I decided recently to reread some of the investing books that helped shape my investment philosophy and see if they are still relevant for individual investors today. Peter Lynch’s 1989 book “One Up On Wall Street” offered investors wonderful insight into the mind of one of the greatest modern investors. Peter Lynch gained his fame as the portfolio manager of the Fidelity Magellan mutual fund, which he took control of in 1977. During his 13-year tenure as portfolio manager, he grew its asset base from $20 million to $14 billion and beat the S&P 500 index in 11 out of 13 years, with a 29.2% average annual rate of return.
You would think that one of the top professional investors who earned his keep by managing other people’s money would try to dissuade individual investors from even trying to pick stocks. Instead, Lynch strongly believed that individuals could not only succeed at investing, but they also had a distinct advantage over Wall Street and professional money managers by being able to identify trends early, investing in what they know, having the flexibility to invest in wide array of companies and not being evaluated on a short-term basis.
Qualities for Investment Success
But Lynch was careful to warn his readers that it was important to first analyze oneself before spending any time analyzing companies. Peter Lynch even provided in his bestselling book a list of the most important qualities it takes to succeed in his best-selling book:
- Common sense
- Tolerance for pain
- Willingness to do independent research
- Willingness to admit mistakes
- Ability to ignore general panic
- Discipline to resist your human nature and your gut feeling
You may be surprised that items such as humility, tolerance for pain and common sense are on Lynch’s personality checklist, but not intelligence. In fact, Lynch noted that the best investors fall somewhere above the bottom 10% and below the top 3%—or nearly nine out of 10 people—in terms of IQ. Lynch felt that the behavior of stocks is generally simple-minded and true geniuses get too “enamored of theoretical cogitations and are forever betrayed by the actual behavior of stocks.”
Lynch further noted that investors need to accept that they will have to make decisions without complete or perfect information. One is rarely certain when making investment decisions, and if one completely understands what is going on, it is already too late to profit.
Short-Term Pain for Long-Term Success
The recent increase in stock market volatility helps to remind us that that long-term stock market success requires a certain detachment and tolerance for short-term pain. As Peter Lynch pointed out, stocks will go up and down, and rather than panic when they go down, you must have detachment to stay the course. Peter Lynch warned investors “when you sell in desperation, you always sell cheap.”over the long haul investing in stocks is more profitable than investing in debt, but there is no way of knowing if the market will be up or down over the next few years. Stock returns are fairly predictable over 10 to 20 years, but not in the short term. You should only invest in the market what you can afford to lose without that loss impacting your daily life in the foreseeable future.
A great source for long-term buy-and-hold investing is AAII’s Lifetime Strategy for Investing. This information-packed guide can be accessed simply by clicking here. Many readers have told us that this brief guide has changed their entire outlook on investing.
Peter Lynch was a bottom-up stock picker who looked for good companies selling at attractive prices. He did not focus on the direction of the market, the economy or interest rates. It wasn’t that he didn’t understand the importance of these big-picture elements, he just did not believe that it is possible to consistently forecast them in any bankable way. Instead he felt it was better to spend your time looking for superior companies, doing fundamental research and keeping a close eye on the fundamentals of your holdings. In addition, it is far better to do your own research and ignore hot tips. Furthermore, understand the companies that you invest in.
Personal preparation is just as important as knowledge and research. Look at the qualities Lynch laid out for investment success before you commit your hard-earned money. If you are undecided about your investment attitude, unclear about your objective and lack conviction, tread carefully. You are more likely to become a market victim who abandons hope at the worst possible moment and sells out at a loss.
I am enjoying rereading Lynch’s “One Up on Wall Street.” When I first examined the book years ago, we used it to construct a quantitative stock filter, or stock screen, with the goal of identify stocks possessing the fundamental characteristics Lynch looks for when selecting stocks. That stock screen is programmed into AAII’s Stock Investor Pro is also presented in the Stock Screens section of AAII.com. I am happy to report that Lynch’s lessons for the individual investor remain relevant today: If you do your homework, stay the course and take a long-term view, you can achieve financial success.
If you are not an AAII member but want to gain access to the AAII Lynch Stock Screen, simply take a risk-free 30-day Trial AAII Membership and AAII’s Stock Screens and all of our other membership benefits will be available for your use.