process
The Six Stock Categories
The rule
Sort every stock into one of six kinds: slow grower, steady giant, fast grower, cyclical, turnaround, or asset play. The kind tells you what to expect, what to check, and when to sell.
Where it flips
Companies drift between kinds. A fast grower matures into a steady giant. A steady giant can quietly turn cyclical. So an old label misleads you. The fix is to re-check the kind each year, and change what you expect when the business changes.
Not every company is the same kind of bet. Judging them all by one measure is a mistake. A steady daily-goods giant is bought for a dependable 30-40% gain, and sold when its price runs too far ahead. A small, fast-growing firm is where the big multi-baggers hide, but also the blow-ups. A cement or steel maker rises and falls with its industry cycle, so you time it. A beaten-down but fixable business is judged on whether it can survive and recover. An asset play is bought for hidden land or cash the market has ignored. Once you name the kind, you know the questions to ask and the reason you would ever sell.
A worked example
Aayra held a large daily-goods giant and a tiny fast-growing retailer. She rightly expected a calm ~35% from the first, and treated the second as a 10-bagger-or-bust. She used a different sell rule for each. [illustrative]
How to spot it
- ·you can name which of the six a stock is
- ·your return hope matches the kind
- ·your sell rule follows the kind, not your mood
Peter Lynch · One Up on Wall Street