Peter Lynch, chairman of lynch federation, is an investor, mutual fund manager, and philanthropist. He is by far, one of the greatest investors. For 13 years that he had managed the Magellan fund at Fidelity investments, he stretched up to an annual average return of 29.2%, which as of 2003 had the best 20-year performance of any mutual fund ever, invariably more than doubling the S&P 500 stock market index. Asset under management (AUM), with his philosophical management, surged from $18 million to 14 billion. He has coined several investing mantras of modern individual investing strategies, such as to invest in what you know and ten-baggers.
1. Investing Theories
- Invest in what you know
“I have found that when the market’s going down, and you buy funds wisely, at some point in future, you will be happy. You won’t get there by reading “now is the time to buy“
Lynch’s investment philosophy is summed up “buy what you know”, and there’s some truth to that and also it’s often way oversimplified.
Lynch uses this principle as the starting point for investors. He always emphasizes on ‘Individual Investor Approach’, rather than ‘Fund Manager Approach’, because individual investors can spot suitable investments in their day to day lives.
He invested in shares of Dunkin Donuts not after reading about the company but after being impressed by their coffee as a customer. That’s a clear example of a ground reality performance check.
- Ten-Bagger Approach
Being a baseball geek. Insisted him to coin a term ‘Ten Bagger‘ which represents two home runs and a double, In financial terms, it is an investment that appreciated to 10 times of its initial purchase price. It is used to describe stocks with bombarding growth prospects and has the potential to increase tenfold. A mixture of market research and quality experience is a prerequisite for finding ten baggers. A growing industry shall have more potential ten baggers than a mature industry with already established players.
“Behind every stock is a company. Find out what it’s doing” says the writer of three books. In a way to create a domino effect, ‘learn to earn’ was written for beginner investors of all ages, mainly teenagers. In “One Up”, Lynch outlines his strategy of buying all kinds of stocks, like growth, cyclical and potential turnaround situations by giving particular emphasis on discipline by rechecking your stocks every few months and not panicking when everyone is selling. An average investor can beat the money managers at their own game if they invest the necessary time and effort in researching stocks exercising common sense and discipline.
According to his practical experience, one should always count on specific characteristics of a company.
2. Investing Learnings for beginners
- Value investing strategies:
He states the company’s ‘duckling nature’ tends to be reflected in the share price, so good bargains often turn up. If there are some negative rumours around the company or disagreeable statement against the company– a higher level of attention should be given to such companies.
- Companies under M&A deals:
Investors should focus on companies participating in a proposed M&A transaction. A further check should be done on the insider buying and take advantage of such volume. In most cases, M&A deals have huge potential to generate returns because of the synergies of the combined entity.
- Focus on Market leaders
Company in a niche business segment having a controlling market share has larger visibility of future profits and sustainable growth because of the barriers to entry in the niche segment.
- Defensive Industries
The company that produces all season usable products – like drugs, eatables or soft drinks provide stable earnings and regular dividend payouts. They would be a good hedge to the portfolio in times of recession.
- Track Insider buying activity
He believed that insiders/promoters buy a stock only when they are confident of the company’s long term prospects.
- No analyst coverage
A multi-bagger stock is identified in its initial phase before it catches the eye of the analysts of the streets. Such companies are often neglected by the market participants and therefore, offering value buying in such companies.
3. Peter Lynch learnings on what a company ‘should not’ have;
- Companies with big plans that have not yet been proven.
- Few buyers account for 25% to 50% of the company’s sales (Concentration of customers)
- A company over diversifying its operations and acquisitions into non-synergistic businesses (financial investments and not strategic investments are not preferable).
- Hot stocks in hot industries rather than hot stocks in dull industries
4. Post investment lessons
- Diversification of portfolio
Do not diversify just for the sake of diversification. Complete research of the market and stocks is essential. Diversification comes at a cost, over diversification will affect the overall profitability of the portfolio.
- Price drop scenario
Buy on dips has been well-tested outperforming strategy. However, one needs to understand the price drop. As per Peter Lynch, price drops in a bearish market is a buying opportunity, whereas a price drop in a bullish market is a selling opportunity.
- Stay in the game
A long-term commitment towards stocks will deliver exponential returns. Using the above principles, the investor must hold the stock for years fulfilling the ten-bagger approach.
- Regular review of the portfolio
One should recheck one’s portfolio regularly depending upon the investment appetite like weekly, monthly or quarterly. Sell if the stocks have played to your expectations or it fails as per your fundamental analysis.
Lynch doesn’t see smartness in getting into a company that’s going up then take their profits rather hang in with the very high stocks when you sell the great companies and add to the losers, it’s like water in the weeds and cutting the flowers. You have to know what you own and why you own it “This baby is a cinch to go up” doesn’t count.