Peter Lynch’s Investing Principles And 25 Golden Rules by Redfield, Blonsky & Co
The following is a cut and paste of a discussion of Peter Principles, “Beating the Street” and Lynch’s 25 Investing Principles. We found this discussion at http://www.travismorien.com/FAQ/shares/lynch.htm. We are not responsible for any errors that may exist.
Peter Lynch ran the Fidelity Magellan Fund for 13 years, during which time Magellan was the number one ranked general equity fund in America. His books One Up on Wall Street and Beating the Street are filled with his accumulated wisdom and in Beating the Street he gives a fairly detailed account of how he did his analysis.
The first thing that will strike new investors as strange is that Peter Lynch’s methods are actually so simple that mostly an amateur could use them entirely unchanged and with the same results. Lynch does not use any gimmicky computer programs, either to pick stocks or optimize the portfolio for volatility. Each and every company invested in by Magellan was considered on its own individual merits, and the managers of Magellan generally did their very best to completely avoid investing in anything that consensus opinion from the average Wall Street analyst declared was a good thing.
Peter Lynch sums up his points in Beating the Street with a number of humorous “Peter’s Principles”, which appear here. Do take the time to read Beating the Street in its entirety though, as he makes a number of very interesting points throughout.
Peter Lynch's Principle #1
When the operas outnumber the football games three to zero, you know there is something wrong with your life.
This first point comes from the preface, where he is talking about how busy he was, regretting being unable to spend time with his family since he was too busy trying to keep current on a few thousand stocks. Although not really a hugely important point as far as this FAQ goes, I guess if I didn't put it here you'd wonder what it was if it was the only thing missing from the list!
Peter Lynch's Principle #2
Gentlemen who prefer bonds don't know what they are missing.
This one gets a going over in this FAQ in the separate "Bonds vs. Stocks" article, Lynch just pointed out that bonds are an inferior investment to shares.
Peter Lynch's Principle #3
Never invest in any idea you can't illustrate with a crayon.
A class of seventh graders at an American primary school did a social studies project on stocks, the kids had to do their own research and dig up stocks for a paper portfolio. They sent their picks to Peter Lynch, who later invited them to a pizza dinner at the Fidelity executive dining room, illustrating their portfolio with little drawings representing each stock. Lynch just loved this because it illustrates the principle that you should only invest in what you understand, the kids portfolio consisted of toy manufacturers, makers of baseball swap cards, clothing manufacturers and outlets, Playboy Enterprises (a couple of boys chose that one), Coke, and other stocks of that ilk. With a portfolio notably lacking in glamorous technology ventures and entrepreneurial risk taking they went for solid stocks with excellent profits, their portfolio returned 69.6% against a background of a 26.08% gain in the S&P 500 in 1990/91.
Peter Lynch's Principle #4
You can't see the future through a rearview mirror.
Chapter 2 of the book talks about "weekend worriers", those pundits that always have a thousand reasons why the economy is bad and it is not a good time to invest in stocks. He points out that even he is guilty of this, appearing on the prestigious Barren's panel on the state of the economy to prognosticate and outdo the other panelists on why the market is about to crash. He also notes that none of the people on the Barren's portfolio are anything less than the top experts on investment, managers of the biggest and best funds and all highly respected, obviously even with all the doom-saying they still find some time to invest. Peter Lynch advocates looking at stocks for their own value, not to go in for top-down analysis in some futile attempt to predict the state of the economy and their effects on stock prices. The market crashes when stocks are way over valued, and doesn't usually crash again until stocks have become over valued again. His point comes down to the old saying, "buy in gloom, sell in boom". When the experts are bearish is the time to buy.
Peter Lynch's Principle #5
There's no point paying Yo-Yo Ma to play a radio.
Bonds vs. Bond funds, Peter Lynch ponders why people invest in bond funds, with all their administrational fees, when any fool can go to a broker or the American Federal Reserve bank to buy a 3-year treasury note, or T-bill from $5000, and other notes for $1000. The returns on the direct investments are better than the managed funds because a T-bill is always a T-bill, there is nothing to manage or research. Bond funds are very popular in America, but Lynch really can't figure out why!
Peter Lynch's Principle #6
As long as you're picking a fund, you might as well pick a good one.
At the time Peter Lynch wrote his book, there were more American mutual funds than there were listed companies! The majority of fund managers would rather be part of the Wall Street herd than do any serious research of their own. Despite the argument for a fund being that you are entrusting your money to a professional who will spend more time doing research than you ever could, the level of analysis in all but a minority of funds is very shallow, and tends to be the corporate equivalent of keeping up with the Joneses. Funds with big entry fees are not necessarily any better than funds without, the fund that comes out of nowhere and gets the top ranking one year is probably just highly leveraged in something that happened to do well that year, and will fail the next. In their quest to invest conservatively most managers buy stocks that have already been bought up to expensive levels, shunning investing in out-of-favor industries. Lynch gives a number of tips as to what to look for in a good fund, but his main point is that the majority of funds are duds. Often it takes as much research to find a good fund as it takes to find a good stock, perhaps more research since there are more funds than stocks.
Peter Lynch's Principle #7
The extravagance of any corporate office is directly proportional to management's reluctance to reward shareholders.
Excellent companies are thrifty. They seek to maximize returns by running their operation efficiently and seeking to be the best at what they do. Companies that buy themselves glamorous skyscraper office towers with indoor waterfalls and gold plated toilet seats, award executives with fat salaries not linked to performance, corporate jets, massive advertising campaigns aimed purely at sprucing up the corporate image, changing a sensible old name to something flashy and techy and other such excesses are not companies you want to invest in. To Peter Lynch, such behavior indicates the management may well be far too concerned