Peter Lynch is an Investment Guru, one of the best Mutual Fund Manager of US based Fidelity Magellan Fund. Since the time he took over in 1977, till 1990 when he retired, that fund grew from $18 million in assets to $14 billion. The share of the Magellan fund increased 900% in value – a 29.2% annual return – and outperformed the stock market by 13.4% annually. This proves beyond doubt that Peter Lynch is an Investment Legend and hence is recommended as the Second Book to read for “Financial Wellness” after, “Learn to Earn” by the same author.
While preparing to invest, Peter Lynch makes an argument for “common sense investing”. According to him, one must ignorethe analysts and “experts.” He believes that, one must not be led by “hot” picks, but do your own research and find the stocks that you understand and believe in.
Further, he cautions us to first answer three basic questions before investing in the stock market:
1.Do I own a house? If you don’t, buy a house first. It provides you a stable and permanent residence. In case you have a home loan, then your first priority would be paying the EMI for the same before you think about investing.
2. Do I need the money? Don’t invest with money that will leave you feeling sick if you lose it. Only when you have some investible surplus after paying for your EMI that, you can invest. Use extra money, money that won’t devastate you with each loss.
3. Do I have the personal qualities it takes to succeed? Lynch lists patience, self-reliance, common sense, a tolerance for pain, open-mindedness, detachment, persistence, humility, flexibility, a willingness to do independent research, an equal willingness to admit mistakes, and the ability to ignore general panic.
This is investing, where the smart money isn’t so smart, and the dumb money isn’t really as dumb as it thinks. Dumb money is only dumb when it listens to the smart money.
The message of this entire portion of the book can be summed up in three words: do your homework. Sure, you should seek out inspiration for companies to look into from your day to day life – companies you observe doing good business and attracting strong positive word of mouth – but once you’ve identified companies, it’s time to dig in and do the research.
What kind of research? Lynch literally goes on for a hundred pages on the research one should do before investing. Basically, learn everything you can about the company – what their balance sheet looks like, who their management team is, how they compare to similar companies, and so on.
- A low price-to-earnings ratio, especially as compared to similar companies
- A low percentage of institutional investors
- Insiders buying the company’s stock
- The company buying back its own stock
- A low debt-to-equity ratio, especially as compared to similar companies
Peter Lynch’s Classification of Company
1.Slow growers are usually “large and aging companies” which “are expected to grow slightly faster than the gross national product.”
2.Stalwarts grow a bit faster, but, even so, you can’t expect them to be agile
3.The fast growers are “small, aggressive new enterprises that grow at 20 to 25 percent a year.”
4.Cyclicals usually follow a rise-fall-rise pattern, rising and falling in a more predictable manner than the rest of the companies. “The autos and the airlines, the tire companies, steel companies, and chemical companies are all cyclicals.”
5.Turnarounds are “no growers” which, from time to time, are capable of rebounding.
Some of the important investment mantras:
1.Sell the second that your reason to own the company changes, but not a second before. Don’t just sell to take gains, you should know exactly what is your reasons for buying it in the first instance and if changes, then you sell.
2.Buy when everyone else is selling (i.e., when the market is down). This is the psychology of a true investor, who behaves in a rational way and buys the stock at its rock bottom price.
3.Be patient. As long as your fundamental reasons for investing don’t change, don’t get impatient. Sit on that stock. Sometimes it takes years for a stock to truly take off.
4.Don’t buy a company you don’t believe in just because the stock is a value. Lynch’s take on the value investing concept is that you shouldn’t just buy because a stock seems cheap – you should believe in the company with sound reasons backing up that belief.
5. The Manic – Depressive Mr. Market isn’t your friend. Trying to earn your money by attempting to predict his behavior is one of the worst things you can do.
6. It Is difficult to integrate the efficient-market hypothesis (that everything in the stock market is “known” and prices are always “rational”) with the random-walk hypothesis (that the ups and downs of the market are irrational and entirely unpredictable). Already I’d seen enough odd fluctuations to doubt the rational part, and the success of the great Fidelity fund managers was hardly unpredictable.
Anyone who wants to start his investment journey, cannot miss this book.
Quintessential Indian 