(MONEY Magazine) – The title of a heartening (and irreverent) new guide to stock picking by Peter Lynch, manager of the world-beating Magellan Fund, says it all. The investors with that one-up advantage, by the way, are not pros like the author but -- as Lynch explains in the following exclusive excerpt -- amateurs like you. Copyright 1988 by Peter Lynch. To be published by Simon & Schuster. Reprinted by permission.

The most popular investment for most Americans over the past two decades has been mutual funds. Of the 2,476 registered funds, the most famous by far is Fidelity Magellan. The reason is simple: in the 11 years that Peter Lynch has run it, Magellan has gained an awesome 1,892%, nearly twice as much as the runner-up fund. But the 44-year-old Boston-based portfolio manager is convinced that any of his 1 million shareholders could potentially do about as well on their own. It was Lynch's wife Carolyn, after all, who touted him onto one of his all-time great picks, Hanes Inc., makers of L'eggs pantyhose. She thus also, perhaps inadvertently, helped him develop his encouraging thesis of the amateur investor's advantage in his soon-to-be-published One Up on Wall Street (Simon & Schuster, $19.95). The book (and the following excerpt) begins with this modest introduction.

This is where authors, usually professional investors, promise readers that they will share the secrets of their success. But rule No. 1, in my book, is: stop listening to professionals! Twenty years in this business convinces me that any normal person using the customary 3% of the brain can pick stocks just as well as, if not better than, the average Wall Street expert. I know you don't expect the plastic surgeon to advise you to do your own facelift nor the plumber to tell you to install your own hot-water tank nor the hairdresser to recommend that you trim your own bangs, but this isn't surgery or plumbing or hairdressing. This is investing, where the smart money isn't so smart and the dumb money isn't really as dumb as it thinks. My point is: when the dumb money gets really dumb is when it's trying to listen to the smart money. To the list of famous oxymorons -- military intelligence, learned professor, deafening silence and jumbo shrimp -- I'd add professional investing. True, there are 50,000 professional stock pickers who dominate the show, and like the proverbial 50,000 Frenchmen, they are credited with never being wrong. From where I sit, I'd say that the 50,000 stock pickers are usually right, but only for the last 20% of a typical stock move. It is that last 20% that Wall Street studies for, clamors for and then lines up for -- all the while with a sharp eye on the exits. The idea is to make a quick gain and then stampede out the door. Small investors don't have to fight this mob. They can calmly walk in the entrance when there's a crowd at the exit and walk out the exit when there's a crowd at the entrance. Investing on your own is going to mean ignoring the hot tips, the recommendations from brokerage houses and the latest ''can't miss'' suggestions from your favorite newsletter in favor of your own research. It means ignoring the stocks that you hear Peter Lynch, or some similar authority, is buying. There are at least three good reasons to ignore what Peter Lynch is buying: 1) he might be wrong! (A long list of losers from my own portfolio constantly reminds me that the so-called smart money is exceedingly dumb about 40% of the time); 2) even if he's right, you'll never know when he's changed his mind about a stock and sold; and 3) you've got better sources, and they're all around you. What makes them better is that you can keep tabs on them, just as I keep tabs on mine. Nine percent to 10% a year is the generic long-term return for stocks, the historic market average. You can get 10%, over time, by investing in a no-load mutual fund that buys all 500 stocks in Standard & Poor's 500-stock index, thus duplicating the average automatically. That this return can be achieved without your having to do any homework or spending any extra money is a useful benchmark against which you can measure your own performance. To make picking your own stocks worth the effort, you ought to be getting a 12% to 15% return, % compounded over time. That's after all the costs and commissions have been subtracted, and all dividends and other bonuses have been added. If you stay half alert, you can pick spectacular performers right from your place of business or out of the neighborhood shopping mall, and long before Wall Street discovers them. It's impossible to be a credit-card-carrying American consumer without having done a lot of fundamental analysis on dozens of companies -- and if you work in the industry, so much the better. This is where you'll find the 10-baggers. (In Wall Street parlance, a 10-bagger is a stock in which you've made 10 times your money.) The first stock I ever bought, Flying Tiger Line, turned out to be a multibagger and helped put me through Wharton Business School. In one of my classes, I'd read an article on the promising future of airfreight, and it said that Flying Tiger was an airfreight company. That's why I bought the stock, but that's not why the stock went up. It went up because we got into the Vietnam War and Flying Tiger made a fortune shunting