There are many financial instruments that can be used by investors and firms to raise capital at a lower cost. Investors must understand the market dynamics and have the right tools to analyze the behavior of securities in different scenarios. This will help them make better investment decisions. It can be difficult to choose a viable investment as a beginner. The path taken by well-known investors can help beginners to minimize the risks and maximize the chances of achieving sustainable returns. We will be presenting some of the investing strategies that Peter Lynch has used to reap benefits through his investment principles.
Peter Lynch was a fund manager at Fidelity Investments. He managed the magellan Fund, which was well-known for its outstanding performance. It achieved an average 29% annual return. Magellan Fund was one of the most successful mutual funds under Peter Lynch’s leadership. Peter Lynch was also able to identify a few stocks that earned substantial profits, other than Magellan Fund. Let’s take a look at some of the most important investment principles proposed by Peter Lynch.
Principle 1: See beyond the visible
“During the gold rush most would-be miners lost their money but those who sold them picks and shovels and blue-jeans made a good profit. You can find non-internet businesses that indirectly profit from the internet traffic today or invest in switches and other gizmos to keep it moving.
This principle states that although anecdotal evidence or clear-cut observations should be used to supplement investment analysis, they shouldn’t be the only basis for investment decisions. The Dotcom bubble is a well-known example that proves this principle. The 1990s saw a boom in the technology and internet industries. Investors dismissed the notion of losing all their value over a short time. However, in the early 2000s many dot-com and telecom stocks lost nearly 95% of their investment value. This is due to the speculation of investors who invested capital in numerous internet-based startups on the assumption that these stocks would be possible without sound reasoning.
You can see the Upcoming IPO List of 2021 & can apply Peter Lynch Lessons while selecting the IPO to apply.
When considering different investment options, investors must consider more than just price. Markets are based on the assumption that everything is discounted. Investors must be able to identify key growth drivers, industry analysis and macroeconomic fundamentals, which could potentially impact the performance of stocks.
Principle 2: Invest only in what you are good at
Don’t invest in ideas you can’t illustrate using a crayon.
Peter Lynch, a strong advocate of value investing, relied on the simple investment principle of only investing in financial instruments he was familiar with. His investment decisions were based on solid knowledge of the investment process. To identify undervalued stocks that could make big bucks, he used the concept of Local Knowledge. He also stressed that investors must be able to understand the current trends, key players in the industry, and the company’s corporate governance framework.
Principle 3: Long-term investing
Investors who prepare for corrections or try to anticipate corrections have lost far more money than they have lost in corrections.
Peter Lynch stresses the importance of long-term investing. Markets are dynamic by nature. Markets respond to new information and surprise announcements by correcting themselves as soon as it receives the information. Investors are often subjugated to market corrections and resort panic selling to avoid losing money. However, the end result is not what they expected and they lose a lot of money by selling their stock. Peter Lynch opposed the idea of market timing.
He did a study on the importance of market timing in relation to investments made during the same period on different days. These are the conclusions
Investment amount
Day on which the investment is made
Return (Compounded).
1965 – 1995
$1000
For 30 years, absolute high day
10.6%
1965 – 1995
$1000
For 30 years, absolute low day
11.7%
He believed that volatility in the short-term had nothing to do the investment’s value. He also didn’t spend his time trying to predict the future direction of the economy. He stated that long-term investors will benefit if the Firm’s finances are sound.
TenBagger was a term that Peter Lynch invented. It derives its name from the Baseball game, which measures the success rate of a runner’s hit. Ten bagger is a stock whose price can rise to 10 times its intrinsic worth. To identify a ten-bagger, the underlying rule is to keep the investment, even if it earns more than 100%.
Principle 4: Do your research
Investors must examine the financials of their company and evaluate the risk involved before deciding on a strategy to mitigate the risks.
Investors must research the financial instruments and calculate the risks involved in investing. This is based on their risk tolerance. Fixed income instruments such as Bonds and Debentures could be a better option for a risk-averse investor. Investors who are willing to take risks could choose investments that offer higher returns. This is because risk and return are directly linked. Investors must have a framework in place to recognize the risks involved with different investment options. Fixed income securities such as Bonds and Deposits are susceptible to inflation, which can significantly lower the purchasing power. Liquidity risk is a concern in the bond market, where buyers and sellers may not be readily available. This can lead to lower prices than expected. Default risks indicate the company’s inability or inability to pay their debt obligations. The investments are also exposed to both systematic and unsystematic risk. Unsystematic risks can be reduced by diversifying the portfolio. However, systematic risks are unavoidable. Investing decisions should be made with a variety of risks in mind.
Conclusion
Peter Lynch was familiar with the GARP strategy, which sought to identify undervalued stocks that have higher growth potential. Three books on investing were also published by Lynch. Peter Lynch believes that a sound investment decision should aim for the long-term, be supported by solid research, and be free of emotions to achieve significant returns.
