Peter Lynch is one of the greatest fund managers of all time, returning a mind blowing 29% per annum average return during his thirteen years as the manager of Fidelity’s Magellan fund.
Every $10,000 invested in Lynch’s Magellan fund was worth $280,000 13 years later.
Peter Lynch didn’t just beat the Street … he absolutely destroyed it.
Fortunately for us, Lynch was willing to share his secrets. In his books, One Up on Wall St and Beating the Street, Lynch shows how to achieve his stunning track record.
Lynch’s 20 Golden Rules
- Your investor’s edge is not something you get from Wall Street experts. It’s something you already have. You can outperform the experts if you use your edge by investing in companies or industries you already understand.
- Over the past three decades, the stock market has come to be dominated by by a herd of professional investors. Contrary to popular belief, this makes it easier for the amateur investor. You can beat the market by ignoring the herd.
- Often, there is no correlation between success of a company’s operations and the success of its stock over a few months or even years. In the long term, there is 100% correlation between the success of the company and the success of the stock. This disparity is the key to making money; it pays to be patient, and to own successful companies.
- You have to know what you own, and why you own it. “This baby is a clinch to go up!” doesn’t count.
- Long shots almost always miss the mark.
- Owning stock is like having children – don’t get involved with more than you can handle. The part time stock picker probably has time to follow 8-12 companies, and to buy and sell shares as conditions warrant. There don’t have to be more than 5 companies in the portfolio at any one time.
- If you can’t find any companies that you think are attractive, put your money in the bank until you discover some.
- Never invest in a company without understanding its finances. The biggest losses in stocks come from companies with poor balance sheets.
- Avoid hot stocks in hot companies. Great companies in cold, non-growth industries are consistent big winners.
- With small companies, you’re better off to wait until they turn a profit before you invest.
- If you invest $1,000 in a stock, all you can lose is $1,000, but you stand to gain $10,000 or even $50,000 over the time you’re patient. You need to find few good stocks to make a lifetime of investing worthwhile.
- In every industry and every region, the observant amateur can find great growth companies long before the professionals have discovered them
- A stock-market decline is as routine as a January blizzard in Colorado. If you’re prepared , it can’t hurt you. A decline is a great opportunity to pick up the bargains left behind by investors who are fleeing the storm in panic.
- Everyone has the brain power to make money in stocks. Not every one has the stomach. If you are susceptible of selling everything in a panic, you ought to avoid stocks and stock mutual funds altogether.
- There is always something to worry about. Avoid weekend thinking and ignore the latest dire predictions of newscasters. Sell a stock because the company’s fundamentals deteriorate, not because the sky is falling.
- Nobody can predict the interest rates, the future direction of the economy, or the stock market. Dismiss all such forecasts and concentrate on what‘s actually happening to the companies in which you’ve invested.
- If you study 10 companies, you’ll find 1 for which the story is better than expected. If you study 50, you’ll find 5 . There are always pleasant surprises to be found in the stock market – companies whose achievements are being overlooked on Wall Street.
- If you don’t study any companies you have the same chance of success buying stocks as you do in a poker game if you bet without looking at your cards.
- Time is on your side when you own shares of superior companies. You can afford to be patient –even if you missed Wal-Mart in the first five years, it was a great stock to own in the next five years. Time is against you when you own options.
- In the long run, a portfolio of well-chosen stocks will always outperform a portfolio of bonds or a money market account. In the long run, a portfolio of poorly chosen stocks won’t outperform the money left under the mattress.
The above 20 Golden Rules can be found at the back of Beating the Street.
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