troops and cargo in and out of the Pacific. In the past decade, the occasional five-and 10-bagger, and the rarer 20- bagger, has helped my fund outgain the competition -- and I own 1,400 stocks. In a small portfolio, one of these remarkable performers can transform a lost cause into a profitable one. It's amazing how this works. To make such a spectacular showing, you had only to find one big winner out of 11. The righter you are about any one stock, the wronger you can be on all the others and still triumph as an investor. You may have thought that a 10-bagger can happen only with some wild penny stock in some weird company like Braino Biofeedback or Cosmic R&D, the kind of stock that sensible investors avoid. Actually, there were numerous 10-baggers in companies you'll recognize: Dunkin' Donuts, Wal-Mart, Toys R Us, Stop & Shop and Subaru, to mention a few. These are companies whose products you've admired and enjoyed, and who would have suspected that if you'd bought the Subaru stock along with the Subaru car, you'd be a millionaire today? This serendipitous calculation is based on several assumptions: first, that you bought the stock at the low price of $2 a share in 1977; second, that you sold at the high price (adjusted for an 8-to-1 split) of $312 in 1986. That's a 156-bagger and the fiscal equivalent of 39 home runs, so if you'd invested $6,410 in the stock (certainly in the price range of a car), you'd come out with $1 million exactly. I talk to hundreds of companies a year and spend hour after hour in heady pow-wows with CEOs, financial analysts and my colleagues in the mutual fund business, but I stumble onto the big winners in extracurricular situations, the same way you could. I was impressed with Taco Bell after eating a burrito on a trip to California. La Quinta Motor Inns? Somebody at the rival Holiday Inn told me about it. Volvo? My family and friends drive this car. Apple Computer? My kids had one at home, and then the systems manager bought several at the office. Dunkin' Donuts? I loved the coffee. And recently the revamped Pier 1 Imports impressed my wife Carolyn, who is one of my best sources. She's the one who discovered L'eggs. L'eggs is the perfect example of the power of common knowledge. It turned out to be one of the two most successful consumer products of the '70s (the other: Pampers). In the early part of that decade, before I took over Magellan, I was working as a securities analyst at Fidelity. I knew the textile business from having traveled the country visiting textile plants calculating profit margins, the historic price/ earnings ratios and the esoterica of warps and woofs. But none of this information was as valuable as Carolyn's. I didn't find L'eggs in my research -- she found it by going to the grocery store. Right there in a freestanding metal rack near the checkout counter was a new display of pantyhose, packaged in colorful plastic eggs. The company, Hanes, was test-marketing L'eggs at several sites around the country, including suburban Boston. When Hanes interviewed hundreds of women leaving test supermarkets and asked them if they'd just bought pantyhose, a high percentage of them said yes, and most of them couldn't recall the names of the brand. Hanes was ecstatic. If a product becomes a bestseller without brand- name recognition, imagine how it will sell once the brand is publicized. Carolyn didn't need to be a textile analyst to realize that L'eggs was a superior product. All she had to do was buy a pair and try them on. These stockings had what they called a heavier denier, which made them less likely to run than the normal stockings. They also fit very well, but the main attraction was convenience. You could pick up L'eggs right next to the bubble gum and the razor blades. Hanes already sold its regular brand of stockings in department stores and specialty stores. The company had determined that women customarily visit one or the other every six weeks, on average, whereas they go to grocery stores twice a week, which gives them 12 chances to buy L'eggs for every one chance to buy Brand X. You could have figured that this was a hot idea just by seeing the number of women with plastic eggs in their grocery carts at the checkout counter. Imagine how many L'eggs were going to be sold nationally after the word got out. Now how many people who bought pantyhose, store clerks who saw the women buying pantyhose, and husbands who saw the women coming home with the pantyhose knew about the success of L'eggs? Millions. From there, it would have been easy enough to find out that L'eggs was made by Hanes and that Hanes was listed on the New York Stock Exchange. The beauty of L'eggs is that you didn't have to know about it from the outset. You could have bought Hanes stock the first year, the second year or even the third year after L'eggs went nationwide and you'd have tripled your money at least. But a lot of people didn't, especially husbands. Husbands -- usually also known as the Designated Investors -- probably were too busy buying solar energy stocks or satellite dish company stocks and losing their collective shirts. The best place to begin looking for 10-baggers is close to home -- if not in the backyard, then down at the shopping mall, and especially wherever you happen to work. The average person comes