Peter Lynch

Background

Peter Lynch was born in 1944 and graduated from Boston College in 1965 with a degree in finance. He served two years in the military before attending and graduating from the Wharton School at the University of Pennsylvania with a Master of Business Administration in 1968.

He went to work for Fidelity Investments as an investment analyst, eventually becoming the firm's director of research, a position he held from 1974 to 1977. Lynch was named manager of the little known Magellan Fund in 1977 and achieved historic portfolio results in the ensuing years until his retirement in 1990.

In 2007, Peter Lynch served as vice-chairman of Fidelity's investment adviser, Fidelity Management & Research Co. Since his retirement, he has been an active participant in a variety of philanthropic endeavors.

Peter Lynch is one of the most famous mutual fund manager.  He started to manage the Fidelity Magellan Fund in 1978.  When he started, the fund had assets of US$ 20 million dollars.  When he retired in 1990, the Fidelity Fund had assets of US$ 14 billion.  Today the fund has assets of over US$ 50 billion dollars.

Investment Terminology

Lynch coined some of the best known mantras of modern individual investing strategies. His most famous investment principle is simply, "Invest in what you know," popularizing the economic concept of "local knowledge". This simple principle resonates well with average non-professional investors who don't have time to learn complicated quantitative stock measures or read lengthy financial reports. Since most people tend to become expert in certain fields, applying this basic "invest in what you know" principle helps individual investors find good undervalued stocks.

Lynch uses this principle as a starting point for investors. He has also often said that the individual investor is more capable of making money from stocks than a fund manager, because they are able to spot good investments in their day-to-day lives before Wall Street. Throughout his two classic investment primers, he has outlined many of the investments he found when not in his office - he found them when he was out with his family, driving around or making a purchase at the mall. Lynch believes the individual investor is able to do this, too.

Lynch did consistently apply a set of eight fundamental principles to his stock selection process. According to an article by Kaushal Majmudar, a CFA at The Ridgewood Group, Lynch shares his checklist with the audience at an investment conference in New York in 2005:

• Know what you own.
• It's futile to predict the economy and interest rates.
• You have plenty of time to identify and recognize exceptional companies.
• Avoid long shots.
• Good management is very important - buy good businesses.
• Be flexible and humble, and learn from mistakes.
• Before you make a purchase, you should be able to explain why you're buying.
• There's always something to worry about.

In picking stocks (good companies), Peter Lynch stuck to what he knew and/or could easily understand. That was a core position for him. He also dedicated himself to a level of due diligence and stock research that left few stones unturned. He shut out market noise and concentrated on a company's fundamentals, using a bottom-up approach. He only invested for the long run and paid little attention to short-term market fluctuations.

After Peter retired he wrote two books on stock selection, “One Up on Wall Street” in 1989 and “Beating the Street” in 1994. Both of which are considered essential reading for any serious investor. Peter has found many of his big investments when not in his office - instead found them when out with his family, driving around or shopping at the mall. Peter believes the individual investor is able to do this too.

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Peter Lynch Quotes

Go for a business that any idiot can run – because sooner or later, any idiot is probably going to run it.

If you stay half-alert, you can pick the spectacular performers right from your place of business or out of the neighborhood shopping mall, and long before Wall Street discovers them.

Investing without research is like playing stud poker and never looking at the cards.

Absent a lot of surprises, stocks are relatively predictable over twenty years. As to whether they're going to be higher or lower in two to three years, you might as well flip a coin to decide.

If you spend more than 13 minutes analyzing economic and market forecasts, you've wasted 10 minutes.

The person that turns over the most rocks wins the game. And that's always been my philosophy.

The key to making money in stocks is not to get scared out of them.

I think you have to learn that there's a company behind every stock, and that there's only one real reason why stocks go up. Companies go from doing poorly to doing well or small companies grow to large companies.

In this business if you're good, you're right six times out of ten. You're never going to be right nine times out of ten.

You get recessions, you have stock market declines. If you don't understand that's going to happen, then you're not ready, you won't do well in the markets.

When stocks are attractive, you buy them. Sure, they can go lower. I've bought stocks at $12 that went to $2, but then they later went to $30. You just don't know when you can find the bottom.

I've found that when the market's going down and you buy funds wisely, at some point in the future you will be happy. You won't get there by reading 'Now is the time to buy.'

There are substantial rewards for adopting a regular routine of investing and following it no matter what, and additional rewards for buying more shares when most investors are scared into selling.

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 the fifth grader won't get bored.

In stocks as in romance, ease of divorce is not a sound basis for commitment.

There's no shame in losing money on a stock. Everybody does it. What is shameful is to hold on to a stock, or, worse, to buy more of it, when the fundamentals are deteriorating.

Stock picking can't be reduced to a simple formula or a recipe that guarantees success if strictly adhered to.

A person infatuated with measurement, who has his head stuck in the sand of the balance sheets, is not likely to succeed.

In business, competition is never as healthy as total domination.

Investing is fun, exciting, and dangerous if you don't do any work.

Your investor's edge is not something you get from Wall Street experts. It's something you already have. You can outperform the experts if you use your edge by investing in companies or industries you already understand.

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Technical Vs Fundamental Analysis (By Farouk)

Through the years I had spent years investing my money in different asset classes around the world, I always met people who were either technical analysts or fundamental analysts, and even though these people have nothing in common, one thing was always common, technical analysts were always losing money and fundamentalists were always making money. Out of every 10 technical analysts I met one fundamental analyst, and to my surprise the only one smiling there on the trading floor was the fundamental analyst.

Fundamental analysis is based on researching the stock you are going to buy, knowing its financial position and estimating a value for it. Technical analysis is based on charting, where the only reason to buy a stock is finding a good signal in its curve.

Technical analysts

Technical analysts claim that human behavior can be easily predicted from charts, and while part of what they are saying is true, as a human behavior expert I can confidently say that charts are useless. Yes you can expect a stock price to go up because it broke through a strong resistance in the chart but you didn’t take into account that a new piece of information that is released the next day may have the power to reverse this signal.

Buying a company just because its chart looks good is way far from investing, it better fits under the act of speculating. If you don’t believe this now, then go invest your money using technical analysis only and when you lose your money come back and read about fundamental analysis.

Fundamental analysis

Fundamental analysis requires you to know the stock’s financial position, its sales, its net profit and lots of other figures that are directly related to financial performance. I guess you now know why technical analysis is very popular compared to fundamental analysis, simply because fundamental analysis requires more effort.

Buying a company because you know about its current financial position and its growth prospects is more likely to make you realize profits than buying a company that you know nothing about just because its chart looks interesting.

Technical and fundamental analysis together

You might think that I am against technical analysis but this is not true, the best way to invest your money in the stock market is not to use technical analysis only or fundamental analysis only but its to use them together.

You should first use fundamental analysis to determine which stock you are going to buy and after determining what to buy, you should then use technical analysis and charts to pick the right timing to buy it so that you can maximize your profits.

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