8 Investing Principles by Legendary FundManager Peter Lynch

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8 Investing Principles by Legendary FundManager Peter Lynch

Post by Dennis Ng »

Peter Lynch ran Fidelity’s Magellan Fund from 1977 to 1990, beating the S&P 500 in all but two of those years. He averaged annual returns of 29%. That’s a mind-blowing figure. It means that $1 grew to more than $27; if you invested as little as $37,000 with him in 1977, you were a millionaire in 1990.

Fortunately for us, he’s willing to share his secrets. To achieve his stunning track record, he clung to 8 simple principles. Here they are:

1. Know what you own
Seems elementary, right? But as someone who talks to lots of investors, I can report that you’d be shocked at how few investors actually do their research. Scroll down to No. 7 for a good first step in getting ahead of the game.



2. It’s futile to predict the economy and interest rates (so don’t waste time trying)
After 2008’s crash, I noticed a distinct increase in armchair economists. We financial types do enjoy water cooler talk about interest rates, trade deficits, debt levels, etc. But there’s a danger in converting thought into action.

The U.S. economy is an extraordinarily complex system, with 300 million people acting in their own self-interest and responding to each others’ actions, government incentives, and external shocks. And that’s before we factor in our increasingly frequent interactions with the rest of the world.

Trying to time the market is futile. Set up a financial plan that allocates your assets based on your risk tolerance, so that you can sleep well at night.



3. You have plenty of time to identify and recognize exceptional companies
Lynch mentions that Wal-Mart was a 10-bagger — i.e. its stock rose to 10 times its initial price — 10 years after it went public. Even if you had gotten in after waiting a decade, though, you’d be sitting on a 100-bagger.

Some would argue that it’s still not too late to get in on Wal-Mart, decades after going public. While the company’s no longer a monster growth story, it continues to crank out 20% returns on equity year after year. That type of consistent ROE is a huge positive indicator of management’s ability to effectively allocate capital.

A similar tale can be told about Microsoft’s early growth years, right on down to its still-impressive current return on equity (42%).

And Amazon.com, though only 13 years old as a public company, has seen its stock double since its 10th birthday. Of these three, it’s the only company still trading at growth-stock valuations. Bulls are hitching their wagon to Amazon.com’s ability to expand its role as the premier online retailer, and its upside in the cloud-computing space.

The lesson of Wal-Mart, Microsoft, and Amazon.com? You don’t need to immediately jump into the hot stock you just heard about. There’s plenty of time to do your research first. See No. 1.



4. Avoid long shots
Lynch claims he was 0-for-25 in investing in companies that had no revenue but a great story. Remember, the guy who averaged 29% returns went oh-fer on long shots. You and I are unlikely to do much better.

Use companies with proven track records as our baseline. ExxonMobil, IBM, and Procter & Gamble are selling for 9, 11, and 16 times forward earnings, respectively. This is what the market is charging for solid, low-to-moderate-growth companies that dominate (or at least co-dominate) their spaces. Expect to pay more for higher-growth prospects, but make sure the risk-reward trade-off on an unproven company is worth it.



5. Good management is very important; good businesses matter more
The pithier Lynchism is: “Go for a business that any idiot can run – because sooner or later, any idiot is probably going to run it.”

For a prototypical example of a so-easy-a-caveman-could-run-it company, think the aforementioned Procter & Gamble.



6. Be flexible and humble, and learn from mistakes
Lynch has said: “In this business, if you’re good, you’re right six times out of 10. You’re NEVER going to be right nine times out of 10.”

You’re going to be wrong. Diversification and the ability to honestly analyze your mistakes are your best tools to minimize the damage.



7. Before you make a purchase, you should be able to explain why you’re buying
Specifically, you should be able to explain your thesis in three sentences or less. And in terms an 11-year-old could understand. Once this simply stated thesis starts breaking down, it’s time to sell.



8. There’s always something to worry about.
Lynch noted that investors made a killing in the 1950s despite the very new threat of nuclear war. There are plenty of fears to choose from right now, but we’ve survived a Great Depression, two world wars, an oil crisis, and double-digit inflation.

Always remember, if our worst fears come true, there’ll be a heck of a lot more to worry about than some stock market losses. Lynch’s parting shot is that investing is more about stomach than brains.