across a likely prospect two or three times a year -- sometimes more. Take the case of Pep Boys (Manny, Moe & Jack), a retail auto-supply chain. Executives at Pep Boys, clerks at Pep Boys, suppliers of Pep Boys, its lawyers and accountants, the firm that did the advertising, sign painters, building contractors for the new stores and even the people who washed the floors must all have observed Pep Boys' success. Thousands of potential investors got this tip, and that doesn't even count the hundreds of thousands of customers. All along the retail and wholesale chains, people who make things, sell things, clean things or analyze things encounter and usually ignore numerous stock-picking opportunities. No wonder people make money in the real estate market and lose money in the stock market. They spend months choosing their houses and minutes choosing their stocks. In fact, they spend more time shopping for a good microwave oven than shopping for a good investment. In general, if you polled all the doctors, I'd bet only a small percentage would turn out to be invested in medical stocks and more would be invested in oil. And if you polled the shoe-store owners, more would be invested in aerospace than in shoes, while the aerospace engineers are more likely to dabble in shoe stocks. Who could have had a greater advantage than yours truly, sitting in an office at Fidelity during the boom of financial services and mutual funds? I'd been coming to work here for nearly two decades. I know half the officers in the major financial services companies, I follow the daily ups and downs, and I could notice important trends months before the analysts on Wall Street did. I couldn't have been more strategically placed to cash in on the bonanza in mutual fund companies of the early 1980s. The people who print prospectuses must have seen it -- they could hardly keep up with all the new shareholders in the funds. The sales force must have seen it as they crisscrossed the country in their Winnebagos and returned with billions in new assets. The maintenance services must have seen the expansion in the offices at Federated, Franklin, Dreyfus and Fidelity. The companies that sold mutual funds prospered as never before in their history. The mad rush was on. Take Dreyfus. The stock sold for about 50 cents a share in 1980, then nearly $40 a share in 1986, an 80-bagger in seven years, and much of that during a lousy stock market. Franklin was a 138-bagger and Federated was up 50-fold before it was bought out by Aetna. I was right on top of all of them. How much did I make from all this? Zippo. I didn't buy a single share of any of the financial services companies -- not Dreyfus, not Federated, not Franklin. I missed the whole deal and didn't realize it until it was too late. I guess I was too busy thinking about Union Oil of California, just like the doctors. Regrettably, I also never took more than a piddling position in the cable TV industry, despite the urging of Fidelity's Morris Smith, who periodically pounded on my table to persuade me to buy more. I think I missed all of this because cable didn't come to my town until 1986 and to my house until 1987. So I had no firsthand appreciation of the worth of the industry in general. Somebody could tell me about it, just as somebody could tell you about a blind date, but until you are personally confronted with the evidence, it has no impact. If I'd seen how my youngest daughter Beth loves the Disney Channel, how much her sister Annie looks forward to watching Nickelodeon, how my oldest daughter Mary appreciates MTV . . . you get the picture. Getting the story on a company is a lot easier if you understand the basic business. That's another reason why I'd rather invest in pantyhose than in communications satellites. The simpler it is, the better I like it. When somebody says ''any idiot could run this joint,'' that's a plus as far as I'm concerned because sooner or later any idiot probably is going to be running it. As I developed my own approach to investing, I became aware that I make my stock-picking decisions largely on the basis of just such very uncomplicated principles. Here are a dozen of my most cherished reasons to buy: It sounds ridiculous or dull. The perfect company has to be engaged in a perfectly simple business, and the perfectly simple business ought to be perfectly boring. The more boring it is, the better. Investors are notoriously attracted to glitter, so you'll always find less of a crowd looking for a dreary stock. Processing paychecks, which is what Automatic Data Processing does, is a good example. That it has a dull name is even better. It does something disagreeable or depressing. Better than boring alone is a stock that's boring and somehow disgusting at the same time. Something that makes people shrug, retch or turn away in disgust is perfect. Like Safety- Kleen. Safety-Kleen goes around to gas stations and provides them with a machine that washes greasy auto parts. Auto mechanics, who otherwise would have to scrub the parts by hand in a pail of gasoline, gladly pay for the service. In this category, my favorite all-time pick is Service Corp. International, which also has a boring name. SCI does burials, and if there's anything Wall Street would rather ignore besides toxic waste, it's mortality. For