Thursday, February 17, 2011

Peter Lynch: The "Cocktail Party" Theory

This Minyanville article written by Jeff Saut covers Peter Lynch's "cocktail party" theory. It's from the book One Up on Wall Street

Basically, during and after an extended bear market, no one at the party wants to talk about the stocks. 

Here's an overview of how Lynch says in his experience things progress over time.

A quick summary of Lynch's theory:

Stage 1: At the party, the markets been down a while and people are not talking about stocks. There's little interest in talking to an equity mutual fund manager like Lynch about it. When folks generally seem inclined talk to about plaque with a dentist than about stocks it's likely the market is about to head higher.
Stage 2: People may talk about stocks long enough to say they're risky but would still rather not talk about it. Party conversations are still more plaque than stocks and the market's up roughly 15%. Few care.
Stage 3: Market is up 30%, people start asking a professional money manager like Lynch what stocks to buy. Most have now bought a stock or two.
Stage 4: People are crowded around Lynch but now they are telling Lynch what stocks to buy. Dentists are now offering stock tips. This stage is a good sign the market is near a top.

What stage are we at now? In the article, Jeff Saut goes on to say we are certainly not near stage 3 or 4 yet. Who knows. I certainly do not. The business of guessing what the market as a whole is going to do is a tough one.
(Determining what a business is worth and paying a price safely below that value seems, by comparison, more doable to me.) 

To me, economic and market forecasts aren't usually all that useful (especially my own). Yet, among those who do make forecasts, Saut's opinion and insights are worth keeping an eye on. 

Check out the full version of Lynch's theory in Saut's article.

Adam

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