Peter’s principles in action
So there you have it. These are the 8 principles Peter Lynch used to bring the market to its knees. They seem simple, but trust me, sticking to them is harder than it sounds.



Source: Motley Fool
Cheers!

Dennis Ng - When You Master Your Finances, You Master Your Destiny

Note: I'm just sharing my personal comments, not giving you investment advice nor stock investment tips.
candy_chia
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Re: 8 Investing Principles by Legendary FundManager Peter Ly

Post by candy_chia »

Peter Lynch also shared his 10 Most Dangerous Things People Say About Stock Prices reproduced below. Even more than the points above, Peter's good sense of humor came through when he discussed these old saws:

1.) "If it's gone down this much already, how much lower can it go?" (answer: Zero)

2.) "If it's gone this high already, how can it possibly go higher?" ( some of the best companies Grow for DECADES)
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3.) "Eventually they always come back." (no they don't - there are lots of counterexamples)
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4.) "It's only $3 a share, what can I lose?" ($3 for every share you buy)

5.) "It's always darkest before the dawn." (Its also always darkest before it goes absolutely pitch black. Don't buy a business just because price dropped and it is cheaper now)

6.) "When it rebounds to my cost, I'll sell." (The stock does not know you own it! Don't take it so personally Note: this comment is explained by the well documented psychological tendencies called loss aversion and anchoring bias which are talked about in Behavioral Finance. If you liked it at ten, you should love it at 6 so either buy more or sell)

7.) "What me worry? Conservative stocks don't fluctuate much." (There is no such thing as a conservative stock - the average stock fluctuates between 50% to 70% from its high to its low price every year.

There is a graveyard where all the "conservative" stocks get buried. Companies and businesses change!
)
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8.) "Look at all the money I lost - I didn't buy it!" (Don't beat yourself up about the missed opportunities because it is not productive - when he managed the Magellan Fund, he almost never owned one of the 10 best performing stocks in a given year, but he did fine anyway).

9.) "I missed that one. I'll catch the next one." (Doesn't work that way)

10.) "The stock has gone up - so I must be right" or "The stock has done down - so I must be wrong." (Technical analysis is not worth much. So many people like something at 20 and hate it at 12 - never made much sense to him).

http://www.gurufocus.com/news/826/the-w ... eter-lynch
candy_chia
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Re: 8 Investing Principles by Legendary FundManager Peter Ly

Post by candy_chia »

Go for a Business that Any Idiot can run


- because sooner or later, any idiot Probably is Going to Run it.

Peter Lynch
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Similar message from Warren Buffett:


“THEY SAY in the stock market, ‘Buy into a business that’s doing so well an idiot could run it, because sooner or later, one will,’” Buffett said.


http://www.brainyquote.com/quotes/autho ... 6tV2OvQ.99
http://quoteinvestigator.com/2010/05/31 ... t-can-run/
candy_chia
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Re: 8 Investing Principles by Legendary FundManager Peter Ly

Post by candy_chia »

"Never invest in any idea you can't illustrate with a crayon."
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"90 seconds is plenty of time to tell the story of a stock.

If you're prepared to invest in a company,then you ought to be able to explain why in simple language that a fifth grader could understand, and quickly enough so that fifth grader won't get bored."


He offers a common-sense approach to stock picking:

Know the "story," or everything about a company, before buying a stock; then follow the "story" after buying the stock.


He says, "DON’T Sell the stock if the 'Story' is Still Good, whether the market is up or down."

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(1) To begin to SELECT a "Story,"
--> find publicly traded companies that provide good products and services.


~~~ You can begin to gather information for your "story" every time you walk into a mall, go to a restaurant, or play with your friends.

~~~~ That is, wherever you go, do Firsthand Observations on companies or products to gauge whether the company is Strong and Growing.
~~~~~ See for yourself whether the store is clean or messy.

