Peter LynchBorn in 1944, Peter Lynch is a legendary equity trader, author, and mutual fund manager. Between 1977 and 1990, he averaged a 29.2% annual return working for the Magellan Fund at Fidelity Investments.

 

PETER LYNCH TRADING TIPS

■ Discipline yourself to ignore your feelings. Stand by your position as long as the fundamental story hasn’t changed

The trick is not to learn to trust your gut feelings, but rather to discipline yourself to ignore them. Stand by your stocks as long as the fundamental story of the company hasn’t changed.

  • There is always something to worry about. Avoid weekend thinking and ignore the latest dire predictions of the newscasters. Sell a stock because the company's fundamentals deteriorate, not because the sky is falling.
  • Good information is useless without the willpower.

 

Be contrarian to the herd

Over the past three decades, the stock market has come to be dominated by a herd of professional investors. Contrary to popular belief, this makes it easier for the amateur investor. You can beat the market by ignoring the herd.

  • Dumb money is only dumb when it listens to the smart money.
  • Small investors tend to be pessimistic and optimistic at precisely the wrong times.

 

When to put your money in the bank

If you can't find any companies that you think are attractive, put your money in the bank until you discover some.

 

 

■ Know what you own, and know why you own it

You should not buy a stock because it’s cheap but because you know a lot about it.

  • If you don't study any companies, you have the same success buying stocks as you do in a poker game if you bet without looking at your cards.
  • Hold no more stocks than you can remain informed on.
  • The worst thing you can do is invest in companies you know nothing about. Unfortunately, buying stocks on ignorance is still a popular American pastime.
  • Behind every stock is a company. Find out what it’s doing.
  • Know what you own, and know why you own it.

 

■ Successful investing requires only a few big winners

All you need for a lifetime of successful investing is a few big winners, and the pluses from those will overwhelm the minuses from the stocks that don’t work out.

  • The typical big winner generally takes three to ten years or more to play out.
  • You have to know when you’re wrong. Then you sell. Most stocks I buy are a mistake.
  • Everyone has the brainpower to make money in stocks. Not everyone has the stomach.

 

Keep things simple

  • Never invest in any idea you can’t illustrate with a crayon.
  • All the math you need in the stock market you get in the fourth grade.
  • All else being equal, invest in the company with the fewest color photographs in the annual report.
  • Go for a business that any idiot can run – because sooner or later, any idiot probably is going to run it.
  • If you spend more than 13 minutes analyzing economic and market forecasts, you’ve wasted 10 minutes.

 

■ Studying history and philosophy as a preparation for the stock market

As I look back on it now, it’s obvious that studying history and philosophy was much better preparation for the stock market than, say, studying statistics.

 

The importance of dividends when building portfolios

The dividend is such an important factor in the success of many stocks that you could hardly go wrong by making an entire portfolio of companies that have raised their dividends for 10 or 20 years in a row.

  • A good company usually increases its dividend every year.

 

■ Diversify when you invest in equities

When you invest in the stock market you should always diversify.

 

■ Accept periodic losses, setbacks, and unexpected occurrences

People who succeed in the stock market also accept periodic losses, setbacks, and unexpected occurrences. Calamitous drops do not scare them out of the game.

 

■ Follow the corporate earnings

If you can follow only one bit of data, follow the earnings—assuming the company in question has earnings. As you’ll see in this text, I subscribe to the crusty notion that sooner or later earnings make or break an investment in equities. What the stock price does today, tomorrow, or next week is only a distraction.

 

■ Do your homework and research

Never invest in any company before you’ve done the homework on the company’s earnings prospects, financial condition, competitive position, plans for expansion, and so forth.

  • Understand the nature of the companies you own.
  • By putting your stocks into categories you’ll have a better idea of what to expect from them.

 

Mondays and Decembers

It is no accident that Mondays are the biggest down days in stocks and that Decembers are often losing months.

 

The investing routine

My routine is always the same. I search for companies that are undervalued, and I usually find them in sectors or industries that are out of favor.

 

Selling  in desperation is wrong

When you sell in desperation, you always sell cheap.

  • The real key to making money in stocks is not to get scared out of them.

 

Six categories of companies

Once I’ve established the size of the company relative to others in a particular industry, next I place it into one of six general categories: slow growers, stalwarts, fast growers, cyclicals, asset plays, and turnarounds.

 

Essential stock trading secrets

  • Moderately fast growers (20 to 25 percent) in nongrowth industries are ideal investments.
  • Be suspicious of companies with growth rates of 50 to 100 percent a year.
  • Look for companies with niches.
  • Look for small companies that are already profitable and have proven that their concept can be replicated.
  • Carefully consider the price-earnings ratio. If the stock is grossly overpriced, even if everything else goes right, you won’t make any money.
  • Companies that have no debt can’t go bankrupt.
  • When purchasing depressed stocks in troubled companies, seek out the ones with superior financial positions, and avoid the ones with loads of bank debt.
  • Managerial ability may be important, but it’s quite difficult to assess.
  • Base your purchases on the company’s prospects, not on the president’s resume or speaking ability.
  • A lot of money can be made when a troubled company turns around.
  • Find a storyline to follow as a way of monitoring a company’s progress.
  • Look for companies that consistently buy back their own shares.

 

Peter Lynch

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