Investing Lessons From Peter Lynch
When it comes to Investing, Peter Lynch is known as one of the best fund managers in the history of US Stock Markets. Lynch managed the Magellan Fund, where he generated an average return of 29.2% for 13 years, which is considered one of the best performances by a mutual fund ever. The Magellan Fund’s AUM grew from $18 million to $14 billion under the tenure of Peter Lynch.
Lynch started his investment career by investing in an air-freight company called Flying Tiger, which helped him pay for graduate school. Peter Lynch is the author of some of the best-selling books on investing, such as One Up on the Wall Street and Beating the Street, and is credited with inventing many popular stock valuation methods.
Picking stocks is a difficult task where not everyone can be successful. Peter Lynch laid out some foundations that he followed as his investment mantra, allowing him to earn huge returns. By following these lessons, you can
improve your chances of wealth creation, and who knows, you may be the next Peter Lynch!
Source: https://fintrovert.com/blogs/top-15-peter-lynchquotes/
• Invest in what you know
It is important to be familiar with the company and the industry you are investing in, as this provides you an edge over the average investor. Do you have intimate knowledge of the industry? Can you connect the dots?
Consider the following example: You are in the business of selling cars. You have a good amount of knowledge of the internal specifications of cars and know what type of cars are selling like hot cakes in the market. A company
launches a new car, and by understanding its features, you are convinced it will be a huge success.
That’s the edge you have over others. Don’t know about a particular industry or company? You can easily research the industry and understand how it works to understand its future growth story better.
• Ten-Bagger Approach
The term tenbagger was coined by Peter Lynch in his book One Up on the Wall Street. It refers to an investment that can grow by 10 times and has future growth prospects.
Lynch generally goes for stocks in this category with a PE Ratio below the industry average and whose 5-year EPS growth rate is generally high but lower than 50%. Identifying stocks in this category is very difficult, and the other tricky part is to stay invested in them for a long time. According to Lynch, Walmart is the best example of a tenbagger that investors had plenty of time to buy. Even if a person invested in Walmart after 10 years it went public, he still would have multiplied his wealth by 30 times.
• Patience
Patience is the most important virtue emphasised time and time again by big- time investors such as Warren Buffet, Charlie Munger, and our very own Peter Lynch. According to Peter Lynch, “the stock market’s been the best place to over the last 10 years, 30 years, 100 years.”
Being invested for the long term offers investors the advantage of compounding, which helps multiply wealth faster. Also, it is easier to grow wealth in the long term while facing a lower amount of volatility.
• Research matters most
Research is the most critical factor that differentiates a great investor from a good one. It is very important to know about the industry and company in which you are investing. Investing randomly without any research is gambling.
Lynch invented the Price to Earnings Growth (PEG) Ratio, which helps determine the worth of a stock given its growth potential and many other valuation methods prevalent today.
• Discipline to handle volatility
According to Peter Lynch, the stomach is the most important organ in the stock market. There will always be downfalls in the market. The question is: Can you survive them? In his tenure at Magellan Funds, the market went
down 10% or more by 9 times. But this did not worry Lynch and he remained invested as he believed in the companies in which he invested.
In the words of Sylvester Stallone (Rocky), “Life’s not about how hard of a hit you can give…it’s about how many you can take, and still keep moving forward.”
• Timing the Markets
An attempt to time the markets is unproductive and leads to lost time and opportunities. People have lost more money waiting for corrections and predicting them rather than what they would have lost in the actual
corrections. If you spot a good opportunity and believe in its future growth prospects, then invest in it rather than waiting for the price to fall.
• Question the rise and fall
It is done matter if your stock grows from $50 to $100. The million-dollar question lies in knowing the reason behind the rise of the stock. The same applies to a fall in the stock price. Knowing the reason will enable you to be
well informed and become better at spotting opportunities in the future.
• Exit when there’s no room to grow
When you buy a stock, you believe in a certain growth story, which you expect the company to reach. Once the company has realised its potential and there is no further room to grow, one should sell their investment. You should exit when the company has reached its maturity or cannot meet your expectations.