Investing Legends: Peter Lynch

Third of four parts on legendary investors.

Peter Lynch was perhaps the most successful money manager of all time, and through his two major books on investing he has had an enormous influence on investors since the early 1990s.

In 2003, Lynch chalked up the best 20-year return of any mutual fund ever. In the meantime he produced two classics of investing, “One Up On Wall Street” (1989) and “Beating the Street” (1994), both must-reads that are as entertaining as they are informative. He is most famous for declaring that amateur investors may outperform professional stock pickers by using common sense and their own day-to-day experience to identify promising companies. Like all of the legends profiled in this series, he believed in investing for the long term.

In his books, Lynch shared stories about how he chose to invest in companies after he experienced them, from drinking coffee at a now-famous doughnut chain to buying products in up-and-coming retail stores. Most professional money managers, he says, fail to identify companies with high growth potential until their stocks already have soared. Ordinary

investors, on the other hand, who keep their antenna tuned as consumers can identify promising companies on the early side of the growth curve. He called this “local knowledge.” Here are three basic principles espoused by Lynch: Invest In What You

Know. Personal experience is vital in identifying companies, as is common sense, Lynch preached. If you have a great experience in a store or restaurant, that is a valuable clue that the company may be poised for growth. Of course, this doesn’t apply to companies that already boast a franchise on every corner, as they are closer to the end of their growth curve. In addition, think in terms of investing while you watch television, read the newspaper, surf the Web and talk with family and friends. However, this type of personal experience and learning is just the beginning, and Lynch warned strongly against investing in a company just because you like its products or services. You have to follow up personal experience with research and analysis, which leads to the next principle. Do Your Homework On

Every Stock. Once you find a company with a good “story,” it’s time to dig a little deeper. Lynch was known for the depth of his research and analysis. He looked at multiple factors, of course, but some of the cornerstones were percentage of sales (whether the product you like accounts for a significant percentage of revenue), profitability, low stock

price, growing dividends, low debt and strong earnings growth. Invest For The Long

Term. Lynch used “value investing” to find companies that promised steady growth over many years rather than try to identify companies that promised explosive growth in the short run. He advised investors to avoid trying to “time” the market and to ignore market ups and downs and predictions about the economy. Lynch invested in strong companies with a high likelihood of future growth based on inherent value, much like Benjamin Graham. Add in the ingredient of “local knowledge” and you have a powerful recipe for investing over the long term.

Next: Warren Buffett