Peter Lynch | 4 Advice from 'Wall Street Hero' to individual investors

 Peter Lynch:

[caption id="attachment_6221" align="alignnone" width="200"] Peter Lynch[/caption]

Peter Lynch is called an investment genius because of his overwhelming performance.

In 1977, at the age of 33, he took charge of Magellan Fund, an equity fund of Fidelity Management, an asset management company.

It was a return that doubled the growth rate shown by the S&P 500, the leading US stock index, during the same period.

As the Magellan Fund performed outstandingly, the fund's assets also increased rapidly.

Assets under management stood at just over $20 million in 1977, but in 1990, it reached over $14 billion, a 660-fold increase.

Despite a more than 600-fold increase in asset size, it was able to continue to outperform the market average.

In this article, we will take a look at the four investment principles that Peter Lynch offers to individual investors.

Identify the type first:

 

He is a well-known big-name investor, so his investment philosophy is already well known.

This is especially true of attitudes that value observation in everyday life.

It is far more beneficial to invest in what you, your spouse, children, friends and co-workers are frequently buying than to scour the news and analysts' stock analysis reports to find promising companies. This is his advice.

The first principle he gives to individual investors is “Not all stocks are the same. Before you buy a stock, first figure out what type of stock it is.”

Peter Lynch stresses that you should never buy any stock in haste.

No matter how tempting information he hears, he suppresses his daunting heart for a moment and tells him that he needs to learn basic information about the company one by one.

Never buy a stock in haste:

 

It seems like a very obvious word, but in reality, it is a principle that most individual investors do not put into practice.

That's why he said:

“It is not uncommon for a couple who spend all their weekend time trying to find a way to buy even a penny cheaper when buying a plane ticket buy 500 shares without spending 5 minutes researching the company when buying airline stock.”

The first thing you should do before buying a stock is to know what type of stock it is.

To know what information you should focus on before deciding whether to buy a stock or not.

Also, only by doing this can I set the target rate of return I want to achieve through this stock and what to do if the stock price falls before investing.

Peter Lynch categorizes stocks into six categories:

 

It is divided into low-growth stocks (dividend stocks), large-cap stocks, high-growth stocks, business cycle stocks, revitalization stocks, and asset stocks.

Low-growth stocks and High-growth stocks:

[caption id="attachment_6070" align="alignleft" width="310"] low growth stock[/caption]

First of all, low-growth stocks are stocks that can generate stable dividend yields without much expectation of market gains.

It can be understood as a dividend stock. When buying these stocks, of course, the most important thing to check is that the dividend has always been paid and that it is steadily increasing.

High-growth stocks are stocks that grow rapidly. They are often small and medium-sized companies with a small market capitalization.

Peter Lynch explains that high-growth stocks do not necessarily come from high-growth sectors.

[caption id="attachment_6069" align="alignright" width="300"] High growth stocks[/caption]

He says that even in stagnant industries, high-growth companies can emerge based on innovative strategies and new technologies.

When investing in high-growth stocks, you should first check how much of the company's popular products represent a company's overall sales and how its operating profit has grown in recent years.

It is also necessary to check whether the P/E ratio and growth rate are rising at the same level.

Large-cap stocks are the stocks of large corporations that grow slowly. These stocks have a current price-earnings ratio.
It is important to determine whether the current stock price is cheap or expensive by comparing the (PER, the price divided by the earnings per share) with the past.

Business cycle stocks are stocks whose sales and profits fluctuate according to the economy.

Rehabilitation stocks are stocks that may go bankrupt because they are experiencing a serious financial crisis.

Asset stockholders refer to stocks that are invested based on the value of the company's assets rather than the company's business activities.

different types of stocks require different strategies:

 

“Categorizing the types of stocks is the first step in developing your investment logic. This work must be done first so that we can know what kind of logic will be established.”

Peter Lynch stresses that different types of stocks require different strategies to follow after buying.

“If you bought a large blue-chip stock at a good price, put it aside and

It's okay to forget about it for 20 years, but if you bought a cyclical stock, you shouldn't forget it."

“It would be foolish for someone who invests in a high-potential high-growth startup to sell for a 50% return when they have a 1000% chance of making a return.”

“On the other hand, if large blue-chip stocks have already doubled and the outlook is not bright, but keep holding them in anticipation of doubling, this is also frustrating.”

