According to Peter Lynch, getting the story on a company is a lot easier if you understand the basic business. That’s why he’d rather invest in panty hose than communications satellites, or in motel chains than fiber optics. The simpler it is, the better he likes it. When somebody says, ’Any idiot could run this joint,’ that’s a plus as far as he’s concerned, because sooner or later any idiot probably is going to be running it.

Given a choice between owning stock in a fine company with excellent management in a highly competitive and complex industry, or a humdrum company with mediocre management in a simpleminded industry with no competition, Lynch perfers the latter. For one thing, it’s easier to follow. During a lifetime of eating donuts or buying tires, he’s developed a feel for the product line that he’ll never have with laser beams or microprocessors.

’Any idiot can run this business’ is one characteristic of the perfect company, the kind of stock Lynch dreams about. You never find the perfect company, but if you can imagine it, then you’ll know how to recognize favorable attributes, the most important Lynch describes as follows:

1. It sounds dull--or, even better, ridiculous.

The perfect stock would be attached to the perfect company, and the perfect company has to be engaged in a perfectly simple business, and the perfectly simple business ought to have a perfectly boring name. The more boring it is, the better. Automatic Data Processing is a good start. But Automatic Data Processing isn’t as boring as Bob Evans Farms. But even Bob Evans Farms won’t win the prize for the best name if you could give it to a stock, and neither will Shoney’s or Crown, Cork, and Seal. None of these has a chance against Pep Boys--Manny, Moe, and Jack. This is the most promising name Lynch has ever heard.

2. It does something dull.

Lynch gets even more excited when a company with a boring name also does something boring. Crown, Cork, and Seal makes cans and bottle caps. What could be duller than that? You won’t see an interview with the CEO of Crown, Cork, and Seal in Time magazine alongside an interview with Lee Iacocca, but that’s a plus. There’s nothing boring about what’s happened to the shares of Crown, Cork, and Seal. Or consider Seven Oaks International, the company that processes the coupons that you hand in at the grocery store--a stock guaranteed to shut your eyes-- while the price goes from $4 to $33.

3. It’s a No-Growth Industry.

Many people prefer to invest in a high-growth industry, where there’s a lot of sound and fury. Not Lynch. He prefers to invest in a low-growth industry like plastic knives and forks, but only if he can’t find a no-growth industry like funerals. That’s where the biggest winners are developed.

For Lynch, there’s nothing thrilling about a thrilling 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. As soon as a computer company designs the best word-processor in the world, ten other competitors are spending $100 million to design a better one, and it will be on the market in eight months. This doesn’t happen with bottle caps, coupon-clipping services, oil-drum retrieval, or motel chains.

4. It’s got a Niche.

Lynch would rather own a local rock pit than own Twentieth Century Fox, because a movie company competes with other movie companies, and the rock pit has a niche. Twentieth Century-Fox understood that when it bought up Pebble Beach, and the rock pit with it. Certainly owning a rock pit is safer than owning a jewelry business. If you’re in the jewelry business, you’re competing with other jewelers from across town, across the state, and even abroad, since vacationers can buy jewelry anywhere and bring it home. But if you’ve got the only gravel pit in Brooklyn, you’ve got a virtual monopoly, plus the added protection of the unpopularity of rock pits.

There’s no way to overstate the value of exclusive franchises to a company or its shareholders. Inco is the world’s great producer of nickel today, and it will be the world’s great producer in fifty years. Once I was standing at the edge of the Bingham Pit copper mine in Utah, and looking down into that impressive covern, it occurred to me that nobody in Japan or Korea can invest a Bingham pit. Once you’ve got an exclusive franchise in anything, you can raise prices. In the case of rock pits you can raise prices to just below the point that the owner of the next rock pit might begin to think about competing with you. He’s figuring his prices via the same method.

Lynch loves niches. The perfect company would have to have one. Warren Buffett started out by acquiring a textile mill in New Bedford, Massachusetts, which he quickly realized was not a niche business. He did poorly in textiles but went on to make billions for his shareholders by investing in niches. He was one of the first to see the value in newspapers and TV stations that dominated major markets, beginning with the Washington Post.

5. People have to keep buying it.

Lynch would rather invest in a company that makes drugs, soft drinks, 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 every child gets only one each. Eight months later that product is taken off the shelves to make room for the newest doll the children have to have -- manufactured by somebody else. Why take chances on fickle purchases when there’s so much steady business around?

Credits & Disclosures: Peter Lynch comments are extracted from his very entertaining book One Up On Wall Street : How To Use What You Already Know To Make Money In The Market.

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