Unless you’re deeply involved in the world of investing, there probably aren’t too many names in the field that you recognize. But just like any line of work, there are superstars; Peter Lynch is one of them.
In a world where most active managers can’t beat their benchmarks, Lynch generated a compound annual return of 29.2% over the 13 years that he ran Fidelity’s Magellan Fund, crushing the performance of the S&P 500 over the same time period.
Peter Lynch has written two excellent books: One Up on Wall Street and Beating the Street. I’ve read both multiple times, but I recently discovered 181 pages of his articles online, and thought I would share the three key investing lessons that I learned from them.
1. Retail investors can beat the pros
Lynch has argued in his books that amateur investors can beat professional money managers, and he hits on this theme often in the articles that he has published. He says that retail investors won’t win by buying “hot stocks” that they have read about in Barron’s or The Wall Street Journal. The way for amateur investors to beat the professionals is to rely on their own research abilities.
Here’s what he wrote:
“I suspect that amateur stock pickers would have a much higher opinion of their abilities, as well as a greater net worth, if they avoided all expert buy recommendations in favor of their own research. This is the only kind of ‘independent investing’ that makes sense.”
“Actually, there are two kinds of investor’s edges: the on-the-job edge, in which you have a working relationship with an industry and the related companies with whom you do business; and the consumer’s edge, with which you can capitalize on your experiences in restaurants, airports, and shopping malls.”
“In fact, of the 20 top-performing stocks on the New York Stock Exchange in the last decade, no fewer than six (Home Depot, Circuit City, the Gap, Wal-Mart Stores, Liz Claiborne, and Dillard Department Stores) have been stuck under the noses of millions of shoppers who, if they’d paid attention to the popularity of these enterprises, could have profited from their edge.”
2. Let your winners run and cut your losers
One of the oldest sayings on Wall Street is, “Let your winners run, and cut your losers.”
Peter Lynch believes this is the way to make money investing even if you have a few mediocre or even terrible stocks in your portfolio.
“If you find one great growth company and own it long enough to let the profits run, the gains should more than offset mediocre results from other stocks in your portfolio.”
3. Don’t waste time on macro analysis
Time spent analyzing macroeconomic conditions is a waste, according to Lynch. Instead, focus on each company’s fundamentals and its valuation.
In all the articles written by Peter Lynch, it’s amazing how little he focuses on economics. Instead, Lynch focuses simply on individual stocks that look attractive, such as Sotheby’s in 1994, REITs in 1997 or H&R Block in 1998.
While Lynch doesn’t stick his head in the sand about economic growth, he doesn’t spend much time forecasting GDP growth or interest rates. He prefers to identify companies that are growing rapidly but trade at reasonable valuations.
These lessons should make investing easier and more lucrative for individual investors. And wouldn’t it feel great to get better returns than all those “top” money managers?