The Shifting Shares view: The wise words of expert investor Peter Lynch (Part 1/2)

By Patricia Miller


Peter Lynch is one of the greatest investors of all time. Yes, Warren Buffett is famous for his exploits, but Peter Lynch achieved a CAGR of 29% over thirteen years during his tenure of Fidelity’s Magellan fund, which grew from $20 million to $14 billion over those years.

Peter bought thousands of stocks, and is known for coining the phrase ‘tenbagger’ – a phrase popular on the UK stock market – especially AIM.

He is also regarded as a popular GARP investor (Growth At A Reasonable Price), and it was this strategy which served him well during his time as a fund manager.

Peter has written two excellent books, Beating The Street, and One Up On Wall Street, both of which contain timeless advice for investing. Here are some of the best pieces:

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

This is a great one-liner. Investing isn’t supposed to be exciting. It’s supposed to be boring, and requiring a lot of patience. But if you want to invest in an exciting stock, then expect exciting returns (usually down).

Those who want the thrill of gambling should really go to the casino, because it’s a lot cheaper. Gambling on oil stocks is fun but if the goal is to make money then perhaps it’s best to have some money you can afford to lose for the story stocks and put the bulk of your capital into quality investments.

  • Behind every stock is a company, find out what it’s doing.

Far too many people invest in companies that they don’t have a clue about, or how the company makes its money. People will spend hours trying to save £50 on Amazon, but when it comes to chucking a few thousand quid into a stock, they’ll read the bulletin boards and see what other people are saying!

Very few people take the time to research the directors. Are they proven value builders – have they done it before? Are they using the listed entity as a vehicle for their own personal gain? What are their salaries, shareholdings, competencies?

A lot of people consider research as downloading the latest slide deck on the corporate website. And I’m not saying one shouldn’t look at this – one should absolutely use all of the resources at one’s disposal – but this deck has been created purely to entice people to buy shares in the stock. The negatives and downside are rarely highlighted. You have to do this for yourself.

A good place to start is the financial statements, in particular the cash flow statements. From here, one can see how cash is moving through the business, from its operations and its financing.

If we see huge negative cash outflows from the cash flow of operations, but large cash inflows from the financing cash flow statement, then we know that the company is sustaining itself via equity or debt as it is haemorrhaging cash in its day-to-day activities.

  • Often, there is no correlation between the success of a company’s operations and the success of its stock over a few months or even a few years. In the long term, there is a 100 percent correlation between the success of the company and the success of its stock. This This disparity is the key to making money; it pays to be patient, and to own successful companies.disparity is the key to making money; it pays to be patient, and to own successful companies.

Given the amount of noise in the stock market, the timeframe for the average holding of a stock has decreased dramatically. Every day there is a reason to sell. Every day there is a new and more exciting opportunity.

It takes great patience to be able to hold onto a stock these days – especially when everyone else is making money and your stock still hasn’t done anything.

But as Warren Buffett knows as well as many great investors, in the long run – value will out.

Author Michael Taylor’s website contains a number of tutorials on how to trade and invest as well as his free book – ‘How to Make Six Figures in Stocks’.


In this article:

Author: Patricia Miller

This article does not provide any financial advice and is not a recommendation to deal in any securities or product. Investments may fall in value and an investor may lose some or all of their investment. Past performance is not an indicator of future performance.

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