Peter Lynch is one of the greatest investors of all time; he ran the Magellan Fund at Fidelity, generating more than 29% annual returns during his 13 years in charge, retiring at 46.
He sat down with Fidelity in a 2021 interview to offer wisdom that every investor could benefit from. Here are three key takeaways from Peter Lynch that can help you revisit and improve your investment style.
Hack No. 1: Knowing what you own
Peter Lynch speaks about how careful people typically are with their money. He says:
The public’s careful when they buy a house, when they buy a refrigerator, when they buy a car. They’ll work hours to save a hundred dollars on a roundtrip air ticket. They’ll put $5,000 or $10,000 on some zany idea they heard on the bus.
Retail investors are often looking for the “next big thing,” which can make them fear that they’re missing out (FOMO), so they act hastily and irrationally. But having a shallow understanding of the stocks you own can leave you unsure when volatility hits. How will you know what to do if your stock falls 10%, 20%, or 50%?
Lynch has said that if you can’t explain why you own a given stock to a child in under two minutes, you probably shouldn’t own the stock in the first place.
Hack No. 2: When to sell a stock
Volatility will eventually create uncertainty. Peter Lynch said that during his 13 years running Magellan, the stock market fell nine of those years.
Knowing the difference between a damaged stock and a broken company is the thin line between mistakingly chasing a stock lower or taking advantage of great buying opportunities.
Peter Lynch states:
Deciding when to sell is exactly the same thing as when you buy it. You have a certain story — why I bought this. This company’s going from crummy to semi-crummy to getting better. And the company has plenty of cash, so they’re not going to go bankrupt.
When the business goes from semi-crummy to better to good, I’m probably out. You sell the company that was the growth story when there’s no room to grow. When Taco Bell was only in southern California, where could they go? Well, they went to central California. Then they were everywhere. I mean, it’s a 70-year story.
You have to define when a company is getting close to maturity, and that’s when you exit. Or the story deteriorates. If the story’s intact, you hold on.
In other words, have an investment thesis for why you own a stock. Know the thesis inside and out so you know how to respond to volatility when it comes. Sell because your investment thesis is no longer solid, not because the share price goes up or down.
Hack No. 3: It’s OK to fail
People generally dislike pain, and the fear of losing money can be a barrier to success for many investors. Know thyself; if you can’t stomach the idea of a stock investment going belly up, you should be investing in index funds. However, the math can work in your favor for those willing to stomach the risk.
You don’t always need to be “right” to make a ton of money in the stock market. Peter Lynch says:
Maybe you’re right 5 or 6 times out of 10. But if your winners go up 4- or 10- or 20-fold, it makes up for the ones where you lost 50%, 75%, or 100%.
Remember that stocks can only go down so far, but the winners can grow to be many times their original value. You can pick ten stocks and have nine of them go to zero. But if that one stock grows to ten times its value, you’ve broken even despite all the losers. Your mindset changes for the better as soon as you realize and accept that losses are a part of investing.
Investors often get in their own way, and that’s the common link between these three investing tips. Successful investing requires the proper mindset because identifying a good stock is often easier than holding it through all of the inevitable ups and downs.
Understand the companies you invest in, and focus on why you bought the stock in the first place. Accept the volatility that comes with investing, and keep a level head through the ups and downs. Do these things and you’ll stand a better chance of investing success over your lifetime.
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