Review: Learn to Earn

Each Friday, The Simple Dollar reviews a personal finance book.

learnI’ve wanted to review one of Peter Lynch’s books for a long time. I’ve leafed through them many a time: One Up On Wall Street, Beating the Street, and Learn to Earn are all considered modern classics of stock investing and personal finance.

Why? A big part of it is the author himself, Peter Lynch. He was, without much argument, the best mutual fund manager of all time. From 1977, when he took over managing Fidelity’s Magellan fund, to 1990, when he retired, that fund grew from $18 million in assets to $14 billion. In those thirteen years, a share of the Magellan fund increased 900% in value – a 29.2% annual return – and outperformed the stock market by 13.4% annually. It is without much question the single greatest run of more than ten years ever by a mutual fund manager, and it’s the reason Lynch is an investing legend.

While I plan to eventually review all three of his books, I decided to start off with Learn to Earn for several reasons, mostly summed up by the subtitle: A Beginner’s Guide to the Basics of Investing and Business. Sounds like a pretty worthwhile place to start.

Does Lynch offer up enough knowledge in this book to make it worth reading, or should an efficient reader find another book with which to spend his or her time? Let’s dig into Learn to Earn and find out!

A Look At Learn to Earn

One: A Short History of Capitalism
This first chapter is a ninety page history of the development of business and stock investing in the United States, starting clear back with the Pilgrims. Honestly, this is not material I expected from this book, but it turned out to be incredibly compelling. I got engrossed in this portion of the book, taking about ten notes on every page and turning to Wikipedia and to other sources many, many times during the reading to increase my understanding of what Lynch was describing.

Some are obviously going to ask what purpose this section serves. It doesn’t teach much directly about how to manage your money today. Instead, it puts investing, money management, and other basic elements of personal finance into the context of American history. For many people, the obvious question will be “Why read it?” and for some the answer will be obvious. Personal finance, as we know it today, is the outgrowth of thousands of years of hard work by our ancestors, and along the way they learned mountains of valuable lessons. Those lessons, sadly, are often ignored and their mistakes are still repeated today: deep personal indebtedness, following a herd mentality when investing, getting involved in complex business schemes without any idea of how they work. All of those things happened time and time again in the past, and they happen again today.

The value here is to show, in a very interesting and authentically American way, that the basic tenets of personal finance have always been true. Always spend less than you earn. Never invest in things that you don’t understand. Never just blindly repeat the investment strategy of the people at the country club. Always plan for bad news in the future. Hard work, intelligence, and diligence almost always pay off. These tenets work – they’ve worked over and over again throughout American history.

Two: The Basics of Investing
This chapter really breaks down into three parts. The first part is incredibly simple: spend less than you earn, do it now, and invest the remainder. This is basically a commandment in this book and for good reason – following it is pretty much the only sure way to financial success.

The second portion outlines the five places where most people can put their money: cash (savings accounts, CDs, foreign funds), collectibles (including metals), real estate, bonds, and stocks. Lynch is obviously a stock investing advocate, but he does a good job outlining the other areas of investing as well. In general, he recognizes cash and bonds to be relatively safe, seems to not like real estate investing much at all (too much manual work and too much risk), and finds collectibles to generally be far too speculative.

The rest of the chapter focuses on stock investing, where Lynch is an expert. There really is a lot of good advice in this section, much too dense to really discuss in detail. Lynch (and Rothchild, who I suspect is probably the ghostwriter at least to a degree) is very good at making this information breezy, so the forty five pages or so that discuss stock investing are simultaneously quite informative and very readable. If Lynch’s more stock-oriented books are similarly readable, I look forward to reading them.

It’s important to note that Lynch assumes the reader doesn’t have much knowledge at all about the stock market. It is written from a beginner’s perspective – if you want detailed info on how to pick stocks, this isn’t it. What it does do is explain very clearly how to invest in individual stocks and how to gather information about them. It details what a brokerage is, how it functions, why you may or may not want an expensive stockbroker, how to gather information about companies and decide whether to invest in them, what dividends are and how they work, and so on.

Three: The Lives of a Company
This short section describes the life cycle of a company, starting with the germ of an idea inside of someone’s head until it’s a publicly traded “value” stock, subject to the cycles, bulls, and bears of the stock market. Along this path, there are different ways to invest in companies, different reasons for doing so, different risks, and different rewards – clearly, a greater view of the growth of a company is valuable information.

Why is this information here? Most people view stocks as an investment game unto itself, neglecting the idea that stocks represent real companies that grow and mature and change. Take Apple, for instance. Once upon a time, it was two guys in a garage. In the early 1980s, it was growing like gangbusters after a huge IPO, clearly a growth stock. It stagnated in the late 1980s and 1990s, then turned back into a growth stock again recently. It was born, grew up, had a midlife crisis, and made some changes. At each stage of the company’s life, the risks and rewards of investing were different – it was a growing stock, a steady stock, a value stock, and a growth stock again at various points along the way. Lynch does a great job of explaining this relationship of a company to its stock, making the connection very clear.

Four: The Invisible Hands
The book closes with an impassioned argument that it’s the leaders of businesses, the people who make intelligent and informed decisions, that drive the success of these companies. Lynch puts a lot of credit on company leaders in determining the success or failure of a company, going almost so far as to say that a company’s leadership is the single most important aspect of a company’s success.

In the end, you have a direct, strong connection between the leadership of a company and the value of that company’s stock. This takes a lot of forms, from the “rock star” status of the leadership (think Steve Jobs or Jack Welch) to the raw leadership ability (like Lee Raymond, the man who built ExxonMobil into a dominant company) or, in some cases, both (Lee Iacocca, the man who saved Chrysler and later became their pitchman). On the other hand, a bad CEO can deeply damage a company (Gil Amelio at Apple and Bob Nardelli at Home Depot come to mind).

Again, what does that mean to the investor, or the person learning about personal finance? A great leader means you’ll have a valuable stock – a bad leader means you’ll have an underperforming stock. Lynch puts a lot of value in this, and he provides a lot of interesting examples and evidence for the argument.

Buy or Don’t Buy?

Learn to Earn was quite enjoyable to read. It provided some food for thought in some sections and was purely entertaining in others. Lynch and Rothchild take material that could be incredibly boring but instead bring it to life with colorful language, humorous anecdotes, and a fast pace.

Another interesting note: Learn to Earn was actually more “basic” than I expected it to be. This is a great introductory book on business, stock investing, and the connection between the two. It’s written in a breezy and simple enough tone that a thoughtful teenager would enjoy it, yet meaty enough that, if you don’t have a good grounding on the basics of business, stocks, and investing, you will learn something new from it.

While I was already familiar with much of the content in the book, the quality of the writing and the respect I have for Lynch make me strongly yearn to read his other two books. When you close a book feeling that your time was well spent but you’re also yearning to read more, that’s a sure sign that something’s right within the covers.

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