After numerous web series and movies portraying business investors’ life stories and their investment philosophy, stock market investment has become a buzzword at a global level.
People are becoming aware of what exactly a stock market is, how it works, and what to do to gain better profit from the stock market.
In short, I can say people are putting their interest in stock market investment.
And, of course, when I talk about stock market investing, I can’t help but think of the legendary investor Peter Lynch. Peter has not only excelled in investing, but he has also inspired many individual investors to learn from his investment philosophy.
Here are seven investment lessons from Peter Lynch that can help you become a better investor.
1. Every Fallback is an Opportunity to Achieve Success:
From decades of experience in stock market investment, Peter Lynch always says, “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.”
Like other successful investors, Peter Lynch also comes from the category of believing in long-term investment as a key to getting maximum returns.
And when it comes to long-term investment, he has always advised his fellow investors to cut contacts with concerns and capitulations, which can act as emotions leading to the downside of your investment career.
In the stock market, there are times when the market witnesses extreme fluctuations, which leads investors to “Concern” emotions.
But to be a great investor, you’ll have to find and use that concern to turn the fallback into an opportunity for success, even at the cost of a bargain.
Another emotion called “Capitulation” hits the investor when they meet their investment falls due to market dynamics. Pointing out this emotion, Peter Lynch says that most investors feel proud to be long-term investors until they meet their lofty fallback and are forced to become short-term investors.
Lesson: To get better returns, stick to long-term investment, but with good and concrete research to gain profit.
Don’t get scared of the calamitous market drop; have some patience, trust your research, and enjoy your meal. Ignore the buzzes that quest your instincts.
2. Never Follow Assumptions or Tips If That’s Not Your Research:
Peter Lynch says that, in the market, many investors are looking for quick profit gain solutions or tips to turn their investment into profit by shadowing the fact that most often these so-called “hot tips” are the fall prey.
That’s why he said, “Never invest in any idea you can’t illustrate with a crayon.” Here, the crayon refers to your investment instinct and study. He further said, “Know What You Own.”
By saying these two lines, Peter is trying to portray, according to me, if you’re getting tips for the investment, take them, but don’t use them if you can’t explain or project how the company will perform in the next minute.
Before making any investment, do your in-depth study about the company, like:
- How was it founded?
- What was its first funding raised, and how much from the funding turned the investment into an asset?
- What was or is its profit margin in the market?
- Who are its competitors?
- Why should customers trust this company?
- How will it perform in the future, seeing as its current performance?
Once you get all these details, you should look for the risks involved in this company investment, and if that happens, how will you recover your investment.
Lesson: As an investor, you should be active and all ears to know when to invest more and when to withdraw your investment to avoid hefty losses and secure your healthy sleep routine.
3. It’s Okay to Make Mistakes:
Peter often says, “Let your winners run, and cut your losers. It’s easy to make a mistake and do the opposite, pulling out the flowers and watering the weeds.”
By saying it, Peter is trying to convey that in a stock market, making mistakes is common, but don’t let your fallback spoil your excitement for further investment. Instead, what you can do is, analyze your investment, list down the facts you missed to cover, find errors, and utilize your new research to make your investment right and add new findings to your checklist to find success in your future investments.
Lynch invested in many stocks during his investment journey, from which some gave him tenfold profits and some mediocrity.
Thus, he made one conclusion about the tenfold profits and named such stocks with the term “ten-bagger” that such stocks are for long-term investment and can’t be bargained to sell up until their fundamental dynamics change extremely.
Lesson: You should be patient about your ten-bagger or top-performing stock investments and enjoy a full-course meal when it reaches its maturity.
4. Be Early But Not Earlier:
Peter Lynch once said,
“I often think of investing in growth companies in terms of baseball. If you buy before the lineup is announced. You’re taking an unnecessary risk.”
With this thought, Peter is trying to say that investing in growing companies, meaning startups with better future opportunities, is a good investment with proper research. But investing in all startups with the expectation to gain better in the future without analyzing their assets is more like putting your hand into a lion’s den.
You can also comprehend this thought by not making decisions too early because some companies start getting new opportunities in bulk and also gain better revenues. But with time and their steady or degrading quality of services, they might lose their fame.
