Peter Lynch is one of the great investors of all time. He was an american mutual fund manager who managed Fidelity Magellan Fund from 1977 to 1990. He compounded the money with rate of return of ~29% in his tenure. Magellan Fund was the best Mutual Fund in the world during that period. Just to give a idea of a benchmark, a annual return of 26% doubles your money in 3 years i.e roughly 10 times in 10 years. When Peter became the head of Magellan Fund in 1977, the fund merely managed funds of 20 million dollars (150 crores) which grew to 14 billion dollars (1.05 lakh crores) till 1990. That is 700 times.
He was known for his investment philosophy "Know what you own". He believed that any normal person is a better investor than those who are called professionals in stock market. The professionals use jargons to confuse the public and make stock market look intimidating but Peter Lynch said that as normal people are the consumers for some products, they know the good products before it is widely known to the stock market and the world. For example, D-Mart is the popular retail store in India, currently dominant in the state of Maharashtra. They give the best price to the consumers and there is always a rush to buy from D-Mart. Today this information is known to most of the public and it is one of the hot favourite stock on street. Peter Lynch wants to say that, a consumer who went to D-Mart in its early days knew the growth potential of D-Mart before any stock market specialist. That is a power a normal person has and he/she should invest in stock market.
Peter Lynch's books "One Up on Wall Street" and "Beating the Street" are very popular books and are recommended reads for any investor. In these books he has explained his investing techniques and how he took investment decisions. In the book "One Up on Wall Street", he broadly classified the stocks into 6 categories which are :-
- Slow Growers :- Very big known companies. Blue Chip companies. Eg - TCS
- Stalwarts :- Big companies with modest returns. Eg - HUL
- Fast Growers :- Small aggressive companies with high growth. Eg - PVR Cinemas
- Cyclicals :- Companies have economic cycles of ups and downs. Eg - Tata Motors, Ashok Leyland
- Turnarounds :- beaten companies that can move upside.
- Assets :- Companies having huge value in their assets. Eg :- Prestige Estates
Many legendary investors prefer to have 10-15 stocks in their portfolio and concentrate on these stocks as over-diversification will lead to less returns. But Peter Lynch managed for such high returns with having hundreds of stocks in the Fund Portfolio. It is said that once the Fund had 1400 stocks during his tenure. At the same time, he believed diversification can be diworsification. He quoted "Owning stocks is like having children -- don't get involved with more than you can handle". Some of the famous known stocks under his portfolio were Dunkin Donuts, Taco Bell, Ford Motors, Phillip Morris and General Electric.
Few philosophies of Peter Lynch
- Don't own a stock if you cannot explain it to a 10 year old within 2 minutes or less. Invest in a company with a simple and easy to understand product.
- Do the homework while buying a stock as you do it while buying a car or a refrigerator. Don't take tips.
- Stocks aren't lottery tickets. There's a company attached to every share. If a company does well, a stock does well.
- Predicting the stock market is a total waste of time. Many people lost more wealth in timing the corrections than one could lose in actual market correction.
- Markets will go up and down. Volatility is an opportunity to buy more at less price if you know what you own.
- In 93 years, US markets had 50 declines of 10% or more (every 2 years), 15 declines of 25% or more (every 6 years). Take advantages of these declines.
Thank You.
One of my colleague has a similar philosophy for investing and managed to get profits by simple investing principles. Here is a link to read about his investment journey and the stocks he owns.
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