Peter Lynch: How Buying a Home Can Prepare You for Buying Stocks

While he may not be a household name like Warren Buffett, Peter Lynch had one of the most impressive investing runs the world has ever seen. But he wants individuals like you and I to see that the habits in buying a home must be the same ones used to buy stocks.

The remarkable success
For 13 years, Peter Lynch sat atop the Magellan Fund at Fidelity, which returned an astounding 29% annually as he made countless wonderful investments. In fact, $1,000 placed into his fund in May 1977 would be worth an incredible $28,000 after he stepped down in May 1990.

While the stock market itself had a resounding run over that time -- $1,000 would be worth roughly $6,000 -- Lynch's success has rightfully catapulted him to being one of the most highly respected investors there is.

Although he is full of wisdom and tips for individuals everywhere about how we should view the stock market, investing, and money, it turns out one bit of advice from Lynch comparing how the process of buying a house should teach us how we should buy stocks is something we should all keep in mind.

The surprising similarities
In an interview with PBS nearly 20 years ago, Lynch was asked plainly, "Can the little guy play with the big guy in the stock market?"

And perhaps now, more than ever, that question is on the minds of millions of Americans.

Thanks to the tenacity with which Wall Street firms have pursued the benefits of high-frequency trading, and the many questions and concerns therein -- to say nothing of the various investigations that have resulted from it -- the concerns of the broader public related to the stock market has only heightened following the release of The Flash Boys by acclaimed author Michael Lewis. 

Although it's important to note I think Lewis is both right and wrong to suggest "the stock market is rigged," it's even more important to note the sound advice Lynch gives in response to the question above.

Lynch began by saying, "there's always been this position that the small investor has no chance against the big institutions," and quickly dismissed this suggestion by noting, "first of all, I think that he or she can do it."

Yet he said far too many think they have no chance, and as a result, they actively day trade, or perhaps buy stock and simply "sell it a month later," treating it more like a bet in a casino than an investment in a company. And Lynch revealed that such a risky course of action is wildly different than the process used to buy homes:

When they look at a house, they're very careful. They look at the school system. They look at the street. They look at the plumbing. When they buy a refrigerator, they do homework. If they're so convinced that the small investor has no chance, the stock market's a big game and they act accordingly, they hear a stock and they buy it before sunset, they're going to get the kind of results that prove the small investor can do poorly.

He went on to say that research is done on countless purchases we make, from not only homes to refrigerators and microwaves, and now cell phones and beyond.

But as it relates to stocks, with far too many people, "they'll put $10,000 in some zany stock that they don't even know what it does that they heard on a bus on the way to work and wonder why they lose money, and they do it before sunset."

Lynch wants us to see that when it comes to investing, we shouldn't blindly throw our money into a stock without doing careful research. As colleague Jordan Wathen revealed, Warren Buffett would agree wholeheartedly, as he himself once said:

If you like spending 6-8 hours per week working on investments, do it. If you don't, then dollar-cost average into index funds. This accomplishes diversification across assets and time, two very important things.

And Lynch concluded by saying, "I've tried to convince people they can do a job, they can do very well, but they have to do certain things," which -- exactly as Buffett would suggest -- is either doing homework and careful research to make an investment decision, or saving through mutual or index funds.

The Foolish bottom line
We must see that day-trading in the stock market is a game that we'll lose. Yet long-term investing is one we can undeniably succeed at with careful research and diligent pursuit. And while we may not have the skill of Buffett or Lynch, with the proper course of action and the right frame of mind, we can likely come closer than we'd ever imagine.

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Patrick Morris

After a few stints in banking and corporate finance, Patrick joined the Motley Fool as a writer covering the financial sector. He's scaled back his everyday writing a bit, but he's always happy to opine on the latest headline news surrounding Berkshire Hathaway, Warren Buffett and all things personal finance.

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