Peter Lynch, for those unfamiliar, ran the Magellan Fund out of Fidelity Investments from the late 1970s to 1990. The fund manager’s largest claim to fame was consistently doubling the S&P 500 market index annually. His performance made the Magellan Fund the most profitable mutual fund on the planet. Suffice to say that every aspiring or even veteran investor has something to learn from Peter Lynch. We have broken down Lynch’s approach to investing into five parts that we believe may be useful to apply to your own strategy, and in fact use it ourselves.
Invest In What You Know- Peter is obviously a strong proponent of investing in companies you know and understand. The closer you can put yourself to the information source, the further ahead you are of the Wall Street analysts who drive the market. Analysts have to wait for opportunity to show itself in the numbers, so be ahead of the numbers.
Can You Explain What You Are Buying?- Just like when you pick a strategy, you need to understand how the process works. If you can’t explain how a company makes money, then you aren’t following the first rule of investing in what you know. And if you are going to invest in what you don’t know, you might as well be buying lottery tickets.
Don’t Waste Time Predicting Things You Cannot Control- The investment world is flush with some of the brightest, most intelligent minds in the world. Unless you think you’re smarter than these individuals who have spend their entire life focusing on specific areas in the economic environment, leave the predictions to the professionals and focus on lesson one. If the environment determines the soundness of your investment, then maybe your idea wasn’t all that sound to begin with.
Find Fast Growth In Slow Industries- Peter often ignored the hot new industries in favor of the mundane, even lethargic ones. His philosophy suggests that if you can find a company who can persevere beyond its peers in the face of a sector headwind, you have found a resilient winner. The more handicapped the company is by operating in a boring industry, the easier it is to identify ingenuity on the behalf of the management.
Find Them Before Wall Street Does- Now before you say this is impossible, it doesn’t mean you have to scour the earth for every new startup. Look at public companies whose institutional ownership is relatively low in relation to their peers. If a stock shows 80-90% institutional ownership, chances are the analysts have already beat you to the punch. Also consider the above example. Hanes was already a widely known company, but Peter was able to identify opportunity through using common sense, not some complex valuation metric or formula.
An excerpt of “The Investment Survival Guide”