several years, this Houston-based enterprise has been going around the country buying up local funeral homes from the mom-and-pop owners, just as Gannett did with the small-town newspapers. SCI has become a sort of McBurial. It's a spin-off. Large parent companies do not want to spin off divisions and then see those spin-offs get into trouble, because that would bring embarrassing publicity back on the parents. Therefore, the spin-offs normally have strong balance sheets and are well prepared to succeed as independent entities. And once these companies are granted their independence, the new management, free to run its own show, can cut costs and take creative measures that improve the near- and long-term earnings. A month or two after the spin- off is completed, you can check to see if there is heavy inside buying among the new officers and directors. This will confirm that they too believe in the company's prospects. The insiders are buyers. All else being equal, favor companies in which management has a significant personal investment over companies run by people that benefit only from their salaries. There's no better tip-off to the probable success of a stock than that people in the company are putting their own money into it. After the Dow dropped 1,000 points in the second half of 1987, it was reassuring to discover that there were four shares bought to every share sold by insiders across the board. At least they hadn't lost their faith. If you see an insider with a $45,000 annual salary buying $10,000 worth of stock, you can be sure it's a meaningful vote of confidence. That's why I'd rather find seven vice presidents buying 500 shares apiece than the president buying 5,000. Insider selling, on the other hand, usually means nothing, and it is silly to react to it. (In general, corporate insiders are net sellers, and they normally sell 2.5 shares to every one share that they buy.) The institutions don't own it, and the analysts don't follow it. If you find a stock with little or no institutional ownership, you've found a potential winner. Find a company that no analyst has ever visited or that no analyst would admit to knowing about, and you've got a double winner. When I talk to a company that tells me the last analyst showed up three years ago, I can hardly contain my enthusiasm. It's a no-growth industry. There's nothing thrilling about a high-growth industry except watching the stocks go down. Carpets in the 1950s, electronics in the 1960s, computers in the 1980s were all exciting high-growth industries in which numerous major and minor companies unerringly failed to prosper for long. That's because for every single product in a hot industry, there are a thousand MIT graduates trying to figure out how to make it cheaper in Taiwan. It's got a niche. I'd much rather own a local rock pit than 20th Century- Fox, because a movie company competes with other movie companies, and the rock pit has a niche. There's no way to overstate the value of exclusive franchises to a company or its shareholders. Inco Ltd. is the world's greatest producer of nickel today, and it will be the world's greatest producer in 50 years. People have to keep buying its product. I'd rather invest in a company that makes drugs, razor blades or cigarettes than in a company that makes toys. In the toy industry, somebody can make a wonderful doll that every child has to have, but the parents buy only one. A great patient's drug is one that cures an affliction once and for all, but a great investor's drug is one that the patient has to keep buying. Tagamet (the ulcer medicine from SmithKline Beckman) was one of the latter. It's a user technology. Instead of investing in computer companies that struggle to survive in an endless price war, why not invest in a company that benefits from the price war -- such as Automatic Data Processing? As computers get cheaper, ADP can process paychecks cheaper and thus increase profits. The company is buying back shares. Buying back shares is the simplest and best way a company can reward its investors. If a company has faith in its own future, then why shouldn't it invest in itself, just as the shareholders do? Exxon has been buying its shares because it's cheaper than drilling for oil. If each of its shares represents $3 a barrel in oil assets, then retiring shares has the same effect as discovering $3 oil on the floor of the New York Stock Exchange. The firm is not in hock. When purchasing depressed stocks in troubled companies, seek out the ones with the superior financial positions and avoid the ones with loads of bank debt. Companies that have no debt can't go bankrupt. Watch the price/earnings ratio. In general, a P/E ratio that's half the growth rate is very positive and one that's twice the growth rate is very negative. We use this measure all the time in analyzing stocks for the mutual fund. If you buy shares in a company selling at two times earnings (a P/E of 2), you will earn back your initial investment in two years, but in a company selling at 40 times earnings (a P/E of 40), it would take 40 years to accomplish the same thing. Cher might be a great-grandmother by then. If you had invested in a company with a P/E of 1,000 when King Arthur roamed England, and the earnings stayed constant, you would just be breaking even today.

