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

By Richard Mason


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. Earlier this week, we took a look at some pearls of wisdom issued by Lynch throughout his career. Here, we round up our review with several further pieces of sage advice:

  • With small companies, you’re better off to wait until they turn a profit before you invest.

This is a lesson I learned myself, as I took a large percentage loss in 7digital. On paper, it looked great. The CEO and board had all put large amounts of their money in the business. They’d raised a big amount of cash to get them to profitability.

The only problem was they burned through all that cash as they didn’t have a view on costs, and then needed to raise more at a significantly diluted price.

Many investors like to invest in loss-making businesses in the hope of getting ahead, but if that stock is really going to make it and generate decent cash flows, then there is plenty of time to jump on board once it’s self-sustaining and profitable.

  • If you invest $1,000 in a stock, all you can lose is $1,000, but you stand to gain $10,000 or even $50,000 over time if you’re patient. The average person can concentrate on a few good companies, while the fund manager is forced to diversify. By owning too many stocks, you lose this advantage of concentration. It only takes a handful of big winners to make a lifetime of investing worthwhile.

I’m a big believer in concentration, but not so much that it can hurt you. Fund managers are forced to own hundreds of companies, but the private investor can own 10 businesses and still be really diversified. They can even own 20 and still have a very good chance of beating the market. Once we go over 20, it becomes difficult to keep track of and the correlation between your portfolio and a good tracker fund starts to become much closer.

By picking 20 stocks, we only need one or two of those to multibag to really make a difference to our lives. By chopping the losers and running the winners we increase our chances of success. In both trading and investing, you will live and die by your P&L and how good you are at doing both of these things will determine what that P&L looks like at the end of the year. A bonus phrase from Peter: we shouldn’t be pulling out our flowers and watering the weeds.

  • If you study 10 companies, you’ll find 1 for which the story is better than expected. If you study 50, you’ll find 5. There are always pleasant surprises to be found in the stock market – companies whose achievements are being overlooked on Wall Street.

This isn’t a game where the smart have an edge. This is a rock-turning business; the person who looks in-depth at 100 stocks is more likely to find a hidden gem than someone who looks at 10.

It’s a numbers game, and a game of managing risk and extracting as much money as possible from winners.

Peter Lynch had a lot of losers, but his money was made in finding growth stocks early, and clinging on to them for dear life as they grew and multibagged over several years. By extending your timeframe, you massively increase your own chances of success.

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’.


Author: Richard Mason

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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