Beating the Street: 25 Golden Rules

For 13 years, Peter Lynch dominated the mutual fund field like no other manager, bringing in an average annual return of 29.2%. He has written about his stock picking for the Fidelity Magellan Fund between 1977 and 1990, as well as his picks for an annual Barron’s magazine feature in two books: "One Up on Wall Street" in 1989 and “Beating the Street” in 1993.

To conclude “Beating the Street,” he provided his 25 Golden Rules: “Before I turn off my word processor, I can’t resist this last chance to summarize the most important lessons I’ve learned from two decades of investing, many of which have been discussed in this book and elsewhere.” And, he wrote those rules in his inimitable style:

1. “Investing is fun, exciting, and dangerous if you don’t do any work.”
2. Amateurs have the potential to do even better than professionals in this field if they invest in companies they already understand.
3. Professionals came to dominate the stock market by the early 1990s—but that has made it easier for amateurs to succeed by ignoring the herd.
4. A stock is never just a stock, it represents a share of ownership in a company, and you should always know what that company is doing.
5. In the short term, there is often no connection between success in a company’s operations and its stock price. However, in the long term, there is a 100% correlation.
6. You need to know why you own certain companies; hunches and tips have no value at all.
7. “Long shots almost always miss the mark.”
8. Only own a manageable number of companies; part-time investors probably have time to own eight to 12. In Lynch’s words, “Owning stocks is like having children—don’t get involved with more than you can handle.”
9. Keep your money in the bank if you can’t find attractive stocks.
10. Big losses come from companies with weak balance sheets, so never invest in a company without knowing its finances, without knowing it is solvent.
11. Stay away from hot stocks in hot industries, but “Great companies in cold, nongrowth industries are consistent big winners.”
12. Thinking of buying the stock of small companies? Wait until they begin showing profits.
13. If you invest in troubled industries, only buy companies with staying power—when the industry appears to be recovering. Lynch wrote, “Buggy whips and radio tubes were troubled industries that never came back.”
14. The most you can lose on $1,000 worth of stocks is $1,000, but you could gain $10,000 or $50,000 if you are patient. Don’t spread that investment among too many stocks, because you could diversify away the rewards of concentration.
15. Watchful amateurs in all regions and all industries will find “great growth companies” much sooner than professionals.
16. Stock market declines should be expected, and we should be prepared for them. What’s more, he wrote, “A decline is a great opportunity to pick up the bargains left behind by investors who are fleeing the storm in panic.”
17. Everyone is smart enough to succeed at investing, but not everyone has the stomach for it.
18. Only sell a stock when its fundamentals take a turn for the worse; avoid all the dire chatter in the media and avoid “weekend worrying.”
19. Since nothing in the future can be known, including interest rates and the economy, focus your attention on the operations and results of the companies in which you have invested.
20. “There are always pleasant surprises to be found in the stock market—companies whose achievements are being overlooked on Wall Street.” Study 10 companies and you’ll find one has a story that’s better than expected; study 50 and find five.
21. “If you don’t study any companies, you have the same success buying stocks as you do in a poker game if you bet without looking at your cards.” Investing without research is simply gambling.
22. If you buy superior companies, time is on your side. Even if you missed a great one in its first five years, it can still be great to own for the next five years.
23. Buy mutual funds if you have the risk tolerance for stocks, but do not have the time or interest to do your homework. Buy different types of funds to diversify your investments.
24. The American market is not always the best performer, so consider making investments in good overseas mutual funds.
25. “In the long run, a portfolio of well-chosen stocks and/or equity mutual funds will always outperform a portfolio of bonds or a money-market account. In the long run, a portfolio of poorly chosen stocks won’t outperform the money left under the mattress.”

Conclusion

Lynch began “Beating the Street” by claiming he did not have a strategy throughout his years at Magellan, or afterward.

But as we see in this list of 25 Golden Rules, he did have a lot of tactics that guided him in his investment work. These tactics span a wide range, but almost all of them will make sense to the average value investor: Choose your stocks carefully by checking out both the fundamentals and the company’s “story,” don’t overpay and think long term.

Read more here:

• Beating the Street: Peter Lynch on Cyclical Stocks
• Beating the Street: 'Great Companies in Lousy Industries'
• Beating the Street: Mr. Lynch Got a Haircut

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