Do you also envy brilliant investors like Warren Buffet and Rakesh Jhunjhunwalla and wish to have that kind of return? Looking over an investment guru’s strategy can help us learn a lot. Today, we are going to decipher the investment strategy of Peter Lynch. Peter Lynch happened to be the fund manager of Fidelity Magellan Fund for 13 years, and the fund gave incredible returns of 29 percent YOY. Not completed yet, the fund beat the S&P 500, its standard, in 11 of the 13 years (1977-1990) while Lynch was the managing the fund.
During his 13 years tenure at Fidelity fund, he increased the assets from $18 million to $14 billion (as of 1990). He has an investment understanding, and his achievements are a testament to that. Let’s also learn about his unique investment strategy and stock picking style.
Play on your strengths:
Table of Contents
“Know what you own” is Lynch’s investment mantra. He believes a retail investor should invest in a company/industry which he is aware of. For instance, A doctor should look for the business of hospitals , Pharma companies, Companies of which drugs he prescribes, because the person that is performing in Industry, would hold access to information that other investors may not have and therefore they would have an edge there. So, the lesson to learn is – always invest in businesses you understand.
Don’t gamble on stocks.
Peter Lynch: “The public is careful when purchasing a house, a refrigerator, or car. They will work hours to save a hundred dollars on a roundtrip air ticket.”
They will put more than $5,000 or $10,000 on some idea they heard on the bus. We call it gambling, which doesn’t require any research but sheer speculation.
Lynch believes that every company has an underlying business. Therefore, whenever an investor purchases a stock, they should feel like they have brought ownership in the company, and there before putting their money, they should thoroughly research it.
If an investor has staked his money so that it will go high within a few days, it becomes a pure form of speculation.
Company Size Matters!
Peter Lynch says – “Big companies have small moves; small companies have big moves.”
In the long term view, a company’s share price would grow with the increase in profits and revenue in the future, and small companies generally have a much more potential to grow and expand than larger companies.
Also, small companies are less covered by analysts, and therefore there are chances that they may be undervalued. Therefore, investors can make huge gains by investing in these companies.
With this advice, Lynch doesn’t necessarily mean that Large-cap companies are a terrible investment avenue. Still, he believes the returns are enormous in smaller companies due to the scope of growth.
Stay away from seasonal investing!
Peter Lynch says – “If I could avoid a single stock, it would be the hottest stock in the industry.”
As per Lynch, hot stocks in hot industries get a lot of attention initially, but once the stock inflates due to this whirr and arrives at a level where the company is highly overvalued, investors understand that the company does not have that kind of earnings or profits to back the valuation, and finally the stock prices fall.
Therefore, Lynch advises dodging these kinds of stocks. The current situation of new-age tech giants like Paytm and Zomato is an example of that, and the share prices reached a level where the revenue did not justify the valuation, and prices crashed.
Go Long or Go Home!
Peter Lynch says, ” The most important organ is the stomach in the stock market. It’s not the brain.”
Lynch believes that daily markets are saturated with negative news, ups and downs are part and parcel of investment, and anyone who wants to become a successful investor should be able to tolerate the volatility in the markets.
As per him, if an investor understands what he owns and why he owns that stock, the volatility in the prices should not affect him, and he should be willing to hold the stocks for 10, 20, or 30 years in the long term market return has been outstanding.
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