2 Thoughts on Investing by Peter Lynch

Earlier, we examined Peter Lynch’s advice to individual investors, and how ordinary people can translate the edge they already have into returns in the stock market. Today, we will discuss his thoughts on two different types of investment -- fast-growing stocks and undervalued slow growers.

Fast growers are like baseball teams on a hot streak

“When most people think about investing in the stock market, they dream about investing in a fast grower, a company that is growing at over 25% a year. At 25% a year, a company’s profits will double in three, they quadruple in six, they go up eight-fold in nine years. That’s how you get a huge stock in a decade. There’s not a lot of these, but they’re very powerful. And the best part is, you don’t have to catch them just as they’re taking off.”

It’s quite easy to look back in time at a company like Alphabet (GOOG, Financial) and to say that you should have bought it, which is why headlines such as "If you had invested $1000 in Google in 2006, here’s how much you would have now" are, frankly, misleading. Everyone has 20-20 hindsight. But growth-value investors like Lynch believe that it is possible to spot these companies before they take off. You just have to wait until the second or third inning:

“One way you can think of growth companies is to think of baseball. A normal baseball game has nine innings. You should look at a growth company and say ‘I don’t want to buy it in the first inning. I want to buy it when they’re in the second or third inning. They’ve got the formula right, they’ve got lots of room to go.’ So you want to see a company that’s very early in its cycle.”

The essence of investing

The business media tends to focus heavily on fast-growing glamour stocks, but the truth is that there is more value to be found in undervalued slow growers. For those of you who may question why someone might want to invest in a business with unimpressive earnings growth, Lynch gives the answer:

“If somebody said to you 'I’m going to sell you a business for $100,000' and they’re earning $50,000 a year, you’d say 'what’s the bad news?' The bad news is that earnings are never going to grow. They’ll earn $50,000 a year forever. So this is a price-earnings multiple of two. You’ll say “I don’t care. I’m going to get a $50,000 return every year. In two years I’m going to make all my money back, and then make $50,000 on my $100,000 investment forever. So sometimes, even when a company has a very low growth rate and earnings, if the stock is selling at the right price it may still be a very good deal.”

To me, this is the essence of investing. If you are able to get a dollar of value for substantially less than a dollar in cost, then the deal really is a no-brainer -- and it doesn’t really matter if the amount of dollars you get back doesn’t grow significantly over time.

Disclosure: The author owns no stocks mentioned.

Read more here:Â

Peter Lynch: Improve Your EdgeÂ

Debt-Laden Companies Can Ruin Your PortfolioÂ

Howard Marks: The Importance of Second-Level ThinkingÂ

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