Peter Lynch's Investing strategy
During his tenure at Fidelity between 1977 and 1990, renowned investor Peter Lynch helped to grow the assets of the Magellan Fund from $18 million to $14 billion. Here are some of the concepts he widely talked about, which made him the icon of investing.
Stock Familiarity
If you follow Lynch's work, you may already know this famous mantra."Know what you own, and know why you own it." Taking this relatable approach can lead you to great retail stocks before analysts catch on because you know about certain business niches than an outsider.
Company Size Matters
Peter Lynch's quote "Big companies have small moves; small companies have big moves" reveals that small to medium companies are generally better stock picks than large ones because they have more to gain.
If you expect the company to rise in value, one of three things must happen:
- The company expands through organic sales and store growth.
- The company's earnings, sales, and profit margins improve.
- The market undervalues the stock, or its quality is not fully seen.
Good small companies often fit two of these factors. This is not to say that you shouldn't buy large-cap retailers, but rather that you should not expect the same things from them. In this case, being richly valued but having limited growth potential is a bad mix.
On Avoiding a Stock
"If I could avoid a single stock, it would be the hottest stock in the hottest industry." They may see huge growth at the start but burn out quickly as investors realize that they do not have the earnings, profits, or growth potential to back the buzz.
Peter Lynch's investing strategy pick a stock if it has these things in common.
- It's in a stable industry that won't change or attract fierce competition.
- It is growing its earnings at a level that can be sustained (10%–25%).
- It has a niche and happy clients.
- It is under the radar. You won't hear many analysts bragging about it.
Summary
While you can't expect to match Peter Lynch's performance, you can improve your stock-picking abilities using his strategies. You still have to do your research and factor in both the financials and your instinct to choose the stocks that you think have the largest upside.
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