Now it's just as hard to spot a loser as to pick a winner. Here is what to watch out for in the flip side of the investment game: Avoid hot-stock schlock. If I could avoid a single stock, it would be the hottest stock in the hottest industry, the one that gets the most favorable ( publicity, the one that every investor hears about in the car pool or on the commuter train and often succumbs to the social pressure and buys. Hot stocks can go up fast, usually out of sight of any of the known landmarks of value, but since there's nothing but hope and thin air to support them, they fall just as quickly. If you aren't clever at selling hot stocks (and the fact that you've bought them is a clue that you won't be), you'll soon see the profits turn into losses. When the price falls, it's not going to fall slowly, nor is it likely to stop at the level where you jumped on. Ignore the whispers. Whisper, or talked-about, stocks have a hypnotic effect, and usually the stories have emotional appeal. This is where the sizzle is so delectable that you forget to notice there's no steak. Yet if you or I regularly invested in these stocks, we both would need part-time jobs to offset the losses. They may go up before they come down, but as a long-term proposition I've lost money on every single one I've ever bought. Beware the next something. Another stock I'd avoid is a company that's been touted as the next IBM, the next McDonald's, the next Intel or the next Disney. In my experience, the next of something almost never is -- on Broadway, the bestseller list, the Boston Celtics or Wall Street. Don't be fooled by a company sitting on cash. If a company must acquire something, I'd prefer it to be a related business, but acquisitions in general make me nervous. There's a strong tendency for companies that are flush with cash and feeling powerful to overpay for acquisitions, expect too much from them and then mismanage them. I'd rather see a vigorous buyback of shares, which is the purest synergy of all. How do I know when to exit? I bail out of a slow-growing stock when the fundamentals have deteriorated. Here are some other warning signs: -- The company has lost market share for two consecutive years and is hiring another advertising agency. -- No new products are being developed, spending on research and development is curtailed and the company appears to be resting on its laurels. -- Two recent acquisitions of unrelated businesses look like what I call diworseifications, and the company announces it is looking for further acquisitions ''at the leading edge of technology.'' -- The company has paid so much for its acquisitions that the balance sheet has deteriorated from no debt and millions in cash to no cash and millions in debt. There are no surplus funds to buy back stock, even if the price falls sharply. How many stocks should you own? In my view, it's best to own as many stocks as there are situations in which: 1) you've got an edge; and 2) you've uncovered an exciting prospect that passes all the tests of research. Maybe that's a single stock, or maybe it's a dozen stocks. There's no use diversifying into unknown companies just for the sake of diversity. A foolish diversity is the hobgoblin of small investors. That said, it is safer to own more than one stock because in spite of your best efforts, the one you choose might be the victim of unforeseen circumstances. In small portfolios, I'd be comfortable owning three to 10 stocks. You will also save yourself a lot of general agony and mistimed moves if you decide that a certain amount you have invested in the market will always be invested in the market. Some people automatically sell their winners and hold on to their losers, which is about as sensible as pulling out the flowers and watering the weeds. Others automatically sell losers and hold on to winners, which doesn't work out much better. The day after the market crashed on Oct. 19, 1987, people began to worry that the market was going to crash. It crashed already and we survived it (in spite of our not having predicted it), and now we were petrified there'd be a replay. Those who got out of the market to ensure that they wouldn't be fooled the next time as they had been the last time were fooled again as the market went up. If you ask me what has been the most important development in the stock market, the breakup of AT&T ranks near the top -- this affected 2.9 million shareholders -- and the Wobble of Oct. 19, 1987 probably wouldn't make my list. Small investors are capable of handling all sorts of markets, as long as they own good merchandise. After all, the losses of October 1987 were losses only to people who took the losses. That wasn't the long-term investor. It was the margin player, the risk arbitrageur, the options player and the portfolio manager whose computers signaled SELL who took the losses. Like a cat who sees itself in a mirror, the sellers spooked themselves.

