Peter Lynch is one of the most successful and top value investor of all time. He was a legendary fund manager who gave 29% returns to their investors for 13 years in a row. He wrote books on value investing , where he shared his investment lessons which he learned and used during his journey as an investor. He is one of the greatest value investor of all time. He is a firm believer that an average investor can also pick winning stocks as Wall Street professional with right research, patience , steady discipline and common sense.
Some of his investment principles are –
1. Invest in what you already know – “The worst thing you can do is invest in companies you know nothing about. Unfortunately buying stocks on ignorance is still a popular American pastime.” -Peter Lynch
People can perform well by investing in what they already know. For instance if a doctor wants to invest in banking sector (about which he know nothing) , he will not have that great return as compared to if he will invest in pharmaceutical companies ( as he already knew about drugs, healthcare sector and their companies)
“Invest in what you know. It leaves out the role of serious fundamental stock research. People buy a stock and they know nothing about it. That’s gambling and it’s not good.” -Peter Lynch
So, it’s better to choose the company whose products/services are either used by you or you are familier of the products/services of that company in some way or other. These knowledge will lead you to invest in better stocks .
2. Invest in companies not in stocks – “Look for small companies that are already profitable and have proven that their concept can be replicated. • Be suspicious of companies with growth rates of 50 to 100 percent a year”-Peter Lynch
Behind every stock there is a company. If companies will perform well, the stocks automatically will perform well. So, it’s important to know about the company, it’s business model. Choose a company whose fundamentals are strong. A company whose business model is so easy to understand that anyone can understand and run that company.
“Go for a business that any idiot can run – because sooner or later any idiot probably is going to be running it” -Peter Lynch
Know a companies management, it’s fundamentals and then ask yourself , “are you able to understand the mission and vision of the company? “ or “If you’ll be given the responsibility to run this company, will you be able to run the company? “
If the answers to the above questions are a YES then it’ll be great to invest in that company.
So always remember that you have to invest in a company and not in a single stock.
“Behind every stock is a company. Find out what it’s doing.” -Peter Lynch
“Never invest in a company without understanding its finances. The biggest losses in stocks come from companies with poor balance sheets.”
3. Don’t take unnecessary risks. Take calculated risks – You don’t have to take risks which you can’t bear. Only take calculated risks.
Let’s say, you have $10 dollar, maybe if you will lost this, you won’t regret. But what if you lost $100 or $1000! Always buy stocks of the amount if you lose won’t regret. You are not required to put all your money in market and risk all that money. Instead put only that amount which if you lose won’t make you regret of investing.
Also, invest only the amount you will not need ever back in your life
4. Peter Lynch said that the most important thing that keep in mind while investing is : know why you own it.
“ You have to know what you own ,and why are you own it .” -Petrr Lynch
It sounds simple but it is not . He said when I asked most people they just don’t know why they own a stock . 80% of investors have no answer to this question .
They maybe hear some tip from anywhere and put their money at risk and when they lose it they blame institutions .
First you have to know the reason . Why you should invest in this company ,research about that company . Check their balance sheets . Without proper research you are not investing you are just gambling . Read and know as much as you can about the company. And remember to buy the company and not just a stock.
“If you’re prepared to invest in a company, then you ought to be able to explain why in simple language that a fifth grader could understand, and quickly enough so the fifth grader won’t get bored.” – Peter Lynch
5. Invest for long time- Lynch used to hold stocks for long period of time. He used to sell the stocks when the fundamentals of any company gets changed. This is his advice for all investors out there to not go behind short term profits but invest for a long period of time.
He even conducted many studies to understand the power of compounding.
“People who succeed in the stock market also accept periodic losses, setbacks, and unexpected occurrences. Calamitous drops do not scare them out of the game.”
Some more investment lessons by Peter Lynch :
• “Never invest in any idea you can’t illustrate with a crayon .”
• “The trick is not to learn to trust your gut feelings, but rather to discipline yourself to ignore them. Stand by your stocks as long as the fundamental story of the company hasn’t changed”
• “Whenever you invest in any company, you’re looking for its market cap to rise. This can’t happen unless buyers are paying higher prices for the shares, making your investment more valuable.”
• “There’s no shame in losing money on a stock. Everybody does it. What is shameful is to hold on to a stock, or worse, to buy more of it when the fundamentals are deteriorating.”
• “Never invest in any company before you’ve done the homework on the company’s earnings prospects, financial condition, competitive position, etc”
• “Big companies have small moves, small companies have big moves.”
• “Good management, a strong balance sheet, and a sensible plan of action will overcome many obstacles, but when you’ve got weak management, a weak balance sheet, and a misguided plan of action, the greatest industry in the world won’t bail you out.”
• “In the long run, a portfolio of well chosen stocks and/or equity mutual funds will always outperform a portfolio of bonds or a money-market account. In the long run, a portfolio of poorly chosen stocks won’t outperform the money left under the mattress.”
This is how he succeed in the world of investment. You can learn from him and help yourself to reach the level you want in investment.