Peter Lynch achieved fame in the investing world by achieving average annual returns of 29.2% between 1977 and 1990. Although he has retreated from the public spotlight, his old interviews and speeches are still great viewing, and I believe that modern value investors can learn a lot from him.
In a 1994 speech, Lynch explored the question of why so many retail investors aren’t succesful.
Know what you own
Lynch is a strong believer that in order to be successful, investors should really understand the businesses that they own:
“The single most important thing in the stock market is to know what you own. I’m amazed how many people own stocks that they would not be able to tell you why they own. If you really press them, they’d say “I own this because this sucker’s going up”. If you can’t explain to a ten year old in ten minutes or less why you own a stock, you shouldn’t own it”.
He referred to his own experience of making money by buying shares of Dunkin’ Donuts (DNKN), a business which he understood completely. He didn’t have to worry about low cost Korean competition, or whether there would still be demand for the product in a recession, or whether some new technological innovation would make the doughnut obsolete. This illustrates why it can be so beneficial to focus on simple industries - there are far fewer moving parts to consider when analyzing the stock.
And it’s strange that so many people seem to own stocks that they don’t actually understand. This is probably even more true nowadays, with ETF investing having become so widespread. As Lynch puts it:
“It bothers me that people are very careful with their money [in other ways]. The public, when they buy a refrigerator, they get consumer reports, they do that with a microwave oven. They ask other people what kind of car to buy. They do research on apartments. But they’ll hear a tip on a bus about some stock and put half their life’s savings into it before sunset! And they wonder why they lose money in the stock market. And when they lose money they blame it on the institutions and programme trading”.
It’s interesting that even back in 1994, when Lynch made this speech, retail investors were already complaining about "the algos," which supposedly make it impossible for the little guy to win. Now, while it’s certainly true that high frequency traders engage in some pretty shady practices by frontrunning the trades of both institutions and retail investors, it’s not like they are the reason why so many fail. Almost always, investors are hoisted by their own petards. By doing your homework, you can raise your chances to avoid this fate, which is one of the major reasons behind Peter Lynch's success.
Disclosure: The author owns no stocks mentioned.
Read more here:
- Warren Buffett: Here's How Ordinary Investors Can Benefit From Wild Price Swings
- Howard Marks: How Passive Investing Affects the Market
- Why Can Stocks Jump on Bad News?
Not a Premium Member of GuruFocus? Sign up for a free 7-day trial here.
