Peter Lynch is a legend in the mutual fund industry. The fund he managed -- Fidelity Magellan (NASDAQMUTFUND:FMAGX) -- generated returns of approximately 29% annually from 1977 to 1990, creating fortunes for investors along the way.
Yet Lynch's greatest contributions to individual investors may, in fact, be his timeless works One Up on Wall Street and Beating the Street. Within these classics are countless pearls of wisdom from one of the greatest investors of all time.
It was difficult to narrow them down to just 10, but here are some of Lynch's most valuable investment tips -- all of which can help you create long-term wealth.
1. "Invest in what you know."
This is perhaps the most famous of all of Lynch's quotes, but it's often misunderstood. Lynch is not advising you to buy stock in a company simply because it makes your favorite product or service. This can be an excellent starting point, but Lynch also recommends diving into the business's competitive position, financials, and growth prospects before investing in its stock. When Lynch says to buy what you know, he's referring to staying within your circle of competence and investing in industries that you understand well.
2. "This is one of the keys to successful investing: focus on the companies, not on the stocks."
Stocks are not just pieces of paper or blips on a computer screen. They represent partial ownership of real businesses. As such, it's the business's fundamental drivers -- revenue, profits, and cash flows -- that will ultimately determine the value of its stock.
3. "What the stock price does today, tomorrow, or next week is only a distraction."
For a long-term investor, volatility and risk are two very different things. A stock's day-to-day movements are irrelevant. Investors would be better served by striving to reduce risk -- defined as a permanent loss of capital -- over their investment time horizons. In this regard, a keener focus on quarterly -- and, even better, yearly -- operating and financial results would be of greater use than a cursory look at often-misleading daily headlines.
4. "The typical big winner...generally takes three to ten years to play out."
Truly life-changing wealth is made over years and decades. As such, investors should be prepared to hold their stocks for long periods of time in order to maximize their gains.
5. "The real key to making money in stocks is not to get scared out of them."
The biggest challenge to holding on to your stocks is fear. Frightening headlines and fear-mongering pundits can cause even ardent bulls to question their views. That's why it's so important to know why you own your stocks. That way, as Lynch says, you can "stand by your stocks as long as the fundamental story of the company hasn't changed."
6. Time is on your side when you own shares of superior companies.
Investing in great businesses can give you a valuable edge. Companies with powerful competitive advantages often grow stronger over time as their weaker rivals fade away. Moreover, elite businesses can generate bountiful profits for decades, giving you plenty of time to compound your gains.
7. "Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves."
When you own stock in great companies, there's no reason to try and time the market cycles. It's nearly impossible to know when a recession is about to occur. It's also extremely difficult to buy back in at the bottom, when things tend to look their bleakest. A better strategy is to simply hold your stocks through the ebbs and flows of the market. That way you position yourself to profit when the market eventually recovers, as it has throughout history.
8. "In this business, if you're good, you're right six times out of ten. You're never going to be right nine times out of ten."
You don't have to be perfect to do well as an investor. Part of the beauty of stocks is their asymmetric risk profile. While a stock could lose 100% of its value, the best stocks can rise 1,000% or more over time. So a few big winners can more than make up for your losers.
9. "All you need for a lifetime of successful investing is a few big winners, and the pluses from those will overwhelm the minuses from the stocks that don't work out."
10. "If you're lucky enough to have been rewarded in life to the degree that I have, there comes a point at which you have to decide whether to become a slave to your net worth by devoting the rest of your life to increasing it or to let what you've accumulated begin to serve you."
Peter Lynch walked away from the mutual fund industry at the pinnacle of his career. Rather than spend more years chasing more money, he used the wealth he created to live a full life. Perhaps that's Lynch's greatest lesson of all.