Peter Lynch's top six
investing tips
everyone must follow
everyone must follow
When it comes to
investing in stock markets, investors usually get trapped between logic and
sentiment. They tend to take decisions based on herd mentality and sometime
they become clueless about the future course of the stock market. This
situation leads to bad investment decisions.
"Sometimes having
good knowledge may not be sufficient to earn good rewards from the market if
the basics are forgotten. These basics, if followed, can help an investor hold
his ground even in a difficult market situation and hence create wealth in
future. Even world-renowned investors would not have earned that respect in the
market, had they not followed the basic fundamentals of investing. One of those
investors was Peter Lynch," says Nitin Vyakaranam, founder & CEO of
ArthaYantra, an online financial planning firm.
Peter Lynch in fact
was known for the consistent returns he generated for his investors at
Fidelity's Magellan Mutual Fund. "When he started overseeing the portfolio
of Magellan in 1977, the fund was less known and had only $18 million in
assets. Magellan's assets were managed by Lynch from 1977 to 1990. During these
thirteen years, the compounded average annual investment return generated by
him was close to thirty percent," says Vyakaranam.
Lynch's success depended on his ability to adapt to different investment styles and go with whatever worked at that time. Even if his styles of investment differed with the changing times, his fundamental checklist remained constant. At an investment conference in New York in 2005, Lynch shared his checklist.
Lynch's success depended on his ability to adapt to different investment styles and go with whatever worked at that time. Even if his styles of investment differed with the changing times, his fundamental checklist remained constant. At an investment conference in New York in 2005, Lynch shared his checklist.
It may a good idea to
revisit these checks to help our own perspective about investments:
1. Don't buy anything
you don't know
Lynch desired to know
everything about the company and carried out his ground checks before investing
in it. He also advocated investing in companies which one is familiar with or
whose business is relatively easy to understand. In the words of the legend himself,
"investing without research is like playing stud poker and never looking
at the cards."
2. Before you purchase, explain why you are buying it
2. Before you purchase, explain why you are buying it
The reasons for our
purchase should never be based only on someone else's suggestions. In order to
explain why you are buying something, you need to know what you are buying.
3. It is futile to
predict the economy and the interest rates
One needs to cut
market noise and concentrate on core fundamentals when selecting investment
options. Lynch said that "if you spend more than 13 minutes analyzing
economic and market forecasts, you've wasted 10 minutes."
4. Good management is
important- buy good businesses
Lynch invested in the 'story' a company has to offer. What a company is going to do to deliver the desired results formed the crux of his investment decisions. If a company has a business that anyone can relate to and the management has a clear plan to deliver expectations, then this check is cleared.
Lynch invested in the 'story' a company has to offer. What a company is going to do to deliver the desired results formed the crux of his investment decisions. If a company has a business that anyone can relate to and the management has a clear plan to deliver expectations, then this check is cleared.
5. Be flexible and
humble and learn from mistakes
No one is perfect. Not
living in a self-denial that our bad investment choices will someday turn good
is a humble start.
6. There is always something to worry about
Investments are
subjected to various risks and market conditions. No investment plan can
curtail all the risks. One can only mitigate risk to achieve higher degree of
success with one's investments. While picking securities, Peter Lynch stuck to
what he knew or could easily understand. He mostly invested for the long run
and was unfazed by short-term market volatility. Buying good business at
reasonable price was his mantra. In order to pick good business, he turned as
many stones as possible to spot the hidden gems.
"Attempt to understand the Peter Lynch approach to investing. You will realize that a share is not a lottery ticket, but a part-ownership to a business," observes Vyakaranam.
"Attempt to understand the Peter Lynch approach to investing. You will realize that a share is not a lottery ticket, but a part-ownership to a business," observes Vyakaranam.
Read more at: