In his best-selling book Beating the Street, legendry investor Peter Lynch lists "25 Golden Rules for Investing." I picked out my favorite four rules and applied Lynch's wisdom to four of my favorite companies: Berkshire Hathaway (NYSE:BRK-B), Liberty Global (NASDAQ:LBTYA), Kinder Morgan (NYSE:KMI), and MasterCard (NYSE:MA).
Golden Rule #5. Often, there is no correlation between the success of a company's operations and the success of its stock over a few months or even a few years. In the long term, there is a 100 percent correlation between the success of the company and the success of its stock. This disparity is the key to making money; it pays to be patient, and to own successful companies.
Berkshire Hathaway isn't a particularly volatile stock, but even it has seen wide swings between the growth in the underlying value of its business (roughly estimated by book value per share) and its stock price -- in the short term. For instance in 2009, Berkshire's book value per share increases 20%. Its stock only advanced 3%. In 2011, book value per share grew 5% and the stock price fell 5%.
But over the long term, the book value per share and stock price have tracked more closely. Over the past 10 years, book value per share has increased around 150%. During the same period, the stock is up 120%.
Golden Rule #18. There is always something to worry about. Avoid weekend thinking and ignore the latest dire predictions of the newscasters. Sell a stock because the company's fundamentals deteriorate, not because the sky is falling.
If you only read the news, you probably wouldn't want to own a cable company, let alone one in Europe. You've probably read articles about "cord-cutting" and over-the-top Internet services that will cut into the profits of big cable companies. And the economy in Europe isn't in very good shape these days, and there's not much hope of a recovery.
However, if you looked at the fundamentals of Liberty Global (NASDAQ:LBTYA), Europe's largest cable company, you might see things differently. Despite the doom-and-gloom sentiment, the company is doing quite well. It's on pace to add more than 1 million new subscribers this year. And its existing subscribers are adding services. Today, 40% of subscribers have opted for a "triple play" package, compared to just 30% a year ago. That's driven revenue per customer up 29%. So while "weekend thinkers" continue to worry, the business fundamentals continue to improve.
Golden Rule #19. Nobody can predict interest rates, the future direction of the economy, or the stock market. Dismiss all such forecasts and concentrate on what's actually happening to the companies in which you've invested.
It's amazing how much time is spent on the fruitless task of forecasting interest rates, the economy, and the stock market, even though no one does it particularly well. I like this rule, and I'd actually expand it to include commodity prices, which are just as impossible to accurately predict. That hasn't stopped investors from obsessing over future prices, particularly with energy stocks.
Personally, I don't shy away from energy stocks, but I'd never base my thesis on any particular change in oil or gas prices. I look for companies that can succeed within a wide-range of prices. For instance, I like Kinder Morgan the largest owner of energy pipelines in the United States. In exchange for transporting oil, gas, and carbon dioxide (used in oil recovery), the company receives fixed or volume based fees. It doesn't really matter if prices are high or low. As long as hydrocarbons are flowing through its pipelines, the company gets paid.
Golden Rule #22. Time is on your side when you own shares of superior companies. You can afford to be patient-even if you missed Wal-Mart in the first five years, it was a great stock to own in the next five years. Time is against you when you own options.
If you can identify a truly quality company, don't anchor on past performance. When you own a quality company, it's intrinsic value will increase over time. The longer you hold it, the greater your returns will be. While short-term hiccups are inevitable, the company's value compound over the years.
MasterCard, a high-quality company, came public in 2006. During its first five years as a public company, MasterCard stock appreciated more than 500%. But even if you missed that initial run-up, it wasn't too late to invest. If you'd bought shares in 2011, you'd be up more than 175% in just a few years. And, it's not necessarily too late to invest now -- the company still has a huge market opportunity in front of it.
Foolish bottom line
If you focus on business fundamentals, ignore worthless forecasts, and invest in quality companies with a long-term horizon, you should do very well. While this isn't exactly a new insight, as an investor, it never hurts to remind yourself of those basic principles.