Investing Lessons from Peter Lynch

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Peter Lynch is known as one of the great stock investors in the world. He brought simplicity to the investment philosophy . He has shared his knowledge with the investing masses through his writings, including his two seminal books “One Up on Wall Street” and “Beating the Street”. The ideas and lessons from his writings are timeless and still transferable to investors across a broad spectrum of skill levels.

I have structured the lessons from Peter lynch into few sections.

Investing Skills

  1. Investing is fun, exciting, and dangerous if you don’t do any work.
  2. Your investor’s edge is not something you get from Wall Street experts. It’s something you already have.
    • You can outperform the experts if you use your edge by investing in companies or industries you already understand.
  3. Over the past three decades, the stock market has come to be dominated by herd of professional investors.
    • Contrary to popular belief, this makes it easier for the amateur investors. You can beat the market by ignoring the herd.
  4. If you study 10 companies, you’ll find 1 for which the story is better than expected. If you study 50, you’ll find 5.
    • There are pleasant surprises to be found in the stock market - companies whose achievements are being overlooked on Wall Street.
  5. If you the have the stomach for stocks, but neither the time nor the inclination to do the homework, invest in equity mutual funds.
    • Here, it’s a good idea to diversify.
    • You should own a few different kinds of funds, with managers who pursue different styles of investing: growth, value , small companies, large companies, etc. Investing in six of the same kind of fund is not diversification.

Companies and Sectors

  1. Behind every stock is a company. Find out what it’s doing.
  2. 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.
  3. Often, there is no correlation between the success of a company’s operations and the success of its stock over a few months or few years.
    • In the long term, there is a 100 percent correlation between the success of the company and the success of its stock.
    • This disparity is the key to making money. It pays to be patient and to own successful companies.
  4. You have to know what you own and why you own it. “This baby is a cinch to go up!” doesn’t count.
  5. If you can’t find any companies that you think are attractive, put you money in the bank until you discover some.
  6. Never invest in a company without understanding its finances.
    • The biggest losses in stocks come from companies with poor balance sheets.
    • Always look at the balance sheet to see if a company is solvent before you risk you money on it.
  7. Avoid hot stocks in hot industries. Great companies in cold, non growth industries are consistent big winners.
  8. With small companies, you’re better off to wait until they turn a profit before you invest.
  9. If you’re thinking about investing in a troubled industry :
    • Buy the companies with staying power.
    • Also, wait for the industry to show signs of revival.
    • Buggy whips and radio tubes were troubled industries that never came back.
  10. In every industry and every region of the country, the observant amateur can find great growth companies long before the professional have discovered them.
  11. Time is on your side when you own shares of superior companies.
    • You can afford to be patient - even if you missed Wal-Mart in the first five years, it was a great stock to own in the next five years. Time is against you when you own stock options. You can take advantage of the faster-growing economies by investing some portion of your assets in an overseas fund with a good record.

Stock market Volatility

  1. A stock-market decline is as routine as January blizzard in Colorado. If you’re prepared , it can’t hurt you.
    • A decline is a great opportunity to pick up the bargains left behind by investors who are fleeing the storm in panic.
  2. Everyone has the brainpower to make money in stocks. Not everyone has the stomach.
    • If you are susceptible to selling everything in a panic, you ought to avoid stocks and stock mutual funds altogether.
  3. There is always something to worry about.
    • Avoid weekend thinking and ignore the latest dire predictions of the newscasters.
    • Sell a stock because the company’s fundamentals deteriorate, not because the sky is falling.
  4. Nobody can predict interest rates, the future direction of the economy or the stock market.
    • Dismiss all such forecasts and concentrate on what’s actually happening to the company in which you’re invested.

Portfolio selection

  1. Owning stocks is like having children - don’t get involved with more than you can handle.
    • The part-time stockpicker probably has time to follow 8-12 companies, and to buy and sell shares as conditions warrant.
    • There don’t have to be more than 5 companies in the portfolio at any time.
  2. In the long run, a portfolio of well-chosen stocks and/or equity mutual funds will always outperform a portfolio of bonds or money-market account. In the long run, a portfolio of poorly chosen stocks won’t outperform the money left under the mattress.

Returns from Stocks

  1. If you invest $1,000 in a stock, all you can lose is $1,000, but you stand to gain $10,000 or even $50,000 over time if you’re patient.
    • The average person can concentrate on a few good companies , while the fund manager is forced to diversify.
    • By owning too many stocks, you lose the advantage of concentration.
    • It only takes of handful of big winners to make a lifetime of investing worthwhile.
  2. The capital-gains tax penalizes investors who do too much switching from one mutual fund to another. If you’re invested in one fund or several funds that have done well, don’t abandon them capriciously. Stick with them.
  3. Long shots always miss the mark.


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