According to Lynch's investment experience, if investors want to make big money, it is usually easier to achieve their goals by investing in some small-scale growth companies. For large enterprises, in a benign market, if the price is right, it may triple in five to six years, but it is basically impossible to quadruple in two years.
Why do small companies get the "money-making effect" more easily? Mainly because small companies have greater growth potential than large enterprises, and it is easier to expand their scale. Additional income or remuneration will bring about a substantial increase in earnings per share, and the rise of stock prices does not require too much capital and flexible management.
Of course, investing in small-scale companies will also face other problems: insufficient financial strength, fragile risk tolerance, limited development of main business and imperfect corporate governance structure.
2. Investors' expected return
It is a very difficult problem for investors to predict and estimate the future earnings of listed companies, and Lynch admits it. However, we find that many people around us are doing this job, and we can see some forecast data by picking up a financial magazine. This does not mean that people have great accuracy in income forecasting, but only show a habit of income forecasting.
All investors want to see the income of listed companies investing in their stocks increase, and the price of each stock contains people's hope for stock appreciation. However, the income forecast is affected by many uncertain factors. Stocks that can predict returns tend to perform in general, while stocks that can't predict or predict mistakes rise sharply.
So how do you have a reasonable expectation for future income investors? Lynch adopted a conservative strategy on this issue. He believes that since it is difficult for investors to predict future earnings, they can at least know how the work plan of the enterprise increases earnings. Generally speaking, there are five ways for enterprises to increase their income: raising prices, reducing costs, injecting high-quality assets, increasing existing market share and opening up new markets. If the enterprise adopts the above methods, investors can really prove that these methods are effective in improving the company's income in advance, then they can predict the rise of the stock price, because doing so will increase the income. But it also depends on the recent 1 to 2 months' stock price increase.
3. Sales proportion
In Lynch's view, the sales ratio mainly refers to what a product means to a listed company and what the sales ratio of this product is. In fact, this is a question related to scale. For a small company, a very popular commodity is of great significance. If it accounts for 90% of the company's sales revenue and is still growing, then its best-selling will bring great benefits to the company, which is directly reflected in the income of each stock.
4. Position
Cash situation mainly refers to the cash flow of enterprises in activities such as selling goods, providing services, purchasing goods, accepting services, investing abroad and paying taxes, and also reflects the cash receipts and payments of enterprises. When the cash income is higher than the expenditure, the cash flow is positive, that is to say, the positive cash flow is free cash flow, which means that the company's sales are normal and the investment income and expenditure decrease. Generally speaking, the ultimate way to evaluate the cash situation of listed companies is to look at the cash flow per share, that is, the cash flow per share. The more cash, the more shares, the greater the value of the company, and the stronger the enterprise's ability to resist risks. It should be said that cash flow is the foundation of a company's life, and it is as important to an enterprise as blood is to the human body. Sufficient qi and blood, smooth qi and blood, the human body can be healthy, and so can enterprises. The healthy growth of enterprises depends on the virtuous circle of cash flow.
Investors should, like Lynch, always check the cash status of the companies they buy and take this research as part of their daily work. With the accumulation of corporate cash, there will be a lot of speculation in the market. Many enterprises mainly distribute cash through the following channels: buy back the shares of enterprises to improve the value of each share; Acquisition of affiliated assets; Acquisition and merger of other enterprises; Distribute a part to investors; Do some equity investment and so on.