Warren Buffett may be the world's most-mimicked investor, but he's not the only proven stock-picker we can learn from. Peter Lynch, lead manager of the Fidelity Magellan Fund (FMAGX -1.17%) between 1977 and 1990, can offer investors some worthy tips, too.
And they'd be wise to listen. His average annual gain during that period was nearly 30%, easily outpacing the S&P 500's typical performance during that 13-year stretch. In fact, the Magellan fund beat the broad market in 11 of those 13 years.
Here's a rundown of his top five nuggets of wisdom for anyone else looking to outperform the indexes.
1. "The person who turns over the most rocks wins the game."
It's a premise that can mean a lot of different things. Is he talking about all the relevant data for one particularly company, or is Lynch referring to stocks that most investors may be overlooking? The answer is yes: both, and more. Knowing more than other investors know about any given matter better equips that investor to make well-informed decisions.
If there was any particular application of the idea that yields the best returns for investors, though, it is the potential payoff in stepping into the smaller, unknown names that other investors simply overlook.
2. "More people have lost money waiting for corrections and anticipating corrections than in the actual corrections."
It's a particularly prudent piece of wisdom right now, on the verge of not just a new U.S. president, but a major shift in how a new administration handles a ravaged economy. Many investors are understandably afraid the transition will lead to a recession.
That's the wrong way of thinking, though.
Sure, stocks might tank in the face of turbulence. But they may thrive instead. Nobody knows. That's the point. And even if your holdings do take a dive before or after Joe Biden takes the helm, there's never been a bear market or a recession we've not recovered from.
3. "You want to buy in the second or third inning and get out in the seventh or eighth."
Investors like to feel they've gotten in early on a budding trend, but it's easy to be lured into a story or a prospect that ultimately lacks substance.
A company like Tesla (TSLA 0.49%) helps frame the concept. Its stock has been a winner since 2013, when electric vehicles were proved viable. Shares have absolutely soared since late last year, when EVs arguably became preferable (and affordable) compared to combustion-powered cars. Tesla's been a publicly traded company since 2010, however, and the stock was stuck in neutral during its first three years of existence, before battery-powered cars became mainstream enough to support a company dedicated solely to them.
Early buyers will argue that the first three years' worth of wheel-spinning was worth the wait for what Tesla was to become a decade later. What they're forgetting is all the other now-broken companies that were also supposed to offer ground-floor opportunities within their respective nascent industries. Had investors held off just a little while on Groupon, Blue Apron, or GoPro, they'd have realized there would be no second or third inning worth playing.
In this vein, be ready for the reality that competitors will at some point eat into Tesla's growth and market share. That's not going to be a big problem this year, or next. It's coming, though. Ford, General Motors, and most other major automotive names are doing serious work on EVs. Once they start to release those vehicles en masse, that's going to more or less mark the fifth inning of the EV revolution.
Point being, nothing lasts forever.
4. "The typical big winner in the Lynch portfolio generally takes three to ten years or more to play out."
This one's a tough truth to swallow, particularly in recent years where the already-overwhelming 24/7 financial news flow has turned into infotainment. Much of this programming suggests investors must "act now" in response to one quarterly report, or one modest product development.
Such action generally does investors more harm than good, however, chipping away at a portfolio's value by constantly prompting sales after a short-term setback, or encouraging buys after a stock's been run up. The biggest and best gains are generally achieved by stepping into quality names and then letting time do most of the work. Most of us should be willing to make a five-year commitment to a stock if we're willing to own it for even a day. Most of us, however, simply don't have the discipline to do that.
By the way, Peter Lynch has seen the power of patience play out in his favor many times. Perhaps the biggest payback for his discipline was served up by Lukens Steel. It gained around 500% for the Magellan fund in just one year, but it wasn't until the 15th year the fund owned the company.
5. "In the stock market, the most important organ is the stomach. It's not the brain."
Saving the best for last, Lynch says it takes more fortitude than aptitude to do well in the stock market.
He's right. Most investors have (or can gain) enough knowledge to find quality names with sustainable potential, as the criteria aren't complicated. Earnings growth is easy to identify. Consumers mostly recognize the top names in any given sector. Our intuition about investment opportunities is usually on-target. The hard part is ignoring all the noise and sticking with stocks even when things look and feel grim.
That was certainly the case just a few months back. The S&P 500 tumbled to the tune of 33% between February's peak and March's trough, as the coronavirus made landfall in the United States. Those sellers who stayed on the sidelines have missed out on the rebound that's carried the index to record highs since then.