Investing mantras from Peter Lynch

Investing is like collecting seashells, and to do so, one needs to dive deep into the ocean of investing mantras given by legends like Benjamin Graham, Warren Buffett, etc.

One such investing sage is Peter Lynch, notably amongst the best of his decade. Peter, not only has been one of the best fund managers, but also has had a great impact on individual retail investors who have followed him over the years. He reaped his investing philosophy while working for ‘Fidelity Management and Research’ where he successfully managed ‘Fidelity Magellan Fund’ for 13 years, from 1977 at the launching of the fund to 1990 when he retired.

He averaged a return of 29.2% CAGR during his reign, which many successful triumphant fund managers could not do over years. To give it a numeric connotation, every ?1 Crore invested on the launch of this fund would have amounted to around ?28 Crores by the time Lynch retired, in just over a decade! The best part about his gratified journey is that he has always been very vocal about his investing philosophies; he has quoted his success mantras in his books like ‘Beating the street’ and ‘One up on Wall Street’.

Peter says that "Making money in the stock market is a combination of science, art, and legwork." Fundamentals of a company and many weaved characteristics are logically bound and have a cause-and-effect relationship.

Peter was not a great fan of those who believed in timing the market. He says that "Far more money has been lost by investors preparing for corrections or trying to anticipate corrections than has been lost in corrections themselves."

He advocated long-term commitments with quality stocks, but this doesn't necessarily mean that investors should hold onto stocks forever. Instead, Peter focused on reviewing his holdings every few months, rechecking the company story and fundamentals.

For Lynch, price fall is an opportunity to average out a quality stock. Rather than selling a stock, he believed in the rotation theory, which substantiated selling the company and replacing it with another company with a similar story but better prospects.

Peter categorized the entire universe of stocks into six heads:

Slow growers

This category consists of large, matured, and stable companies that grow along with the economy. These companies usually pay high dividends and grow yearly at 8-10% per annum. Peter personally didn't find such companies appealing for huge investment sizes.

Stalwarts

This category consisted of large companies with more scope for growth when compared to slow growers. These companies have the potential to grow at a rate of 12-18% per annum.

Fast growers

The companies that foster the potential to turn into multi-baggers qualify under this category; a rational investor is needed to identify such companies and hold them till they deliver the desired return.

Cyclicals

This was one of the most treasured categories for Peter Lynch. Such companies were usually engaged in selling luxury products. Such companies are featured by cyclical trends in revenue, profits, and customer base. Peter believed that these kinds of stocks could result in high losses if entered in the wrong part of the market; hence he believed in buying such stocks when the economy was weak, and he says that the trick with such kinds of stocks is to exit before their downtrend arrives because many times cyclical are confused with being stalwarts.

Turn-arounds

“Eagles fly against the wind and not with it.” Similarly, there are companies that are going through tough times, that are battered, on the verge of bankruptcy, and aren’t really growing. But such companies can turn the tables for investors since these are high-risk, high-reward companies. They are categorized as turnarounds. Peter says that low-risk takers should strictly stay away from such companies; however, these companies could be a blessing in disguise for high risk-taking investors because these companies may turn 2x in a concise span if they receive financial assistance and other fundamental support.

Asset-plays

Peter defines them as stocks whose assets are overlooked by the market and are undervalued. These assets could be real estate, properties, cash, equipment that the company is holding but are not valued by investors when downtrends happen. Many public sector stocks can be classified as asset plays.

Further, he says that an important key to investing is remembering that ‘stocks are not lottery tickets'. He always believed that "The stock market really isn't a gamble, as long as you pick good companies that you think will do well, and not just because of the stock price."

Peter Lynch's investing lessons offer practical approaches that cater to the needs of multifold diverse kinds of investors from high risk-taking to low risk-taking. To conclude this piece, let’s quote the legend himself “Know what you own and the reason why you own it.”