5 Important Pieces of Investing Advice From Peter Lynch

There are plenty of well-known investors, but few have a track record to match Peter Lynch. In 1977, Lynch was put in charge of Fidelity’s Magellan Fund, which had $18 million in assets at that time. By 1990, when Lynch resigned, the fund had grown to over $19 billion in assets. Lynch’s compounded average annual investment return during the 13 years was 29.2%. A thousand dollars invested the day Lynch took over Magellen would have been worth $28,000 when he quit.  

Whether you are new to investing or have been at it for years, it pays to take a lesson from someone who has consistently beaten the market. With that in mind, here are a few inspirational quotes from Peter Lunch, and what we can learn from them.

1. “The person who turns over the most rocks wins the game.”

In fact, the full quote by Peter Lynch reads as: “So I think it was just looking at different companies and I always thought if you looked at ten companies, you’d find one that’s interesting, if you’d look at 20, you’d find two, or if you look at hundred you’ll find ten. The person that turns over the most rocks wins the game.” 

In investing, the more companies you look at, the more good ideas you find. The more you look at companies, the better you become at analysing companies. To become a good investor requires practice. Time is better spent researching new companies rather than just watching stocks trade all day.

2. “More people have lost money waiting for corrections and anticipating corrections than in the actual corrections.”

Many investors continually search for reasons for stocks to fall. There is always something to fear – declining profit margins, high valuations, earning shortfalls, slowing economic growth, rising/falling interest rates, inflation/deflation, geopolitical risks, the list could go on forever. 

Consider that researchers at Morningstar.com found that over the 20 years from 1992 to 2011, the U.S. stock market averaged 7.8% annually. If you were out of the market on the 10 worst days in that period, you would have averaged 12%, while if you were out during the 10 best days, you would have averaged 4.1%. 

The point is that it is futile to try to predict where the market is going next. And if you let the fear of a correction keep you out of the stock market, it could cost you dearly.

3. “You want to buy in the second or third inning and get out in the seventh or eighth.”

Unlike most investors, Lynch looked for growth in small and almost unknown companies, waiting for them to rapidly compound. His reasoning for staying small and under-the-radar is simple. Small is where the growth is, or as Lynch puts it, “Big companies have small moves, small companies have big moves.”

Lynch bought Hanes stock, during his time at Fidelity, because his wife brought home a sample of their new product called L’Eggs and after wearing them raved about how great they were. L’Eggs stole market share from cheap drugstore competitors, and Lynch eventually made it one of Magellan’s biggest holdings. Eventually, L’Eggs was bought by Consolidated Foods, which is now called Sara Lee. Magellan fund-holders benefitted from a 30-fold appreciation in Hanes’s stock. 

To achieve multi-baggers returns like Lynch, investors must be willing to look past hot companies. He reasoned that they would attract too much attention, which would bid up stock prices and attract competitors. 

4. “The typical big winner in the Lynch portfolio generally takes three to ten years or more to play out.”

New investors can be easily overwhelmed by the 24/7 financial news flow that has turned into infotainment. Much of TV programming suggests investors must “act now” in response to a poor quarterly report or even a short-term setback. But such action generally does more harm than good. 

Despite what the stock market wants us to think, we cannot measure a company’s success over a single quarter or year. Look back at the best companies in the stock market and you will find that it takes time for them to execute their winning business strategies and achieve full potential. It can also take a while for a company’s stock price to reflect the success of its business.

The biggest and best gains are generally achieved by investing in quality companies and then letting time do most of the work. To achieve investing success, investors should commit to a long-term approach and be willing to make a five-year commitment to a stock. However, most simply do not have the discipline to do that.

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 is right. Most investors have (or can gain) sufficient knowledge to spot quality names to invest in as the criteria are not complicated. Earnings growth is easy to identify. Our intuition about investment opportunities is usually on-target. The hard part is ignoring all the market noise and sticking with stocks even when things look and feel grim.

Know that volatility is a feature of the stock market. The superior returns you get from investing in stocks come at a cost: enduring the inevitable ups and downs in the overall market and the share prices of the companies you select. 

Hence, remind yourself that the stock market volatility is normal, and that sitting tight and taking a long-term approach to investing can help you avoid losses and come out a winner. The real key to making money in stocks is not to get scared out of them. 

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