Figure out the company's story says "Peter Lynch":

Explain for two minutes Peter Lynch advises that once you've identified the type of stock you want to buy, the next step is to figure out the company's story.

I want you to put into words why I want to buy this stock and what will happen to the company after I buy this stock.

He recommends that you explain to yourself about a stock's characteristics for a couple of minutes to get a sense of the stock's story.

“Before I buy a stock, I like to talk to myself about why I'm interested in this stock, what the company needs to be successful, and what obstacles it may have in the future.”

“This two-minute monologue can be muffled or loud enough to be heard by a nearby colleague.”

“Once you tell the stock story to your family, friends, and dogs, and you can explain it in words that even children can understand, you are on the right track.”

My advice is to explain in simple language that anyone can understand why you want to buy the company's stock.

I want to see if I am going to buy this stock with a clear mind or if I am just being swept away by others.

In order to tell this story, you have to directly research the current sales, operating profit, and future growth prospects of the company.

Monologues Peter Lynch actually gave before investing:

 

Mumbling to yourself for two minutes means to study and research a company before buying a stock.

Here are some of the monologues Peter Lynch actually gave before investing.

Before investing in La Quinta, a motel chain that returned 1500%, I mumbled: Talking to myself like this gave me confidence as to why I should buy this stock.

 

“La Quinta is a Texas motel chain. This company was very profitable in Texas.”

“In Arkansas and in Louisiana, they have replicated their successful business practices. Last year, the motel chain expanded 20 percent over the previous year. Profits are increasing every quarter.”

“The company expects to see rapid expansion in the future. Debt is not excessive”

“The motel business is a very competitive low-growth sector, but La Quinta has found a niche.”

“The company still has plenty of room for further expansion in the market.”

The types has distinct areas of focus regarding their story:

 

Peter Lynch, who advises looking at stocks into six different types, emphasizes that each type has different areas of focus when looking at the story.

When telling the story of high-growth stocks, we need to focus on where and how we can sustain high-speed growth.

The story of a low-growth stock should primarily be about what dividend yields have been like in the past.

Large blue-chip stocks should include their price-earnings ratio (PER), whether their stock price has surged in recent months, and the company's strategy to boost growth. Like this:

 

[caption id="attachment_6225" align="alignnone" width="310"] Coca cola growth chart[/caption]

“Coca-Cola has reached the bottom of its P/E ratio. The company’s situation has improved in many ways, but the stock price has not moved in the past two years.”

“The growth rate of diet drinks has increased dramatically. Last year, Japanese Coke consumption increased by 36 percent compared to the previous year. Spanish consumption increased by 26 percent. It's a phenomenal increase. Overseas sales are excellent overall”

“Currently, the company has more control over distribution and domestic sales. Based on these factors, Coca-Cola is expected to perform better than expected.”

Monologue focusing when investing in cyclical stocks:

 

[caption id="attachment_6078" align="alignleft" width="310"] Cyclical stocks[/caption]

If you are considering investing in cyclical stocks, you should make a monologue focusing on the business environment, inventory, and inflation.

The reinstate should focus on what work has been undertaken to improve the company's operations and how those plans are paying off.

As an asset owner, you have to deal primarily with the value of the company's assets.

As I said before, Peter Lynch's advice is that I should only buy stocks when I can easily and concisely explain why I buy them based on the characteristics of the company.

 

[caption id="attachment_6210" align="alignright" width="310"] Convincing yourself[/caption]

His point is that if you start investing without convincing yourself, even a slight fluctuation in the K stock price will cause you to become anxious and sell the stock at a low price and only lose money.

The second piece of advice he gives individual investors is

“Explain why I should buy the stock of this company in easy-to-understand language. If I can't convince myself, I shouldn't buy the stock."

See yourself differently:

 

With the purpose of conveying his investment know-how to individual investors, Peter Lynch is disclosing his own criteria in detail to distinguish preferred stocks from avoidable stocks.

The criteria for classifying items to avoid are divided into 6 categories and criteria for classifying preferred stocks into 13 categories, which are explained in detail.

“The stocks I avoid are the most popular among the most popular stocks.”

“It has the best reputation amongst people, and it is a stock that is often bought by carpooling or listening to other people’s stories on the commuter train.”

“Prices of popular stocks usually rise quickly outside of well-known values, but the vague hope and emptiness that sustain these high stocks are as rapid as they go down,” he said.

