Thursday 17 May 2012

Peter Lynch's 20 Golden Rules

We amateur DIY Income Investors can always learn something from the *good* professionals - those that have established a track record over several years (i.e. those who have not just succeeded by luck).

Peter Lynch was the manager of the Fidelity Magellan Fund for 13 year until he retired in 1990. During his tenure, Magellan was the top-ranked general equity mutual fund (similar to a unit trust, in the UK). So I'd listen to him.

Be clear that I'm not saying 'buy funds' or even to invest the way he did, but rather 'listen to what he has to say'.

These 20 Golden Rules (his description) come from his book 'Beating the Street' - and this is perhaps the best part of the book, most of which will have little interest for a DIY Income Investor.

I paraphrase a little below, to keep it short.

1) You can outperform the experts if you invest in companies or industries you already understand.

2) You - the amateur - can beat the market by ignoring the (professional) herd.

3) It pays to be patient: in the short term there can be a disparity between the success of a company's operations and the success of its stock; in the long term there is 100% correlation.

4) You have to know what you own, and why you own it.

5) Long shots almost always miss the mark.

6) Owning stocks [shares] is like having children - don't get involved with more than you can handle. The part-time stock picker probably has time to follow 8-12 companies. There don't have to be more than 5 companies in the portfolio at any one time [!].

7) If you can't find any companies that you think are attractive, put your money in the bank until you discover some.

8) Never invest in a company without understanding its finances - beware of weak balance sheets.

9) Avoid hot stocks in hot industries. Great companies in cold, non-growth industries are consistent big winners.

10) With small companies, you're better off to wait until they turn a profit before you invest.

11) You need to find only a few good stocks to make a lifetime of investing worthwhile.

12) In every industry and every region of the country [US], the observant amateur can find great growth companies long before the professionals have discovered them.

13) The regular occurrence of a stock market decline is a great opportunity to pick up bargains left behind by investors who are fleeing the storm in panic.

14) Everyone has the brainpower to make money in stocks [shares]; not everyone has the stomach. (Are you susceptible to selling in a panic?)

15) There is always something to worry about but only sell a stock [share] because the company's fundamentals deteriorate, not because the sky is falling.

16) Nobody can predict interest rates, the future direction of the economy or the stock market. Concentrate on what's actually happening to the companies in which you are invested.

17) If you study 10 companies, you'll find 1 for which the story is better than expected; if you study 50 you'll find 5. There are always pleasant surprises to be found in the stock market - companies whose achievements are being overlook [by the professionals].

18) If you don't study any companies, you have the same chance of success buying stocks are you do in a poker game if you bet without looking at your cards.

19) Time is on your side when you own shares of superior companies - you can afford to be patient.

20) In the long run a portfolio of well-chosen stocks [shares] will always outperform a portfolio of bonds or a money market account [savings bond]. However, in the long run a portfolio of poorly chosen stocks won't outperform the money left under the mattress.

All-in-all, good advice, I'd say.

I am not a financial adviser and the information provided does not constitute financial advice. You should always do your own research on top of what you learn here to ensure that it's right for your specific circumstances.

1 comment:

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