Novice Investing - Learning From Peter Lynch

Date: Tuesday 13th 2008f May 2008 02:47:33 PM

Learning From Peter Lynch - Part I - 09/11/2006

By: Hari Wibowo

Having just read Peter Lynch's "One Up On Wall Street", I must say that this is the one book that I wished I have read earlier. Not that I agree with the whole philosophy. But the book has many different elements that we as investors can learn a lot from. This article will exploit just one of the many things we can learn from Peter Lynch.

One of the very few things that Peter Lynch asks before investing in stocks is not the P/E ratio, dividend yield or the growth rate of a company. But rather, it is the: "Do I own a house?" question. Why a house? Peter Lynch beautifully elaborate that regular folks have an edge in investing in a house rather than a stock. Further, investing in houses have many merits that stocks do not have.

1. A house will be a money maker. That may not be obvious but the truth is, in 99 out of 100 cases, you will always make money in house. You won't wake up one day and find that the house that you live in has declared bankruptcy or goes under. This kind of thing may happen with individual stocks.

2. A house is rigged in home owner's favor. Home owners can put 20% down and enjoy the power of leverage. While some brokers will lend you that kind of money to invest in stocks, but if your stock price fell by 20%, you have to put more money into it. Not with a house. You are welcomed to take your time and pay off your mortgage even as your house value goes down in value. Lynch elaborates a wonderful illustration on how nobody will ask homeowners to "come up with twenty thousand dollars tomorrow or else you should sell off your two bedrooms". When this happens to a stockowners, it is called margin call and it does happen a lot of time to leveraged stock investors.

3. Tax advantage. Your mortgage expense is tax deductible. Your stock purchase is not tax deductible. Only when you sell your stock at a loss, you can then a tax write off. Further in your later years, you can decide to sell your house and move into a bigger house, while avoiding tax on your profit. In stocks, what you sell at a gain, you can't escape the taxman (unless illegally) and then when you make another good investment, you will be taxed later on your profit gain.

4. House Put a Roof Over Your Head. That won't happen in stocks. You need to pay rent when you invest in stocks. When you bought a house, you can stay in it and avoid paying rents. Furthermore, you won't likely to sell your house reading the headline: "Home Prices Take A Dive". Also, the afternoon papers do not publish the daily closing price of your house in the classifieds and ten most active house in the neighborhood.

5. Everyone has an edge in house investing. It is handed down from your parents. You naturally knows how to poke around from the kitchen to the garage and ask the right question. You can drive around the neighborhood and see how many houses are being sold and what is being renovated. Further, before you make an offer of the house, you hire many many experts to search for termites, roof leakage, piping, wiring, cracks and others. Imagine that with investing in stocks. Some stock investors even spend more time clipping coupons for grocery than finding a good stock investment.

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Disclaimer: The sole purpose of this article is educational. This article is merely the opinion of the writer and is not in any way a buy/sell recommendation regarding any securities.

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