So, don’t invest in companies too early, but wait for their settlement in the market and take an opportunity to make your deal with them before they raise their rates.
Lesson: Invest in companies in their second or third funding round because they have already proved their ability and accomplished their promises to investors. And, for listed companies, I would recommend you to observe at least 4 quarters post IPO.
5. The Creativity to Success:
Peter always compared stock market investment to art and science. And these were his exact words, “Making money in the stock market is a combination of science, art, and legwork.”
Why did he say this? Let’s comprehend its meaning:
Companies’ fundamentals and weaved characteristics have a direct implied relationship with their cause-and-effect relationship. In simple words, even a single and tiny negative event in a company can excessively impact its stock prices.
So, in relation to art and science, the individual invests in the company before investing takes place. Investigation demands talent to ask the right question to the right person to get the nearby answer, helping you make the decision, whether to invest or not.
The questions could be:
- Why did the company face a market situation in the past?
- What caused that in the past?
- How do they recover?
- Are there any chances for this company to face a similar issue?
- How does this past condition pave the company in the future?
Lesson: If you’re an investor like this who asks such questions before making an investment, consider yourself a creative and competent stock market investor.
6. It’s High Time:
Peter has never followed the term “timing the market”, but instead, he said, “Far more money has been lost by investors preparing for corrections or trying to anticipate corrections than has been lost in corrections themselves.”
As you have also seen above, Peter always advised to pursue a long-term investment with quality stocks/top-ranking stocks, but along with this, he also said to not commit to forever with that stock.
I believe that he is making a point not to withdraw quality stocks early but to wait for the right time to do it rather than sticking to it for more than necessary time.
Peter also insisted on keeping the investment sheet and reviewing it every few months to check:
- Why did you buy it in the first place?
- What were its fundamentals?
- How are they performing than before?
- What are the changes in their fundamentals?
- Is there a hope to stick to it for some more time?
- Or should I withdraw it, gain the profit, and close the chapter?
By analyzing and answering these questions, either you can unlock new opportunities to buy more stock when its dynamics change if there are chances to recover, or sell them to someone else at the best cost and gain profit.
Lesson: Peter always used this checklist to make the most out of his investment in the stock market, which you can do the same by adding to your investment checklist.
7. Find Yourself:
Seeing and experiencing the dynamics of the stock market, Peter categorized the market into six labels:
- Slow Growers: This category of companies is large, mature, stable, and worth investing in if you’re looking for a steady income. They pay high dividends to investors with a yearly increment ratio of 8-10%. But Peter doesn’t really find them relatable for the huge investment.
- Stalwarts: This category of companies has higher chances of growth, with potential rates of 12-18% per annum.
- Fast Growers: This category of companies is profitable according to the different timespan. So, you can research such companies, make an investment, and stick to it until the expected return is delivered. e.g., Rakesh Jhunjhunwala discovered Titan in this category; its stock price was 3 INR in 2003, and now, it is valued at around 2491.85 – 2550 INR per stock.
- Cyclical: Peter Lynch considers this category as the most trusted one for investment, as its companies are mostly engaged with luxury products and cyclical trends. Peter says that they meet many fluctuations in a particular time span, which means if they enter into the wrong market, they meet a high loss, and if in the right market, they gain high profits. So, you should find such stocks, invest in them during their downtime, and sell them by finding the right opportunity. Automobile firms fall into this category.
- Turnarounds: In the stock market, you will find many companies whose graphs are going down and they are about to go bankrupt, but there are times when many companies have turned their tables to higher profits after meeting the high losses. So, for risk-takers, such firms are worth investing in, which give high returns with high risks.
- Asset-Plays: These categories of companies have many assets which are blindfolded by the market and undervalued. Here, the assets could be cash, other investments, real estate, etc. Many investors don’t value these assets and companies in their downtime. Such companies’ stocks can be classified by the market when their assets act.
Peter Lynch sets the greatest example as an investor. Whether you just started your investment journey or are in the middle of it, replicating his advice in your mindset can help you get better returns.
So, read them once again if you feel worth reading.
Have any doubts?
Let us know in the comment section. I’d be happy to clear it out.