6 Timeless Lessons from Peter Lynch's One Up on Wall Street
Tips for beating the market by one of the world's most successful investors
Peter Lynch is one of the most successful investors of our time. He's been called "the greatest stock picker in history," and his track record speaks for itself.
He ran the Fidelity Magellan Fund from 1977 to 1990. During that time, his mutual fund beat the S&P 500 11 out of 13 years. And even more incredibly he averaged 29% annual return... All while avoiding hot industries and the fastest growing companies.
From start to finish, he earned a 2,700% return.
But how did he do it?
In his book One Up On Wall Street, Lynch shares six timeless lessons he learned during his career as a fund manager. Here are some of the best ones.
Look for dull and boring stocks
Peter Lynch likes boring stocks. He says it is easier to find good companies than great ones. He doesn't care about the hype surrounding the latest technology or fads. Instead, he looks for companies that are doing things that matter to people. They're not necessarily big businesses, either. A lot of his investments are small cap companies.
Lynch is known for being one of the best stock pickers ever. He had a long career picking stocks at Fidelity Investments where he earned $100 million over three decades. His investing philosophy is simple: Buy what you know. If you don't understand something, don't invest in it.
In fact, Lynch isn't even interested in tech stocks. "I'm not very fond of tech," he told CNBC. "The reason I'm not fond of tech is because most of the stuff that happens in tech is ephemeral."
He prefers to look for companies that make products that people use every day. Lynch likes simple companies, with simple business models. These are the companies that tend to see consistently higher stock prices over the years.
And he says that find companies with growth rates above the average company, in a no-growth industry can lead to huge profits.
"Only invest what you could afford to lose without that loss having any effect on your daily life in the foreseeable future."
The stock market is volatile. There are good times and there are bad times. So it's important to only invest in stocks with money you can afford to lose.
If you need $2,000 to pay the mortgage next month, that money shouldn't be invested in the stock market. The advantage in owning stocks is that over the long run, stocks will out earn all other investments... And rolling 30-year returns of stocks show much less volatility than 30-year returns on cash or bonds.
And people who need money shortly inevitably do dumb things. They will buy the stock and on the first dip they will sell... Even if it's down and at support. They stop thinking rationally and only concentrate on what the money can be used for.
They end up buying high and selling low - not our goal.
Time is our friend with stock investing. Make sure you have enough of it on your side.
Go for a business that any idiot can run…
Investors often make the mistake of thinking that anyone can run the business. Or that the board will only hire competent leaders. This is a dangerous assumption.
Eventually someone will get hired who couldn't even hold the jock strap of the previous CEO. And when that happens you want to make sure the business essentially runs itself. That way if the CEO sets a bad course, the main business will continue running.
A business that runs itself is Coca-Cola ( $KO ). No matter what the CEO does, diehard Coke drinkers will still drink their Coke. As long as the CEO doesn't "open source" the secret formula for Coca-Cola, KO will have reliable business.
An example of a business that doesn't run itself, would be General Electric ( $GE ). GE has struggled ever since Jack Welch left the firm. When new CEOs took over, they couldn't guide the GE behemoth as smoothly as Welch could. And the share price has languished ever since.
This is also why Lynch doesn't like tech stocks. Cutting-edge tech companies need to have competent CEOs at the helm. CEOs who can clearly envision the future and the technologies needed to make it happen. And they need to position the company years in advance of that technology. Not an easy task.
Be careful when holding tech companies for the long run. Idiots can't run them.
"If you want to avoid a single stock, it would be the hottest stock in the hottest industry."
Peter Lynch, said, "Don't invest in stocks that everybody else is talking about." Investors should avoid the hot stock tip at all costs.
Lynch points out that investors often lose money because they follow trends rather than sticking to what makes sense. He suggests avoiding hot sectors like tech and biotech.
Instead, look for industries that people don't follow as closely. For example, Lynch likes buying stocks in companies that sell products used in construction. These kinds of businesses tend to be overlooked because most people think that the economy is doing great. But when times turn sour, those types of companies do better than others.
He also said investors need to be skeptical of companies growing revenue 50% - 100% a year. Eventually the growth of these companies will slow down. And when they do, the valuations investors assign to these companies will crater... Taking share prices down with it.
"Invest in what you know."
The late investor Peter Lynch once told his followers that "investing in what you know" is one of the best ways to invest. He used to say it over and over again.
If an investor buys a stock where he doesn't know the business, he has to rely on others' opinions. And that gets dangerous... And likely means the investor will buy the "hot stock" that he says we should avoid.
So if you work in construction, you likely know what products are the best and can invest accordingly. Or if you are a people that collaborates with creative people, you'll know the best software for artistic expression and collaboration. A social media influencer likely knows what social media platform is performing, so they could make an investment in the up-and-coming platform... While avoiding the laggard.
We could give many more examples, but you get the point. If you're kids want something because "all their friends are doing it" look to make an investment.
By doing this individual investors can beat institutional investors. The institutional guys tend to live in a bubble on Wall Street. These money managers tend to be overpaid and live a privileged life.
We on the other hand, can see what's growing in front of our eyes. And We can invest in small cap, individual stocks.
By doing this we can get in early on trends and ride a multi-bagger much higher. This is the biggest advantage an amateur investor has over institutional investors.
There is always something to worry about.
Investors are constantly worried about market volatility, economic uncertainty, geopolitical risks, etc. But it doesn’t mean that you shouldn’t invest. In fact, some of the best investors in history had plenty of worries along the way.
I'm not saying that you shouldn't plan ahead, prepare yourself, do research, and look out for red flags. You definitely should.
But don't let that stop you from buying shares of quality companies. We'll never see a time with a Goldilocks economy and world peace. People and countries will always have some kind of conflict.
We need to know how to invest in a world of uncertainty... Because that's all investing is. Uncertainty.
We'll inevitably make a bad investment from time to time. We'll have believed we found the perfect company, with the perfect stock price. The ideal investment. We'll make a large initial investment. But this exciting prospect will turn into a dud.... Or even worse, the bull market comes to an end, the growth rate declines, and we lose money. It happens.
But over the long-run, buying stocks will build our wealth.
Peter Lynch's Lessons Can Help Us Make Money
These are six of the best lessons we can learn from "One Up on Wall Street." And by applying these lessons, the average investor can increase their returns by finding high quality investments.
Finding cheap stocks is not always the goal. Lynch looked for companies with strong balance sheets and a great business model... That were trading at a reasonable price.
If you want to learn more about Peter Lynch's strategies, I highly recommend reading the entire book.