Peter Lynch was one of the most successful fund managers of all time. Between 1997 and 1990, he managed Fidelity's Magellan Fund, where he achieved an average annual return of 29.2%.
Lynch essentially developed the "growth at a reasonable price" investment strategy. He would travel around the country and world looking at different businesses in their early development stages and then buy the stocks if he liked what he saw.
Lynch was looking for companies that seemed cheap compared to their growth potential. He didn't just rely on Wall Street projections to establish whether or not a business was undervalued or had a bright growth outlook. He spent the vast majority of his year traveling, reviewing companies' stores and operating footprints. With this active mentality, he coined the "buy what you know" strategy. Lynch wanted to know and understand each and every business before he bought into the opportunity. He wanted to know what the company did and how it made its money, as well as what the customers thought about the business. This rigorous approach undoubtedly helped contribute to his impressive performance record.
In 1996, in an article titled "The 5% Solution," Lynch laid out some of the basic rules of investing he had developed and followed throughout his career. Even though this list is now nearly 25 years old, it is still just as informative today as it was when it was first published by the successful fund manager. Here are some of the points I found most informative on the list:
"People who exit the stock market to avoid a decline are odds-on favorites to miss the next rally. If you don't believe corporate profits will continue to rise, and you can't stomach a decline in the market, don't buy stocks or equity mutual funds."
Lynch believed that trying to time the market was a waste of time. He didn't wait for the perfect time to buy shares of the companies he liked. Instead, when he found a company, he bought it, and then added to the position if the stock became more attractive from a price perspective. He did not let the market dictate his actions.
"A stock certificate is not a lottery ticket. Behind every stock is a company. Stock prices go up 8% a year, on average, because corporate profits go up 8% a year. Add in the dividend yield of 2.5% (today's levels) and stocks give you a total return of 10.5%. Dividends are raised, on average, by 8% a year, right along with corporate profits."
This is very similar to the advice Benjamin Graham first issued nearly 100 years ago. Like Graham, Lynch understood that behind each stock was an individual company, and investors needed to concentrate on the underlying business's fundamental performance, rather than the ticker.
This is part of the reason why he spent so much time traveling and trying to understand companies. He knew the market price only reflected investor sentiment at that point in time, and it did not reflect the real situation of the underlying business. Lynch could only find this out by traveling around and talking to people.
"In a correction or a bear market, great companies, good companies, mediocre companies, and terrible companies all see the prices of their stocks decline. A correction is a wonderful opportunity to buy your favorite companies at a bargain price."
As noted above, Lynch wasn't interested in trying to time the market. He wanted to find good companies and stick with them. He didn't let market volatility dictate his actions. Instead, he used it as an opportunity to increase positions when the time was right.
Disclosure: The author owns no share mentioned.
Read more here:
- Peter Lynch on the Challenges of Investing in Biotech Stocks
- What Investors Should Know Before Following Ray Dalio's 'Cash Is Trash' Mentality
- Seth Klarman: Know What You're Good At
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