Financial planning,  Investing,  Markets

The investing principles of a legend

Peter Lynch is one of the best known fund manager of all time. He ran the Fidelity Magellan fund from 1977-1990 and over that time it returned an average of 29% per annum making it the best performing managed fund in the US. The fund started out with $20 million and by the time he retired it had grown to $13 billion.

Lynch wrote two very well known books, One up on Wall Street (1989) and Beating the Street (1993), in which he set out some of his investing principles. His almost folksy wisdom is reminiscent of Warren Buffett, but, like Buffett, the folksiness hides a fearsome intellect. These principles may not work for everyone but they make a great foundation for anyone.

  1. Never invest in an idea that you can’t illustrate with a crayon.
  • Lynch was a big fan of old fashioned manufacturing businesses. He was fond of buying the best company in the worst industry, because often the only way they survived was to be super efficient and watch every penny.
  1. If you study 10 companies, you’ll find one for which the story is better than expected. If you study 50, you’ll find five. If you don’t study any companies, you’ll have the same success buying stocks as you do in a poker game if you bet without looking at your cards.
  • Apparently he wrote “Investing is fun, exciting, and dangerous if you don’t do any work.”
  1. Owning stocks is like having children – don’t have more than you can handle, 5-8 is plenty.
  • Lynch encouraged private investors to avoid over-diversification. Find a few companies you know really, really well and stick to them. Kind of interesting given his fund would invest in as many as 1,400 stocks at once!
  1. You can’t see the future through a rear-view mirror.
  • History is a track record, not a road map. Buffett’s version of this is “If past history was all there was to this game, the richest people would be librarians.”
  1. The best stocks to buy are the ones you already own.
  • If you’ve done the work and know a company well, if it still looks cheap then buy more of it. Another way of not over-diversifying.
  1. The extravagance of any corporate office is directly proportional to management’s reluctance to reward shareholders.
  2. If you like the store, chances are you will like the stock.
  • Lynch would go shopping with his kids and see where they spent their money. That’s how he came to invest in The Gap in its very early days.
  1. The biggest losses in stocks come from companies with poor balance sheets.
  2. In business, competition is never as healthy as total domination.
  • Lynch loved a good monopoly.
  1. All else being equal, invest in the company with the fewest colour photographs in the annual report.
  2. When even the analysts are bored, it’s time to start buying.
  • Being a contrarian can be very profitable.
  1. Corporations, like people, change their names for one of two reasons; either they’ve gotten married, or they’ve been involved in some fiasco that they hope the public will forget.
  2. Whatever the government is selling, buy it.
  • When a government offloads a public asset they generally discount it to make it attractive to mum and dad investors. And they can be great businesses (think CBA and CSL and maybe try not to think about Telstra).
  1. Avoid hot stocks in hot industries. Great companies in cold, no growth industries are consistent big winners.
  2. With small companies, you’re better off to wait until they turn a profit before you invest.
  3. If you are susceptible to selling everything in a panic, avoid stocks and mutual funds altogether.
  4. There is always something to worry about – sell a stock because the company’s fundamentals deteriorate, not because the sky is falling.
  5. Time is on your side when you own shares of superior companies.
  • CSL floated in June 1994 at $2.30, five years later it was $12.70 – more than a five-fold increase. Too late to buy? Now it’s $170 paying annual dividends of almost $2.


This information is of a general nature only and nothing on this site should be taken as personal financial or investment advice, or a recommendation to buy or sell a particular product.

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