PETER LYNCH MADE THOUSANDS OF PEOPLE MILLIONAIRES – EVER HEARD OF HIM?

THE BATTLE – PETER LYNCH VERSUS WARREN BUFFETT

Years ago my friend Wendell Williams, told me I should invest in the Fidelity Magellan Mutual Fund. I had one problem; I did not know what a mutual fund was.  Had never heard of Fidelity Investments.  And was clueless how to open an investment account.  Maybe I had several problems! 

But it was this suggestion that started my long-term investment journey and a path to becoming financially literate.  I also learned about a man, some say is the greatest stock picker of all time, Peter Lynch. 

You may have heard me mention Warren Buffett, CEO Berkshire Hathawaya few dozen times, but some consider Peter Lynch to be a better investor than the Oracle Of Omaha – Warren Buffett.  Here are their batting stats for your own judgment: 

  • From 1977 to 1990, Peter Lynch was the portfolio manager of the Fidelity Magellan Fund, which returned ~29.2% annually. A $10,000.00 investment for 23 years, at 29.2% annual growth, would grow to ~$3,622,750.00
  • Warren Buffett reminds me of a Timex watch and is still ticking! Buffett has been buying stocks and companies for over 54 years leading Berkshire Hathaway with an average yield of ~20.9%. Using Lynch’s 23 year tenure, Buffett would grow your $10,000.00 to ~$786,700.00.  However, if your Grandparents had invested that $10,000, 54 years ago, (and hundreds did) you would have a net worth of ~$282,501,170.00.   This is called the magic of compounding!  Better than playing the lottery baby!  

Who is better?  Personally, I would happily take either!

FINANCIAL LITERACY

Peter Lynch Published Books

When I decided to increase my financial literacy I read one of Lynch’s books, “Beating the Street” and discovered his investment techniques are based on common sense.  He writes in an easy to understand style.

PETER LYNCH’S INVESTMENT RULES

Let’s talk about Peter Lynch’s major investment rules and how I continue to use those rules:

  • Financial Literacy – Get a solid foundation of business and stock market knowledge         
  • Invest only in companies you thoroughly understand
  • Diversify your portfolio
  • Do not ignore smaller companies 
  • Do extensive research
  • Invest with a long-term mind-set

FINANCIAL LITERACY – GET A SOLID FOUNDATION OF BUSINESS AND STOCK MARKET KNOWLEDGE  

PETER LYNCH – UNDERSTANDING THE MARKET

Lynch said: “behind every stock is a company. Find out what it’s doing.”  That is the reason I read Apple, Amazon, Berkshire Hathaway and other stocks I own, annual reports. If you buy a stock without reading annual reports and other available data, you are hoping for success.  Hope is NOT a strategy! 

All of Lynch’s books providesan overview of how business works, and basic concepts about investing and the stock market, such as how to read stock charts and what to focus on when reading a company’s annual report. 

INVEST ONLY IN COMPANIES YOU THOROUGHLY UNDERSTAND 

PETER LYNCH -FIND GREAT COMPANIES

The above statement is Lynch’s best lesson. When I first started buying individual stocks, I concentrated on energy, oil and gas and chemical companies, because I am a Chemical Engineering and I worked in those industries.  If you do not understand a company or it’s product, steer clear.  How will you know if you are buying a star or the next Sears?  I understand Apple’s products.  My family and I own most of their products. I am an Amazon prime member and see a LOT of Amazon boxes on my porch (especially at Christmas).  I understand how Amazon makes money and by reading the annual reports, most importantly I understand how Jeff Bezos, CEO of Amazon, intends to keep growing Amazon’s sales and profits. Last weekend I spent hours listening to Warren Buffett, CEO Berkshire Hathaway and Charlie Munger, Vice Chairman, Berkshire Hathaway, conduct their annual shareholders meeting.  I understand Mr. Buffett’s company and I know what stocks he has been buying recently.  FYI- Berkshire Hathaway is the largest owner of Apple stock.  Berkshire Hathaway owns BNSF Railroad and I worked for BNSF for a little over a year as a consultant. Those are three stocks I have owned for several years.

If you are interested in buying stocks pay attention to the world around you.  Less talk about politics and more observations!  What phones, ear pieces or electronics are people buying? What cars are growing in popularity?  Which stores are always crowded? Which restaurants do you wait 90 minutes to get a table? Be more observant of what and where people are spending their hard earned money. Then do your research X 2! 

DIVERSIFY YOUR PORTFOLIO

PETER LYNCH – PICKING GOOD COMPANIES

Lynch believed strongly in diversification or spreading your investment dollars and risk around, in terms of industries, company size, and growth potential. When Lynch managed the Magellan Fund he had more than 1,000 individual stock positions at times, more than five timesthe number held by the average equity mutual fund. His goal was simple; one really bad apple would not tank his results. 

FOCUS ON BUSINESSES WALL STREET AND OTHERS ARE OVERLOOKING

PETER LYNCH
– BE YOUR OWN EXPERT

Lynch believes the average investor can do better than many Mutual Fund Managers, because of size. When you are managing over $10 Billion, buying a few shares in a small company is not going to increase your returns.  And larger companies stock price tend not to increase as fast as smaller companies.  But if you are investing your $10,000 and your industry knowledge tells you that Lithium is in short supply due to the surge in electric vehicles, you can buy a few shares of the top supplier. And when that stock increase three fold in one year you can shout Halleluiah!

