Invest like Peter Lynch - The Stock Picking Expert
Widely considered to be one of the best investors of all time, Peter Lynch seems to have a magic touch when it comes to the stock market. His 80s achievement of turning a $20 million mutual fund, Fidelity Magellan, into the biggest in the world means that some even consider him to be better than Warren Buffet.
In fact, tips shared by this famous investor in a recent Telegraph article with Richard Evans demonstrate that his investment strategies aren't really that magical at all. Instead, the refreshingly down to earth advice includes "never invest in any idea you can't illustrate with a crayon" and "invest in what you know". In other words, his focus is on a practical, grounded approach to the markets.
What's intriguing is that Lynch claims to get many of his best ideas away from his desk. Instead, he finds his inspiration at home, in shopping malls or even in fast food chains. For instance, he was inspired to invest in Dunkin' Donuts simply because he loved the coffee so much. That said, he doesn't base investment decisions solely on these extracurricular insights - rather, they are catalysts for him undertaking deep, thorough research on the companies in question.
He is also more than willing to share his knowledge with beginners. Popular Lynch books include "One Up On Wall Street", where he advises amateurs on how to beat the pros, and "Learn to Earn", where he shares basic principles of the stock market that he claims many experienced investors don't even know.
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Here are some tips on how you can invest wisely, the Lynch way:
Avoid the two most common mistakes
According to Lynch, there are two big errors that investors often make. The first is paying too high a price for a company that is growing rapidly. He explains this is because "a great industry that's growing fast attracts too much attention and too many competitors".
The second mistake is buying cheap stocks from businesses that have actually stopped growing. That's because, if the business isn't expanding, then there is little chance of your investment flourishing. So do your research.
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Only buy what you understand
If you are going to invest, then choose companies, products or industries that you already know really well and ideally, are passionate about.
This way, you are more likely to have an intuitive sense of what you are investing in, plus you will have the drive to study that industry in depth. Essentially, the more you know about a company, the more you will be attuned to subtle shifts in its fortune. Using a simple example, if you decide to invest in your favourite pizza restaurant chain but notice a falling away of visitors at various branches, then this may be a bad sign.
In short, your portfolio should reflect your personal passions, knowledge and experience. After all, what's the point in pouring money into agriculture if you don't give a hoot about the industry? No matter how "smart" an investment might be, it's not smart if you're not clued up on it.
Do your homework
Lynch analysed companies, industries and markets obsessively, making it his mission to understand them. He also firmly believed in evaluating the highest amount of stocks possible - that way, he could compare and contrast them to find the best one. To do this, he used a range of investing metrics to help him to make better comparisons, calculations and predictions.
Admittedly, these metrics may sound daunting at first, but once you get the hang of using them, they can become second nature. So be willing to swat up on concepts like per cent of sales, price-to-earnings ratio, debt-to-equity ratio, book value and cash position.
If you are really serious about investing your money in stocks, then you should begin by investing your brainpower in learning to tell the difference between a potential champion and a dud. So find out what tools a master investor uses, then follow suit.
No one becomes a stock-picking expert overnight, but by learning from a legend like Peter Lynch, we can avoid many beginner mistakes. Start by studying his skills in books like "One Up On Wall Street" and "Learn to Earn", then get ready to make your money grow.
For more investing lessons check Peter Lynch books:
- One Up On Wall Street
- Learn to Earn
- Beating the Street
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