Legendary investor Peter Lynch said the biggest mistake people make when picking stocks is to think a decline in the share price equates to a buying opportunity.
Lynch is one of the world’s most successful value investors. In his 13 years as an asset manager, he turned the $18 million Fidelity’s Magellan fund into a $14 billion fund with exceptional returns.
He averaged a 29.2% annual return through the period – more than double the S&P500’s 13.2% rally. It made the Magellan fund a standout performer.
In a 1982 interview, Lynch advised investors to avoid “bottom fishing”, saying it is the biggest mistake many people, including himself, make when picking stocks.
Bottom fishing refers to investing in shares which have seen a significant decline which may point to the company being undervalued.
“People buy stocks because they have fallen from x to two-thirds of x or even half of x. They pick them on that basis alone,” he said.
Lynch said it is very difficult to pick good investments using a bottom fishing strategy, even for a professional like him.
He gave the example of Standard Oil Ohio failing from $90 to $60 per share. “I told everyone the stock is not going any lower,” he said.
“When the stock went to $50, I said this is it, it cannot go any lower. As it went to $40, I told people this is it.”
“Finally, when it got down to under $30 and people asked what I think of Standard Oil Ohio, I said, ‘What does it do, I don’t know that company’ I absolutely backed away from it.”
Instead of bottom fishing, Lynch advised retail investors to look for good opportunities in their industry as they know it well.
“People are in some industry, like insurance, technology, or textiles, and they will see their industry turn,” he said.
Curiously they will most likely not buy the stocks in their industry. Instead, they will rely on the media or analysts to tell them what to buy.
“They have a big edge over me. I work awfully hard, but they are months ahead of me. They should work on what they have in front of them.”