BOX: A Pro's Tip How to get the most out of a broker

If you buy and sell stocks through a full-service brokerage firm instead of a discount house, you are probably paying an extra 30 cents a share in commissions. That's not a lot, but it ought to be worth something besides a Christmas card and a newsletter with the firm's latest ideas. Remember that it takes a broker only about four seconds to fill out a buy or sell order and another 15 seconds to walk it to the order desk. Sometimes this job is handled by a courier or a runner. Why is it then that people who wouldn't dream of paying for gas at the full-service pump without getting the oil checked and the windows washed demand nothing from the full-service broker? Brokers can provide the Standard & Poor's reports and the investment newsletters, the annuals, quarterlies and prospectuses and proxy statements, the Value Line Survey and the research from the firm's analysts. Let them get the data on P/E ratios and growth rates, on insider buying and ownership by institutions. They'll be happy to do it, once they realize that you're serious. If you use a broker as an adviser -- a foolhardy practice generally, but sometimes worthwhile -- then ask the broker to give you a two-minute speech on any recommended stocks. You will probably have to prompt him with some questions, and a typical dialogue should go like this:

Broker: We're recommending La Quinta Motor Inns. It just made our buy list. You: How would you classify this stock? Cyclical, slow grower, fast grower or what? Broker: Definitely a fast grower. You: How fast? What's the recent growth in earnings? Broker: Offhand, I don't know. I can check into it. You: I'd appreciate that. And while you're at it, could you get me the P/E ratio relative to historic levels? Broker: Sure. You: What is it about La Quinta that makes it a good buy now? Where is the market? Are the existing La Quintas making a profit? Where's the expansion coming from? What's the debt situation? How will they finance growth without selling lots of new shares and diluting the earnings? Are insiders buying? Broker: I think a lot of that will be covered in our analyst's report. You: Send me a copy. I'll read it and get back to you. Meanwhile, I'd also like a chart of the stock price vs. the earnings for the past five years. I want to know about dividends, if any, and whether they've always been paid. While you are at it, find out what percentage of the shares are owned by institutions. Also, how long has your firm's analyst been covering this stock? Broker: Is that all? ) You: I'll let you know after I read the report. Then maybe I'll call the company . . . ((Professionals call companies all the time, yet amateurs never think of it. If you have specific questions, the investor relations office is a good place to get the answers. That's one more thing the broker can do: get you the phone number.)) Broker: Don't delay too long. It's a great time to buy. You: Right now in October? You know what Mark Twain says: ''October. It is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August and February.'' -- P.L.

