The great investor Peter Lynch has always been generous in sharing his investing precepts, most notably in his books, One Up On Wall Street and Beating The Street.
The individual investor really can have an edge on professionals, he says, but they need to be disciplined and follow certain rules. “If you want to learn to ski, you ought to go on the bunny slope and learn how to stop,” he says.
In a recent conversation with Barron’s, Lynch sketched out some of the most important principles.
Know the narrative. It’s critical to understand the broad story of the companies you own and how they make money. He asserts that people do far more research when they buy houses or cars than they do when they buy stocks. “Stocks aren’t lottery tickets. Behind every stock is a company. If the company does well, over time the stock does well.”
Lynch was famous, back in the day, for turning on a 90-second timer while analysts offered the merits of a stock before the buzzer. “If you can’t get excited in 90 seconds, you go to the next 90-second story,” he says. “Everybody that’s buying individual stocks has to understand the story. Write down ‘why am I owning this?’ Our best fund managers, know why the heck they own it, not just [because] the sucker’s going up. They have five reasons why something’s going to go right.”
Photograph by Heather Sten
Do the math. Spend some time—30 minutes, Lynch says, but you might take that with a grain of salt—with the company’s financials. “If you made it through fifth grade, you can handle the math. I mean, this is not complex stuff.”
Determine if a company has enough cash to weather temporary problems. “Bankruptcies have been my single worst problem,” he says. “I once was going to pass out bumper stickers that said ‘cheap sucks.’ There’s a great expression on Wall Street, ‘It’s always darkest before it’s pitch black.’ Cheap and a story is different. Wait until something’s gotten better.”
Fact-check the story. Keep an eye on what’s happening with the company, to more easily spot if it’s about to be disrupted. “He absolutely is great at that, and continues to vacuum up information,” says Joel Tillinghast, manager of Fidelity Low-Priced Stock and a Lynch protege.
You have more time than you think, because people often miss the story. “The average range of a stock is about 100% in a year,” Lynch points out. “It doesn’t go from terrific to terrible in an hour. The beauty of active management is, you can own the good companies and see what happens, and avoid the bad ones, the ones losing share or losing their edge.” Consider fancy furniture store RH (ticker: RH), which changed its format to include restaurants in its Restoration Hardware galleries and a membership model that entitled members to discounts. This year, the stock has nearly doubled. Warren Buffett recently took a stake. “Professionals missed it,” Lynch says.
Yes, you should buy what you know… Small investors often have an edge because they can spot trends in their lives before the pros do in the aggregate. Take discount retailer TJ Maxx (TJX), headquartered near Boston. Lynch recalls: “I got a tip from a nurse working with me after I had a knee operation. One day, she said, ‘Gee, I just got a call, and my afternoon patient can’t see me. So I’m going to the mothership.’ I said, ‘What’s the mothership?’ She just looked at me. She said, ‘I’m going to TJ Maxx. I love going there. It’s fun. They had something different every time.’”
Lynch loves researching. He likes to ask companies who they regard as the best analyst that covers their stock, as well as the most bearish analyst. Then he likes to call those analysts and ask them which companies they really like. (Usually, it isn’t the referring company.) He has written that his personal rule is to have at least one conversation with a representative of each major industry group at least once a month. “It’s best to pepper these [personal] inquiries with bits of information so that your source thinks you’ve done your homework. I never hang up on a source without asking: What other companies do you admire most,” he writes in Beating the Street.
… but that doesn’t mean investing is easy. Still, Lynch acknowledges that it’s less easy than his books make it sound. He’s quick to say he hates the phrase “playing the stock market,” as it’s not a game and no investment is sure. “I can count on two hands the number of stocks that were really easy, after 50 years,” he told Barron’s. “Generally, there’s a couple of negatives, a couple of positives, and you say, I think these three things could happen in the next couple of years. If any of those happen, the stock’s going up. But the stock doesn’t [always] respond.”
The best stock pickers have the disposition for it. “You think, if I work and work and work, I’ll get the answer. There’s a lot of risk here. You really have to stick your neck out . A lot of times you’re wrong. Not a lot of people can do that. Some people have that inside their personality. They’re risk takers.”
Barrons / Balkantimes.press
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