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Robert Stephens, CFA
Robert Stephens, CFA
Articles (359) 

Peter Lynch on Why Intelligence May Be Overrated

Self-discipline may be more important than intellect when investing

June 30, 2020

Recent market volatility and the economy’s unpredictable future may lead some investors to believe they lack the knowledge or intellect to buy stocks at the moment.

However, intelligence may not have a huge bearing on your portfolio’s performance. Character traits such as self-discipline may be more valuable than intellect in successfully managing a portfolio.

For instance, Peter Lynch has relied on a simple strategy to generate high returns. His value investing principles, which can be followed by any investor, could be a key reason for his 29% annualized returns when managing the Magellan Fund between 1977 and 1990.

Simplicity beats complexity

Complicated investment strategies may appear to some investors to be more impressive than simple plans. However, they do not necessarily produce higher returns over the long run.

At its core, investing in stocks is a simple idea. Investors all have the same aim, which is to buy a company’s shares when they are low and potentially sell them at a later time when they are trading higher.

Identifying value opportunities may not necessarily be the most difficult process facing an investor. Rather, the most challenging part of investing could be having the self-discipline to act upon market mispricings while they are temporarily available.

At the moment, many stocks seem to offer good value for money. For instance, they may trade at a discount to their sector peers despite having stronger finances or a wider economic moat. Investors who can identify them using a simple strategy and then act upon it through purchasing those undervalued stocks may be able to efficiently apportion their capital for the long run.

As Lynch once said, “Everyone has the brainpower to follow the stock market. If you made it through fifth-grade math, you can do it.”

Unearthing the best opportunities

An investor’s level of intelligence may not help them to unearth the best value opportunities. A more useful character trait is likely to be a strong work ethic, since finding the best stocks naturally requires an investor to cast their net over a wide search area.

This will inevitably lead to them identifying a large number of unattractive stocks. However, this is part of the process of efficiently allocating your capital to generate high long-term returns.

After the stock market’s decline in 2020, a large number of businesses offer low valuations. Therefore, investors who have the capacity to search through them to find the small number of mispriced securities available may be able to generate higher returns than their peers.

Lynch’s strategy has always focused on putting more effort into finding value stocks than his peers. He said, “The person that turns over the most rocks wins the game. And that's always been my philosophy.”

Accepting your limitations

It is tempting for any investor to seek to wait for a stock’s lowest price before buying it. They may feel they have the intellect to identify when this will occur, and can perfectly time the market to boost their returns.

However, it is impossible to accurately forecast the short-term price movements for any stock. There are an infinite number of unpredictable variables that that can affect its performance.

Therefore, a more productive strategy could be to buy a stock when it appears to be fairly priced based on factors such as its financial position, the size of its competitive advantage and its growth strategy. Investors who seek to wait for the lowest price possible before buying a stock could miss out on buying opportunities, and their portfolio’s performance may suffer as a result.

Lynch has always accepted his limitations when buying stocks. He said, “When stocks are attractive, you buy them. Sure, they can go lower. I've bought stocks at $12 that went to $2, but then they later went to $30. You just don't know when you can find the bottom.”

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