It is virtually impossible to argue with the stunning results that Peter Lynch brought investors in Fidelity Magellan during his years managing the fund. He posted an average annual return of 29.2% annually during his 13 years as fund manager. Many, including myself, believe he may well be the best mutual fund manager of our age. There are a lot of investing lessons that can be learned by understanding Peter Lynch’s thought process. Thankfully, Lynch has shared many of his biggest keys to investing in speeches and in his best-selling books.
5 Investing Lessons Taught by Peter Lynch
- Invest in what you know- Peter Lynch is a strong advocate of investing in stocks of companies that you know very well. The belief is because of your knowledge about the firm and the way they run their business you are actually ahead of Wall Street and all the analysts on understanding what is going on at the company and what its future growth prospects may be.
- Be able to explain what you’re buying- This is a valuable lesson, especially for those investors who are looking to invest in a company for the long run. Before you actually purchase shares of the company you should make yourself explain what the company does and how it will make money. Lynch believes if you can’t do that, you don’t have any business buying the company in the first place.
- Predicting the economy and interest rates is futile- Lynch believes that investors take too much time trying to figure out what is going to happen with interest rates or how the economy will be doing in a few months. He believes that even the best of economists typically don’t understand this, so you are much better off sticking to understanding the company you are buying.
- Look for fast growing companies in slow growing industries- Peter Lynch made a mint while at Fidelity Magellan buying companies in industry that aren’t hot at all. Lynch believes that if you are able to find a company that is growing much faster than its peers and it is in a less than exciting area, you have found a great winner. The more boring and basic the industry the better.
- Look for companies Wall Street hasn’t yet found- One of the best ways to measure whether Wall Street has found a stock is to look at the institutional ownership numbers of the stock. Many stocks show institutional ownership levels above 80-90% if they are very well-known by the street. Finding solid stocks that the street hasn’t found yet is a very profitable way of making money, because eventually large investment firms will begin to find out what this company is doing right and drive the price up.
Peter Lynch is one of the best people to learn investing lessons from because he has proven that he is very adept at building a winning portfolio. Have you learned these lessons yet while you have been investing? If not, now is as good of a time as any to understand that these five lessons can help you immensely in your personal investing.
Aaron K. Smith is a freelance writer with experience working in the mutual fund industry and writing about investing and the stock market. View all posts by Aaron.
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