Legendary American fund manager Peter Lynch shared his 10 investment principles for long-term success in the stock market.
Lynch managed the Magellan Fund at Fidelity Investments for 13 years, beating the market for over a decade and averaging a compound annual return of 29.2%. It is one of the best 20-year returns by any mutual fund in history.
It is unsurprising that Lynch is considered the best money manager in history, growing the Magellan Fund from $18 million to $14 billion.
Working as a caddy, Lynch’s interest in the stock market was sparked by overhearing conversations between players who worked in finance.
Lynch’s investment success began well before working at Fidelity. Famously, he paid for graduate school with an investment in an air freight company called Flying Tiger.
After completing his MBA at the Wharton School of Business, Lynch served in the Army from 1968 to 1970.
Returning from service, Lynch was the caddy for Fidelity’s president and got his first full-time job at 25 as a textiles and metals analyst at Fidelity.
Just 21 years later, at 46, Lynch retired after managing the Magellan Fund for 13 years.
Throughout his career, Lynch has been committed to helping the average retail investor beat the market through his books “One Up on Wall Street”, “Beating the Street”, and “Learn to Earn”.
These books teach investors how to analyse companies and industries and understand the fundamentals of any business.
Lynch’s investment style has been described as adaptive to the prevailing economic environment, but he has always stressed that you should understand what you own.
For Lynch, if the individual investor knows what they own, then they can perform well relative to the market.
The ten principles outlined by Lynch in a 1997 speech are considered timeless in the investing community and are listed below.
- Know what you own
For Lynch, the most important rule when investing is knowing and understanding the company that you own.
In a 1997 speech, Lynch said, “If you can’t explain to an 11-year-old in two minutes why you own a stock, then you shouldn’t own it.”
The central idea here is to understand the business behind the share price, as it is the performance of the business that drives share price performance over the long term.
- Don’t try to predict the economy
Lynch outlined the bottom-up approach he takes to investing, where he invests through analyses of companies and industries – not macroeconomic trends or changes such as interest rates.
Even if you can predict the economic future, Lynch said, you would still have to correctly predict the sectors that would benefit from that future and then predict the companies that will do well in such a scenario.
No one, according to Lynch, can do that consistently.
Lynch famously commented, “If you spend 13 minutes a year on economics, then you have wasted 10 minutes.”
- Be patient
Investing, for Lynch, is a marathon and not a sprint.
You will not miss out if you do not buy it now, says Lynch, noting the example of Walmart, which you could have bought a decade after it listed and still make 30 times your money.
- There are great stocks everywhere
Lynch tells investors to avoid prejudice toward certain industries or companies unless they do not understand the operations of the business, as in Rule 1.
Money can be made by investing in any kind of company – particularly those considered “boring” – as they are easy to understand.
- When to sell stocks
Investors, according to Lynch, should write down, as simply as possible, the reasons why they bought a share, and if those reasons are no longer true, they should consider selling.
For Lynch, investors should never sell because of short-term market fluctuations – selling should only occur when the fundamentals of the business change.
- Stocks can always go lower
“Just because a stock has gone down does mean that it cannot go lower… just because it has gone down does not mean that it will bounce back.”
- Stocks can always go higher
The fact that a stock has gone up is not a reason to sell in and of itself – one should only sell if the fundamentals of the business change.
Just because the stock has gone up does not mean that it has to come down.
- A decline in share price does not mean that you are wrong
Lynch urges investors to ignore the short-term fluctuations in share price and rather focus on the fundamentals of the business as that is what drives share price over the long term.
The performance of the share price over the long term proves your investment thesis correct or wrong.
- You can always lose what you invest
Many people forget when investing that you can always lose what you have invested, even if a stock is cheap.
If you invest R10,000 in a company at R10 a share or R10,000 in a company at R50 a share, if the share price goes to zero, you will lose R10,000 in either situation.
- The person that turns over the most rocks wins
Lynch says, “If you look at ten companies, you will find one that is mispriced. If you look at 20, you will find two… the person that turns over the most rocks wins.”
Simply put, the investor who studies more companies will find more opportunities to invest.
Peter Lynch’s investment principles, according to ChatGPT
The investment principles above come from what Peter Lynch has said over his investing career.
When we asked the artificial intelligence (AI) chatbot ChatGPT about Lynch’s investment principles, it provided a different answer:
Peter Lynch was a highly successful investment manager and one of the most famous figures in the world of finance. He is known for his investment philosophy and principles, which are based on his decades of experience in the stock market. Some of Peter Lynch’s key investment principles include:
- Invest in what you know: Lynch believed that investors should focus on companies and industries that they understand, rather than trying to invest in things they don’t know much about.
- Look for growth: Lynch was a growth investor, and he believed that the key to successful investing was finding companies with strong growth potential. He looked for businesses that were growing faster than the overall economy.
- Focus on the long-term: Lynch was a long-term investor, and he believed that it was important to hold onto investments for several years, rather than trying to make quick profits through short-term trading.
- Ignore the noise: Lynch advised investors to ignore short-term market fluctuations and focus on the underlying strength of the companies they were invested in.
- Don’t follow the crowd: Lynch believed that the best investment opportunities were often found in out-of-favour industries and companies that other investors overlooked.
- Don’t try to time the market: Lynch believed that it was impossible to predict the ups and downs of the stock market consistently, and he advised investors to focus on finding great companies and holding onto them for the long term.
These principles have helped many investors achieve success in the stock market, and they continue to be widely followed today.