📖Peter Lynch

Earnings Growth

🌿 Intermediate★★★★☆

Revenue and hype are distractions — only sustainable earnings growth drives long-term stock prices.

💬

In the end, earnings are what count.

— *One Up On Wall Street*，1989

🏠 Everyday Analogy

Investing in stocks is like investing in a small shop. No matter how attractive the storefront or how prime the location, if it doesn't generate profits, it's just an empty shell. Only a shop that consistently earns money can increase the value of your investment. This is precisely why focusing on a company's profitability matters.

📖 Core Interpretation

Profit is the fundamental driver of long-term stock price appreciation.
💎 Key Insight：A company can have exciting products, great press coverage, and soaring revenue while losing money every quarter. Lynch cares about one thing: earnings. Specifically, he looks for companies with consistent earnings growth, improving margins, and a clear path to continued profitability. Before buying any stock, trace the earnings trend over five years and project forward conservatively.

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❓ Why It Matters

In the short term, stock prices may be swayed by sentiment, but in the long run they inevitably follow earnings.

🎯 How to Practice

Analyze the profit growth trends over the past 5-10 years to forecast the sustainability of future growth.

🎙️ Master's Voice

If you can't convince yourself when I'm down 25 percent, buy more, you will never get the advantage of the correction.
Lynch bought more during drawdowns. He saw 25% drops as opportunities, not threats. This conviction separated winners from losers.

⚔️ Practical Guide

✅ Decision Checklist

  • Can I buy more when down 25%?
  • Do I have conviction?
  • Am I taking advantage of corrections?

📋 Action Steps

  1. Build conviction before buying
  2. Prepare to add during drops
  3. Use corrections as opportunities

🚨 Warning Signs

  • Cannot add during drops
  • Weak conviction
  • Missing correction opportunities

⚠️ Common Pitfalls

✕Don't focus solely on one year's profits.
✕Distinguish between recurring earnings and one-time gains.

📚 Case Studies

1
Ford Motor Turnaround (1982)
Coming out of recession, Ford slashed costs and refocused on profitable models, driving strong earnings recovery through the early 1980s.
✨ Outcome：Lynch emphasized accelerating earnings; holding Ford during improvement produced substantial multibagger returns for Magellan shareholders.
2
PepsiCo Consistent Compounder (1986)
PepsiCo grew earnings steadily via snacks and beverages, reinvesting cash in marketing and distribution while raising prices modestly.
✨ Outcome：Earnings advanced year after year; Lynch highlighted it as a reliable grower, rewarding long‑term holders with strong capital gains.

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