3 Things You Must Learn From Investing Guru Peter Lynch

Source: 401kcalculator.

Peter Lynch has been one of the most successful investors in the mutual fund business. He famously ran the Fidelity Magellan Fund from 1977 until 1990, delivering annual average returns of 29% that made it a top-ranked mutual fund over the investment period.

He beat the major S&P 500 index in 11 of 13 years, even as the fund ultimately reached $13 billion under management. Achieving outperformance for so many years with such a big fund is particularly difficult, which is why Lynch enjoys a strong reputation on the Street.

Lynch has also written and co-written several best-selling books about investing, which continue to excite readers thanks to their easy-to-apply investment methodology.

Here are three key thoughts about investments from Lynch.

1. Do your homework and select your investments wisely
Lynch famously said,"The person that turns over the most rocks wins the game. And that's always been my philosophy."

Source: Businessinsider, Peter Lynch.

This is just another way of saying, have high discriminatory investment standards and be extremely selective. If you are looking for undervalued stocks, you must do the homework and turn over many stones to find the hidden gems that have the potential to deliver outstanding returns.
 
Don't buy what everybody else buys. Look for value off the beaten path in areas of the stock market that the mainstream investor shuns.
 
2. Don't try to be a market timer
According to Lynch: "When stocks are attractive, you buy them. Sure, they can go lower. I've bought stocks at $12 that went to $2, but then they later went to $30. You just don't know when you can find the bottom."

A lot of high-value advice here: Many investors try to time the market by forecasting peaks and bottoms of stock prices, or even the stock market itself. Don't waste your time here: Nobody can credibly claim to be able to accurately forecast future events over long periods.
 
Instead, do your research homework (see No. 1) and invest for the long term. Timing the market is a loser's gamble.
 
3. Get rid of your gambling attitude
In Lynch's words, "Although it's easy to forget sometimes, a share is not a lottery ticket ... it's part-ownership of a business."
 
Sad to say, but many people who "invest" in stocks really don't think like owners; they are more like short-term renters of a business.
 
Lynch is pretty well on the same wavelength as Buffett on this one: Shares represent a stake in an actual business, one that you would want to succeed over the long run. The erratic price movements seen every day on a stock ticker board have the potential to distract you from the bigger picture and seduce you into trading.
 
Put simply: Be serious about investing, don't chase the money, and don't trade.

The Foolish takeaway
Peter Lynch has been an extremely successful equity investor, and his investment philosophy contains some valuable nuggets for the investor today.

His investing approach is as timeless as it is direct: do your research, be willing to turn over a lot of stones to find value, invest for the long term, and don't mindlessly trade stocks.

This philosophy has produced Lynch's sterling returns over a long time period, and the application of such timeless investing principles might serve your returns just as well.

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Read/Post Comments (3) | Recommend This Article (1)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 30, 2014, at 10:41 PM, PFNikolai wrote:

    Failure to time the market is a fool's game. After two decades of no growth (see S&P 500 chart from 1987-2007), anybody who advocates buy-and-hold or "investing for the long term" is either ignorant or self-serving. Advisors who advocate that investors ride out bear markets would be guilty of fiduciary negligence if we had laws and regulators designed to protect investors.

  • Report this Comment On August 31, 2014, at 9:02 AM, sonoftherepublic wrote:

    This article is not very comprehensive but a good start for ways to approach investing in paper assets.

    Modern portfolio theory should be studied and brought to bear against the problems and pitfalls the stock market will present since all or part of the would-be investors portfolio should be invested on the institutional level ie indexing or managed mutuals as well as CEF's and ETF's

    before chasing gains as an investor purchasing individual stocks - the volume of work required to do this intelligently is considerable.

    @PFNikolai - you may require some instruction how to make money in paper assets - your quoting statistics that are not showing a true picture of an investment experience if what I said formally in this comment was/ is implemented with discipline.

    I am proof of this concept.

  • Report this Comment On August 31, 2014, at 8:38 PM, luckyagain wrote:

    I read one of his books and he suggested the following investment strategy that is easy to follow and more suitable for average investors:

    1. On January 1st, look at the DJIA and pick out the 3 stocks that had the highest percentage increase in value including dividends during the last year.

    2. Buy them. Sell any other DJIA stock that are not in the top 3.

    According to his book, this will yield about a 10% per year. One of the key item in this strategy, is that you keep a multiple year winner and get rid of your losers. Selling your loser is probably the most important thing to do but average investors hate to take a loss.

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