3 Essential Investment Rules from one of the Best Investors of All Time

Post on: 29 Март, 2015 No Comment

3 Essential Investment Rules from one of the Best Investors of All Time

A long time ago, before the dawning of the big-mouth hedge fund kings and the popularity of self-directed investing. a quiet stock-picking genius was making millions for himself, his employer and his investors.

The former golf caddy was first hired by Fidelity Investments as an intern, but he quickly worked his way up the ranks. He would go on to manage a fund that exploded from $18 million to $14 billion with more than 1,000 different stock positions.

It grew to become one of the most popular mutual funds of all time, averaging an annual return of more than 29% from 1977 to 1990.

Fortunately, this fund manager was very open with his stock-picking maxims and opinions, authoring two books.

Who am I talking about? Peter Lynch. The wonder-fund was Magellan Fund (MUTF: FMAGX). and his books are One Up On Wall Street and Beating The Street.

Although he retired in 1990 in pursuit of philanthropy, his investment wisdom remains relevant. I have distilled his wisdom to three easy-to-follow rules:

Only invest in what you understand

In his writings, Lynch credits his observations and conversations with friends and family for his stock-picking success. He believes that if you like a product, service or store, then it stands to reason that others will also, thus creating a successful business. Always look for strong needs in the marketplace and then find companies that fill the needs for investment. Every time you leave your home, keep your eyes open for new opportunities.

Research is essential

Investing in what you know and understand is only the first step in finding lucrative stocks. Understanding the fundamentals of a company is key. If the numbers don’t make sense to you, Lynch says, don’t invest. Here are the metrics he believes are most critical.

Percentage of sales

Be certain the item or service that first attracted you to the company makes up a significant portion of its sales. If it’s a small percentage, be certain the other products and services of the company attract your interest as unique, new or different.

Price/earnings to growth

Peter Lynch is credited with popularizing this fundamental ratio. Also known as the PEG ratio, it measures whether a stock is overpriced based on its growth and forecasts.

If the PEG ratio is greater than one, then it suggests market expectations of growth are higher than the consensus estimate. It can also mean the stock is overvalued due to heightened demand for shares. If the PEG ratio is less than one, it means the market is underestimating growth and the stock is undervalued or the analyst ‘s consensus estimates are set too low. When the PEG hits two or higher, it may mean future growth is already built into the stock price. It’s important to note that the PEG ratio is best suited for non-dividend paying stocks, since it does not take dividend returns into consideration.


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