Peter Lynch is a legendary investor who was the fund manager of the Magellan Fund at Fidelity Investments in the 1980s. He beat the market for over a decade and generated an incredible compound annual return of 29%.
In a 1997 speech, Lynch outlineed the key principles of his successful investment philosophy which he learned over his 25-year career. Lynch said these principles, “Were true then, are true today and will be true in 25 years from now.” Thus, in this article, I have compiled this iconic speech into 10 principles for investing success.
1. Know what you own
Many people own stocks but don’t really know why or truly understand the business. Lynch suggests, “If you can’t explain to an 11-year-old in 2 minutes or less, why you own the stock, you shouldn’t own it.”
Understanding the business behind the stock is the most important principle of investing in the stock market. This is why Warren Buffett (Trades, Portfolio) only invests into what he understands and what falls in his circle of competence. “I buy stuff like Dunkin Donuts (DNKN, Financial), Stop and Shop… and made money on them,” Lynch said.
2. Don’t try to predict the economy
Lynch is a “bottom up” investor, which means he invests in individual stocks through company and industry analysis. Macroeconomic investors try to make bets based on interest rate changes, the economy and more. Lynch believes “it’s futile to try and predict interest rates or the economy... If you spend 13 minutes per year on economics, you’ve wasted 10 minutes."
This is a very similar philosophy to another guru invesetor, Howard Marks (Trades, Portfolio), who also doesn’t believe in macroeconomic forecasts.
3.Be patient
Often when investing, people think they need to buy now so that they don't miss out, but Lynch highlights that since investing is a long-term game, “You could have bought Walmart (WMT, Financial) 10 years after it went public and still made 30 times your money."
A decade after Walmart when public in 1970, it only had 15% penetration across the U.S. Thus, one could assume they had plenty of runway ahead to expand across the country, but success wasn't guranteed, so some investors might have though they already missed the bus.
4. There are great stocks everywhere
Lynch believes in avoiding prejudice towards certain stocks and industries. There are “great stocks everywhere," even those in bankruptcy or close to it. Often times great investments are the ones where everyone else will think you are crazy.
5. When to sell stocks
Lynch suggests writing down the reasons you buy a stock, and then if or when those reasons are no longer true for the company, then that is when you might want to consider selling. When the story changes, the investment thesis changes.
6. Stocks can always go lower
A key point Lynch highlights is that just because a stock has gone down a lot doesn’t mean it can’t go lower. Stocks can always go lower. “Polaroid went from $140 to $107 and people said buy if under $100… 9 months later it was at $18/share.” Stocks also don’t have to bounce back just because they went down.
7. Stocks can always go higher
If a stock goes higher, especially if it's a high-flying stock without the earnings to back it up, investors may think it couldn't possibly go higher. If the fundamentals of the business are great, with sales and profits expanding, then the stock could still continue to rise higher, as the market's short-term movements are often driven by sentiment, not reality. The fact that a stock has gone higher is not a reason to sell in and of itself, though don't forget that overvalued stocks are risky.
8. A stock price decline doesn’t mean you are wrong
The short-term movements of a stock price don't determine whether you are right or wrong. Investing success cannot be determined by the initial outcome alone. For example, you may close your eyes and randomly pick a stock that goes up 10 times, and others might say it is a success. However, that doesn’t mean you were correct. Conversely, if you do a thorough analysis of stock and it goes down, this could just be short-term market volatility, even if it looks like a loss at first.
“The average movement of a stock on the New York Stock exchange this century has been 50% between its high and low,” noted Lynch. Even good stocks have traded down significantly at some points in the past.
9. You can always lose what you invest
Many people often forget that when investing, you can always lose what you have invested, even if a stock is cheap. “If it’s $3 per share, how much can I lose?” Lynch asked the audience. “If you put $25,000 into a stock at $3 per share and your neighbor puts $10,000 at $50 per share… if the stock goes to zero, you both lose everything.”
10. The person that turns over the most rocks wins
Lynch said if you “look at 10 companies you will find one which is mispriced… If you look at 20 you will find two... The person who turns over the most rocks wins.”
Final thoughts
Peter Lynch is a legendary investor and his investing principles are as relevant today as they ever were. Lynch’s philosophy focuses on common sense and rational investing. It may seem simple, but these principles are challenging to implement in the longer term. Reading the words of Lynch can help us to put things into perspective and remind us that investing is a marathon, not a sprint.
