A Simple Idea for Exceptional Returns

By Andrés Cardenal - August 26, 2012 | Tickers: AMZN, AAPL, EBAY, GOOG, MELI | 0 Comments

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The stock market is sometimes depicted by the media as a complicated ecosystem in which all kind of sophisticated tools and analysis are required for success. But you don´t need a PHD in mathematics or access to exclusive information flowing at the speed of light  to consistently beat the markets in the long term, at least according to Peter Lynch, one of the most successful stock investors of all times.

Lynch managed the legendary Fidelity Magellan Fund for 13 years, and under that period he achieved an outstanding 29.2% compounded annual return. To put that into perspective, those kinds of returns could have turned $10,000 into almost $280,000 or $50,000 into nearly $1.4 million at the end of the 13 year holding period.

The numbers are outstanding, and even more important for individual investors is the fact that Lynch didn´t use any kind of ultra-complicated analysis to achieve that performance. In fact, Lynch found many of his most profitable investment ideas while outside of his office, driving around town or shopping at the mall with his family.

Peter Lynch popularized the phrase “invest in what you know” to express the idea that individual investors can have an advantage over the professionals when they focus on the companies they find attractive based on their day to day experience. Watching your habits as a consumer, or those of you friends and family, can be a powerful method to discover some of the best run companies with superior long term potential.

The opportunities around us are almost unlimited; we just need to be alert and well-disposed to transform our observations into lucrative investment ideas. You can look at the same things you see every day and detect exciting investment ideas if your attention is focused on such task.

 Not one day passes without me using Google (NASDAQ: GOOG) services in some way, from the search engine to Gmail, passing through Google maps, Chrome and all the Android applications I use on my Samsung smartphone. The company owns more than 60% of the US search market, and its position in the high growth mobile segment is likely to be even bigger considering that Google is the default search engine in both Android and iPhone, the two dominant platforms in smartphones.

Think about that for a second, Apple (NASDAQ: AAPL) is sending its search traffic to its biggest competitor in mobile, there must be a very strong reason for Apple to accede to such a deal. It´s clearly not because of the money involved, Apple has more than enough cash, and the Cupertino company is well known for putting products and customer experience before dollars.

In fact, Apple uses Google because it’s the best search engine available, at least according to the gigantic masses of population around the world which prefer Google over its competitors. The company obtains valuable information about users and their habits each time a search is done, and that gives Google the possibility to translate that information into better services to widen its gap over competitors over time.

Going back to Apple, Steve Jobs reportedly announced “we´ve made it!” after observing lots of people wearing the distinctive white headphones included in the iPod on his way to work. You could have capitalized that trend years ago for tremendous gains in Apple stock, the iPhone was a second chance to detect the opportunity, and the iPad still provides room for more growth in Apple over the next years. No sophisticated technique is necessary to understand Apple, the value of its brand and the quality of its products.

Many of the things we used to buy in brick and mortar stores are now bought online, and the trend will much likely continue growing over the next years.  Amazon (NASDAQ: AMZN) offers fiercely competitive prices, and the company has been reducing delivery times notoriously with the expansion of its distribution centers and its logistics network. You don´t need to be an expert in rocket science to understand that online shopping is here to stay and grow, benefiting companies like Amazon and eBay (NASDAQ: EBAY) in the long term.

eBay is not only profiting from online commerce, its payment platform PayPal has been notoriously successful over the last years, both as a payment method for  transactions inside eBay and as a standalone system for all kinds of commercial operations. The company is building alliances to position PayPal as a leader in the mobile payment space, so when you notice that PayPal is growing in acceptance at different places, that may be a good reminder to consider the possibility of investing in eBay.

The online commerce boom is not only a growing phenomenon in the US and Europe, Latin America offers many opportunities for expansion in that industry, and Mercado Libre (NASDAQ: MELI) is the undisputed leader in that segment. The company covers the whole region, from Mexico to Argentina, obtaining a big portion of its profits in Brazil, one of the most exciting countries for long term investors due to its growth prospects.

Mercado Libre simply matches buyers and sellers, both companies and individuals, charging a commission on sales. The company doesn´t need to worry about inventory management or logistics, since those responsibilities lie with the seller. Mercado Libre has a very efficient business model, and is exceptionally positioned to capture growing profits from the rise of ecommerce in Latin America.

You don´t need to be a genius or have access to a super computer to do well in the markets over the long term. Using your knowledge as a consumer, and astutely observing the world around you, may be an invaluable source to detect the best investment opportunities. You don´t need to take my word for it, just ask Peter Lynch.

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