5.      What is a quick way to tell if a stock is overpriced?


6.      What is the value of the P/E ratio?


7.      Can P/E ratios be compared from industry to industry or over time?


8.      Complete the following: “If you remember nothing else about p/e ratios, remember to avoid stocks with _________ _____ ____.”


9.      Complete the following: “…when you find that a few stocks are selling at inflated prices relative to earnings, it’s likely that _______ _______ are selling at inflated prices relative to earnings.”


10.  Complete the following: “Interest rates have a large effect on the ________ ____ _____, since investors pay more for stocks when interest rates are low and bonds are less attractive.”


11.  What are the five basic ways a company can increase earnings?


Chapter 11: The Two-Minute Drill


1.      Complete the following: “The next step is to learn as much as possible about what the company is doing to bring about the _____ _____, ____ _________ _____, or whatever happy event is expected to occur.”


2.      Complete the following: “…something has to happen to keep the _____ ____ ____. The more certain you are about what that something is, the better you’ll be able to follow the script.”


3.      What things do you look for in each category of stock?


4.      Why was La Quinta a great stock?


5.      Complete the following: “I always try to learn something new from every investment _________ I have.”


6.      Complete the following: “I followed up on this conversation by spending ____ ____ in ______ ______ La Quintas while I was on the road talking to other companies.”


7.      Complete the following: “From the prospectus of the stock offering, I learned that the company was not going to burden itself with ___________ ____ _____.’


8.      What did Lynch learn from Bildner’s?


Chapter 12: Getting the Facts


1.      Complete the following: “Chairmen, presidents, vice presidents, and analysts fill me in on ________ _____, ________ ____, _______-_____ _________, and anything else that’s relevant to future results.”

2.      What is the old “Oracle Rule?”


3.      What four things do you want the firm’s analysts to provide, once they realize that you’re serious?


4.      What were the seven rapid fire questions that Lynch asked about La Quinta?


5.      What did Mark Twain say about speculating in stocks?


6.      What does “held in street name” mean?


7.      What does Lynch look for when visiting the headquarters of a company?


8.      What is the value of attending the company’s annual meeting?


9.      Complete the following: “I could never prove this scientifically, but if you can’t imagine how a company respresentative could ever _____ ___ ____, chances are you’re right.”


10.  What is the value of wandering through stores and tasting things?


11.  What is the value of questioning customers who have purchased the product?


12.  What is a couple of sure signs of prosperity for a company?


13.  What do you really want to know in the short exercise of getting the facts?


Chapter 13: Some Famous Numbers


1.      Complete the following: “…the first thing I want to know is what that product means to the company in question. What ______ ___ _____ does it represent?”


2.      Complete the following: “The p/e ratio of any company that’s fairly priced will equal its ________ ____ [of earnings].”


3.      What are the general rules for very positive and very negative PEG ratios?


4.      Why is the cash position important?


5.      Complete the following: “How much does the company _____, and how much does it _____?”


6.      What is the normal percent of equity and debt on a company balance sheet?


7.      What determines if a company will survive or go bankrupt in a crisis?


8.      What is the “Bladder Theory” of corporate finance?


9.      Complete the following: “Then again, the small companies that don’t pay dividends are likely to ______ much faster because of it.”


10.  What relationship does the book value have to the actual worth of a company?


11.  Are foreign companies a good bet?


12.  What is the difference between cash flow and free cash flow?


13.  What do you check for relative to inventories?


14.  Complete the following: “If you find a business that can get away with _______ ____ year after year without losing customers, you’ve got a terrific investment.”


15.  What is the difference between a 10 % grower and a 20% grower?


16.  Complete the following: “What you want, then, is a relatively high _____-____ in a long term stock that you plan to hold through good times and bad, and a relatively low _______-_____ in a successful turnaround.”


Chapter 14: Rechecking the Story


What are the three phases of expansion?


Chapter 15: The Final Checklist


What is the value of the phrase: “The more you know the better?”