DO SOME RESEARCH UNTIL YOU ARE TIRED AND THEN DO SOME MORE AND MORE

PETER LYNCH – FIND YOUR WINNERS

IT IS YOUR HARD EARNED MONEY.  Just like good carpenters measure twice and cut once (I should have done that a LOT more). RESEARCH and RESEARCH SOME MORE before you hit buy! Peter Lynch recommends learn basic investing metrics.  We do not have to be mathematical genius to use investing metrics! Lynch favorite metrics for investors to learn, are all explained in depth in One Up on Wall Street, or just Google them. You can utilize Google to better define the below examples and many more.

{By the way, how many times per day do you use Google? Remember –Research, Research Some More and buy what you understand. I own Alphabet/Google and I utilize it several times per day.}

  • Price-to-earnings ratio — To calculate the price-to-earnings, or P/E ratio, simply divide a stock’s annual earnings by its current price. This is the amount of money investors are willing to pay for every dollar of the company’s earnings. A mature company like Best Buy, tends to have a lower P/E ration.  A new company with potential growth, say Uber, tends to have a very high P/E.  {FYI – I am not recommending any stock, but especially NOT Uber, at this time.}
  • Price-to-earnings growth ratio (PEG ratio)— This is simply a stock’s P/E ratio divided by it’s earnings growth rate. 
  • Cash position— How much cash does a company have, relative to its debt?  Similar to looking at your own Net-Worth.  Do your liabilities/debts outnumber your assets/cash value?
  • Debt-to-equity ratio— You can find a company’s equity and debt on its balance sheet, and this can give you some insight on the financial strength of a particular company. The debt-to-equity ratiotells you how much a company owes relative to how much it owes.

There are many more of these ratios: 

  • Liquidity Ratios.
  • Activity Ratios.
  • Debt Ratios.
  • Profitability Ratios.
  • Market Ratios.
  • Etc. 

Utilize Google to find the definitions and other good metrics.  

FORGET ABOUT TRYING TO TIME THE MARKET- THINK LONG TERM 

PETER LYNCH – YOU WILL NEVER BE RIGHT 100%

Humans panic.  I remember the first time I experienced a serious drop in stock prices.  I believe the market dropped by over 30%.  So I sold EVERTHING!  Wrong move.  Here is the problem; I did not know when to go back in the market.  So as the market starts to recover I am huddled in a closet afraid. I missed out on making my HARD EARNED MONEY AND GAINS BACK!  I do not know anyone, regardless of their claims, degrees or any other BS they are selling that can accurately time the market repeatedly.  A chimpanzee can correctly pick one date on a calendar the market will go up or down!  

So, do Mutual Funds, managed by WELL PAID professionals, time the market?  Yes they do and often times they are wrong. Even if a mutual fund normally employs buy-and-hold strategies, managers are often worrying about the returns they produce at end of year and make rash/sometimes wrong sell and buy decisions in the 4thquarter.  As to whether the market is going to be higher or lower in two, three or more years, you may as well flip a coin as depend on most advice!

It is almost impossible to pick the perfect entry point to buy or sell, and even if you pick the worst possible time to buy, you will be fine over the long run as long as you keep your focus on finding great companies.

CONCLUSION

THE BATTLE ON WALL-STREET – PETER LYNCH VERSUS THE ORACLE OF OMAHA

RECAP OF PETER LYNCH’S INVESTMENT RULES

  • Financial Literacy – Get a solid foundation of business and stock market knowledge         
  • Invest only in companies you thoroughly understand
  • Diversify your portfolio
  • Do not ignore smaller companies 
  • Do extensive research
  • Invest with a long-term mind-set

Peter Lynch’s Magellan Fund was my first equity investment.  Some time later I read his book and articles to increase my financial literacy.  No other mutual fund manager has been as successful as Peter Lynch.  Today with even more companies, both US and globally, to choose from and with Artificial Intelligence programs executing buy signals in microseconds, it is even harder to match Lynch’s 23-year performance.

I followed Peter Lynch and Warren Buffett’s advice and have converted majority of my mutual funds to an S&P 500 ETF while owning a few good stocks (that meet Lynch’s rules). 

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DISCLAIMER

I am a proud nerd (my beautiful wife and daughter told me so) investment and finance blogger, with a NC State, Chemical Engineering, University Rutgers, MBA and Harvard University, Advanced Management education.  

I started my first business at ~13 years of age. 

I am a successful investor in equities and real estate and happy to share my personal finance and investment lessons learned with you. However, I am NOTa licensed financial advisor.  Please do not construe my suggestions on this blog, as recommendations for your personal situation.  For individual finance advice please seek your own licensed CPA or financial advisors.  

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Powers Investments Management, LLC

This blog will provide, information and simple strategies, that will assist you to achieve YOUR financial objectives and long term targets. For over 30 years, I solved multi-million dollar problems, for Fortune 10-250, companies. My formal education includes: Business, Finance and Chemical Engineering {Problem Solving} at: Harvard, Rutgers and North Carolina State. And an additional 30+ years, managing my family’s investment decisions. I currently manage/advise people with net-worths ranging from the tens of thousands to several million dollars.

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