Library / Investment Classics
Date of review: March 2019
Book author: Peter Lynch
Вook published: 1994
Book author: Peter Lynch
Вook published: 1994
'Stockpicking can't be reduced to a simple formula or a recipe that guarantees success if strictly adhered to'
There are over 20 different stocks in various sectors, including retail, restaurants, autos, banks and natural resources.
One of the key messages in the book is that great companies are found from personal experience rather than advice made by financial professionals. It is important to keep focusing on what clothes your family like to buy, what restaurant chains are becoming popular in your area and so on.
As Lynch said, 'often there is no correlation between the success of a company's operations and the success of its stock over a few months or even years. In the long term, there is a 100% correlation… it pays to be patient, and to own successful companies'. 'Behind every stock is a company'.
Lynch highlighted that with more flexibility, individual investors have good chances of outperforming professional investors as long as they do their homework and avoid companies with troubled balance sheets.
Sadly, Lynch does not offer a clear-cut formula, although he describes his method including through specific stock examples. 'Stockpicking can't be reduced to a simple formula or a recipe that guarantees success if strictly adhered to' is his direct quote. He adds that 'stockpicking is both art and a science, but too much of either is a dangerous thing'.
One of the key messages in the book is that great companies are found from personal experience rather than advice made by financial professionals. It is important to keep focusing on what clothes your family like to buy, what restaurant chains are becoming popular in your area and so on.
As Lynch said, 'often there is no correlation between the success of a company's operations and the success of its stock over a few months or even years. In the long term, there is a 100% correlation… it pays to be patient, and to own successful companies'. 'Behind every stock is a company'.
Lynch highlighted that with more flexibility, individual investors have good chances of outperforming professional investors as long as they do their homework and avoid companies with troubled balance sheets.
Sadly, Lynch does not offer a clear-cut formula, although he describes his method including through specific stock examples. 'Stockpicking can't be reduced to a simple formula or a recipe that guarantees success if strictly adhered to' is his direct quote. He adds that 'stockpicking is both art and a science, but too much of either is a dangerous thing'.
Other key messages
- Do not try to predict macro (rates, FX, inflation).
- Do not follow big picture pessimistic theories — there is always something to worry about, this is not the reason to sell stocks.
- 'Everyone has the brainpower to make money in stocks. Not everyone has the stomach.'
- Focus on a few companies (8−12), invest in about 5. Stay concentrated. If you can't find any companies that you think are attractive, put your money in the bank until you discover some.
Lynch does not suggest any particular style (value, growth), although he says that he 'searches for companies that are undervalued, and [he] usually finds them in sectors… that are out of favour'.
Importantly, when Lynch talks about 'undervalued' companies, he does not necessarily mean low PE stocks, rather undervalued relative to their long-term potential. He reiterates a few times that a company with a high PE that's growing at a fast rate will eventually outperform one with a lower PE that's growing at a slower rate.
Finally, it is worth highlighting the importance of discipline, which Lynch mentions a few times in the book. He recommends reviewing each stock in the portfolio every six months and deciding if it is worth adding (when earnings and other fundamentals have improved but the stock has not reflected this), selling (when the opposite happens) or doing nothing.
To me, the investment principles of Peter Lynch are very similar to the ones of Warren Buffett. They both point out that stocks represent interests in real businesses, and in the long-term, stocks follow the company's fundamentals. They also advise to ignore macro forecasts and avoid emotions as much as possible in making investment decisions. Both investors argue that stocks are the best investment option in the long term. Doing lots of legwork research also makes Peter Lynch's approach similar to a young Warren Buffett. Finally, both suggest to maintain a concentrated portfolio of well-understood stocks rather than trying to diversify through not well research stocks.
Importantly, when Lynch talks about 'undervalued' companies, he does not necessarily mean low PE stocks, rather undervalued relative to their long-term potential. He reiterates a few times that a company with a high PE that's growing at a fast rate will eventually outperform one with a lower PE that's growing at a slower rate.
Finally, it is worth highlighting the importance of discipline, which Lynch mentions a few times in the book. He recommends reviewing each stock in the portfolio every six months and deciding if it is worth adding (when earnings and other fundamentals have improved but the stock has not reflected this), selling (when the opposite happens) or doing nothing.
To me, the investment principles of Peter Lynch are very similar to the ones of Warren Buffett. They both point out that stocks represent interests in real businesses, and in the long-term, stocks follow the company's fundamentals. They also advise to ignore macro forecasts and avoid emotions as much as possible in making investment decisions. Both investors argue that stocks are the best investment option in the long term. Doing lots of legwork research also makes Peter Lynch's approach similar to a young Warren Buffett. Finally, both suggest to maintain a concentrated portfolio of well-understood stocks rather than trying to diversify through not well research stocks.