~~~~~~Are people Lining up at the Cash register or does the store look Empty? Are the customers happy with the services or do they complain a lot? You are not likely to see an empty McDonalds or Wal-Mart.


~~~~~~~ On the playground, see what Brand of Soda your friends are drinking. Are most of them wearing Nike or Reebok shoes?
~~~~~~~~ Notice what New Sports, such as roller hockey, have become popular. Then, look for companies that will benefit from the trend.

~~~~~~~~~ Also check with your parents, relatives, and neighbors who are doctors, engineers, and bankers. Your neighborhood doctor knows which companies make excellent drugs or the best medical equipment. Your engineer dad knows which companies have a dominant position in computer software or hardware. Your uncle banker knows which banks are the most profitable.

(2) Once you begin to take notice of some of these companies, your next step is to learn More about the "story" of the company before you invest in it.

- You can learn more about the "story" from resources such as trade magazines, annual reports, and the Internet.
As the "story" goes on, you will want to know what must happen for the company to continue its growth spurts, as well as the pitfalls that may slow its earnings.

Peter Lynch believes that, in the Long Run, there is a strong correlation between the success of the company and the success of the stock.

So look for the success stories.

(3) He further suggests that every few months, it is worth while to recheck the company’s "story."

-> That may involve checking the stores to see if there are still lines at the cash registers or new developments of the "story" from your neighbor’s workplace.

(4) Also,check the earnings and growth from the company’s quarterly reports or from the latest Value Line.



As long as you own the stock, the "story" will never end.

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As a young investor, you should start looking at the world through a stock picker’s eyes. Better yet, you can collaborate with other kids across the Internet about your investment ideas.

http://library.thinkquest.org/3096/41pick1.htm
Dennis Ng wrote:
Peter Lynch ran Fidelity’s Magellan Fund from 1977 to 1990, beating the S&P 500 in all but two of those years.....if you invested as little as $37,000 with him in 1977, you were a millionaire in 1990.

To achieve his stunning track record, he clung to 8 simple principles.

7. Before you make a purchase, you should be able to explain WHY you’re Buying
Specifically, you should be able to explain your thesis in 3 sentences or less. And in terms an 11-year-old could understand. Once this simply stated thesis starts breaking down, it’s time to sell.
candy_chia
Investing Mentor
Posts: 1731
Joined: Sun Jul 17, 2011 11:36 am

Re: 8 Investing Principles by Legendary FundManager Peter Ly

Post by candy_chia »

"When stocks are Attractive, you BUY them.
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Sure, they can go lower. I've bought stocks at $12 that went to $2, but then they later went to $30.[/color]





You just Don't know WHEN you can Find the Bottom."


Market Timing and Daring to be Different

Lynch sums up issues on market timing beautifully.

His basic idea is that, not only is it difficult to predict the markets, but small investors can be both Pessimistic and Optimistic at all the Wrong Times.

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Basically, it can be self-defeating to try to invest in good markets and get out of bad ones. That's not to imply that the small investor doesn't know what they're doing, but rather that accurate market timing, especially in the short run, is unlikely.

The critical point is that You Don't have to be able to predict the stock market to Make Money with it.


http://www.investopedia.com/articles/pf ... z2COX44jos


http://www.brainyquote.com/quotes/autho ... SL0LSTI.99
Dennis Ng wrote:
2. It’s futile to predict the economy and interest rates (so don’t waste time trying)

After 2008’s crash, I noticed a distinct increase in armchair economists. We financial types do enjoy water cooler talk about interest rates, trade deficits, debt levels, etc. But there’s a danger in converting thought into action.

The U.S. economy is an extraordinarily complex system, with 300 million people acting in their own self-interest and responding to each others’ actions, government incentives, and external shocks. And that’s before we factor in our increasingly frequent interactions with the rest of the world.

Trying to TIME the Market is Futile.
up or down.png
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Set up a financial plan that Allocates your Assets based on your Risk Tolerance, so that you can Sleep well at night.
candy_chia
Investing Mentor
Posts: 1731
Joined: Sun Jul 17, 2011 11:36 am

Re: 8 Investing Principles by Legendary FundManager Peter Ly

Post by candy_chia »

"When in Doubt, Tune In Later."
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Now this is where the EMOTIONAL part about investing comes into play.[/b]

I have spent ten days researching a stock, and thankfully on the eleventh day, I find that it’s a great business and even available at a good discount to the intrinsic value. So it seems like a perfect “buy”.

The 15-20 days After I Complete my Analysis on a stock help me know whether my Stomach is ready to Digest the Stock even when the mind answers in the affirmative.
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http://www.safalniveshak.com/10-investi ... ll-street/
Dennis Ng wrote:

Lynch’s parting shot is that

Investing is More about STOMACH than brains.

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