BOX: LYNCH ON STOCKS VS. BONDS: The long-term returns from stocks are both relatively predictable and far superior to the long-term returns from bonds. In spite of crashes, depressions, wars, recessions, 10 different presidential administrations and numerous changes in skirt lengths, stocks in general have paid off 20 times as well as corporate bonds ((since 1926)), and 30 times better than Treasury bills.

ON PERSONAL INVESTING: In the unlikely event that your mate is dismayed at your stock selections, you could always hide the monthly statements that arrive in the mail. I'm not endorsing this practice, only pointing out that it's one more option available to the small investor that's out of the question for the manager of an equity fund.

ON INSTITUTIONAL INVESTORS: Between the chance of making an unusually large profit on an unknown company and the assurance of losing only a small amount on an established company, the normal mutual fund manager, pension fund manager or corporate portfolio manager would jump at the latter. Success is one thing, but it's more important not to look bad if you fail. There's an unwritten rule on Wall Street: you'll never lose your job losing your client's money in IBM. Security-conscious portfolio managers don't buy Wal-Mart when the stock sells for $4 and it's a dinky store in a dinky little town in Arkansas but soon to expand. They buy Wal-Mart when there's an outlet in every large population center in America, 50 analysts follow the company and the chairman of Wal-Mart is featured in People magazine as the eccentric billionaire who drives a pickup truck to work. By then the stock sells for $40.

ON OPTIONS TRADING: I have never bought a future or an option in my entire investing career, and I can't imagine buying one now. It's hard enough to make / money in regular stocks without getting distracted by these side bets, which I'm told are nearly impossible to win unless you are a professional trader. There's a generous broker's commission attached to every purchase to boot. Options are the broker's gravy train. A broker with only a handful of active options clients can make a wonderful living.

ON TAKEOVERS: By the way, in spite of all the takeover rumors that fill the newspapers these days, I can't think of a single example of a company that I expected to be taken over when I bought the stock actually having been taken over. Usually what happens is that some company I own for its fundamental virtues gets taken over -- and that too is a complete surprise.

ON PRIORITIES: Invest in a house before you invest in stock. Common stocks aren't for everyone, nor even for all phases of a person's life.

ON TIMING: Predicting the economy is futile. Predicting the short-term direction of the stock market is futile. Sometime in the next month, year or three years, the market will decline sharply. I've made money on great companies even in lousy markets, and vice versa.

ON RESTRUCTURING: That is a company's way of ridding itself of certain unprofitable subsidiaries it should never have acquired in the first place. The earlier buying of these ill-fated subsidiaries, also warmly applauded, was called diversification. I call it diworseification. Every second decade, corporations seem to alternate between rampant diworseification (when billions are spent on exciting acquisitions) and rampant restructuring (when those no- longer-exciting acquisitions are sold off for less than the original purchase price). The same thing happens to people and their sailboats. The 1960s was the greatest decade for diworseification since the Roman Empire diworseified all over Europe and northern Africa and then tried to restructure too late.

ON MARKET VAGARIES: Just because a company is doing poorly doesn't mean it can't do worse. Just because the price goes up doesn't mean you are right. Just because the price goes down doesn't mean you are wrong. A stock does not know that you own it.

ON STOP ORDERS: I've always detested stop orders, those automatic bailouts at a predetermined price, usually 10% below the purchase price. True, when you put in a stop order you have limited your losses to 10%, but with the volatility in today's market, a stock almost always hits the stop. It's uncanny how stop orders seem to guarantee that the stock will drop 10%, and instead of protecting against a loss, the investor has turned losing into a foregone conclusion.

ON INITIAL PUBLIC OFFERINGS: IPOs of brand-new enterprises are very risky because there's so little to go on. Although I've bought some that have done well over time (Federal Express was my first and it's gone up 25-fold), three out of four have been long-term failures.