Good morning, let’s get into it!
Today we need to understand something about investing, and we’re getting our lesson from Peter Lynch. I was inspired to make this post about this from a Substack I read.
Who is Peter Lynch?
Peter Lynch (born January 19, 1944)[1] is an American investor, mutual fund manager, author and philanthropist. As the manager of the Magellan Fund[2] at Fidelity Investments between 1977 and 1990, Lynch averaged a 29.2% annual return,[3] consistently outperforming S&P 500 stock market index and making it the best-performing mutual fund in the world.[4][5] During his 13-year tenure, assets under management increased from US$18 million to $14 billion.[6]
1. Investor Psychology: The "Stomach" Over the "Brain."
Lynch argues that investing isn't a game of high-level math; it’s a game of emotional discipline.
Expect Volatility: Just as you expect it to be cold in Minnesota in January, you must expect market declines. If you can’t handle a 25% drop without panicking, you shouldn't own stocks.
The "Anti-Panic" List: He highlights specific traits for success: patience, self-reliance, humility, and the ability to ignore general panic.
Ignore the "Bottom": Don't try to time the market perfectly. No one knows where the absolute bottom is, so focus on the value of the company instead.
2. Investment Strategy: Math & Mechanics
Lynch simplifies complex finance into digestible rules that anyone can apply.
The Rule of 72: A quick way to estimate how long it takes to double your money.
❝$$\text{Years to Double} = \frac{72}{\text{Annual Return Percentage}}$$
Buy the Dip in "Good" Stocks: A price drop is only a tragedy if you sell. For a strong company, a price drop is a "bargain" opportunity to load up on more shares.
Consistency Wins: Adopt a routine and stay invested long enough to ride out the inevitable market "corrections."
3. Due Diligence: Turning Over Rocks
Lynch is famous for saying that the person who "turns over the most rocks" (does the most research) wins.
The Fifth-Grader Test: If you can’t explain why you own a company to a ten-year-old in simple language without boring them, you don't understand it well enough.
The Napkin Test: Never buy anything you can’t illustrate on the back of a napkin.
Avoid the "Extravagant": He jokes that the fancier a company's head office, the less likely management is to reward shareholders. He prefers "unsexy" businesses that are easy to understand.
4. The "Tenbagger" Mindset
You don't need a high win rate to be a wealthy investor; you just need a few massive winners.
Quality over Quantity: You only need a few "ten-fold" (tenbagger) stocks in a lifetime to make a fortune.
Avoid "Long Shots": While it’s tempting to gamble on speculative stocks, Lynch warns that "long shots almost always miss the mark."
Know Why You Buy: Don't buy a stock just because it's cheap; buy it because you know a lot about it. Investing based on ignorance is a "popular pastime" that leads to losses.
Sources
Wikipedia
Investing Insights, a Substack