“If you do not dispose of your popular stocks wisely,
(If you bought these stocks in the first place, you wouldn't be as agile already.) Profits turn into losses."

“Stocks are not falling slowly, nor are they stopping at the price you bought them.”

Commonalities of stocks Peter Lynch does not invest in:

Conversely, explain that stocks you are looking for have the following characteristics:

(1) Companies with boring and ridiculous names
(2) A company doing boring business

 

(3) Companies doing hateful business

(4) A company spun off from its parent company
(5) not owned by institutional investors;
Companies not investigated by analysts (analysts)
(6) Toxic waste or mafia
A company known to be related
(7) Companies doing dismal business
(8) Companies in stagnant growth sectors
(9) A company that has secured a niche
(10) Companies that make products that are continuously purchased
(11) Companies that use new technologies instead of developing them
(12) Companies in which internal executives and employees purchase stocks
(13) There are several standards that are far from common sense of companies that buy treasury stock.

Peter Lynch's own investment philosophy:

 

Even in fast-growing industries, I'm telling you to invest in companies that aren't getting enough attention instead of those that stand out.

“If I had to invest in either a company run by outstanding management in a highly competitive and complex industry, or a company run by outstanding management in an uncompetitive, humble industry with not-so-special management, I would invest in a mediocre company.”

His own philosophy was created as he accumulated experiences of making great profits by investing in marginalized stocks that Wall Street did not pay attention to.

It was SCI, a funeral services company, that he identified as his favorite company in his book.

It's a forgery company.

As a result of looking at the company from a different perspective than other Wall Street investors who didn't even pay attention to the dismal business related to death.

I was able to get a high return of up to 2000%. The third lesson of Peter Lynch that can be found here is, “You can't hit a double by looking at the flashy industries that everyone else is paying attention to. Sometimes the best stocks come from boring, dismal, stagnant industries.”

Find it near you:

And Peter Lynch explains how to spot high-growth stocks in industries that others don't notice.

As I said at the beginning of this article, this method is the heart of the Peter Lynch style of investing.

 

 

“The best place to look for a -10 stock (a high-growth stock that can go up 10 times or more) is near home. If you're not near home, check out the mall, or especially around work."

“People may think that the 10-base event is only available in ridiculously low-priced stocks. But even among companies that can be easily recognized just by name, there are countless number of 10-base events.”

“Dunkin Donuts, Wal-Mart, Toys Us, Stop & Shop, and Subaru are examples of this. People appreciate the products of these companies and enjoy using them. But even after looking at the possibility, I don’t buy the stock.”

Observe the products used by people in their daily lives:

 

Peter Lynch emphasizes that in order to discover high-growth stocks, it is necessary to persistently and sharply observe which products are frequently used by people in their daily lives, especially those that have recently become popular among people.

He explains that most of the stocks that gave the Magellan Fund a huge profit were discovered through this process.

Taco Bell and Dunkin Donuts were representative sports discovered through such efforts.

Legs, who made a huge profit for him as a stocking manufacturer, also explained that he became interested in investing after hearing his wife say, 'I really like these stockings'.

“My wife is my best source of information,” he said.

[caption id="attachment_6095" align="alignright" width="310"] product inspection[/caption]

“The beauty of investing in familiar companies like Legs and Dunkin Donuts is that just putting on your stockings or sipping your coffee is like doing the basic analysis a Wall Street analyst does.”

“Because visiting stores and testing products is a key component of a securities analyst’s job.”

He explained that the first step to discovering promising stocks can be started simply by going to a mart or shopping mall to visually check which products are on the cart, and then to entering an online shopping mall and searching for the best-selling products. no see.

Make sure that the company is a publicly traded company:

Once you've found a product that's popular with people, the next thing to do is make sure that the company that makes it is a publicly traded company.

If it is a publicly traded stock, you need to figure out the type of stock the company belongs to based on the above principles, and then make an investment decision while drawing the story of the company in your head.

Peter Lynch explains that there is no indicator that shows the company's future as clearly as the consumer's reaction to the product.

What individual investors can learn from him

The fourth investment principle is
“There is no indicator that clearly shows the stock price of a company in advance than the reaction of consumers to purchase a product. Make your everyday shopping the best opportunity to discover promising companies that will come in the future.”