Behind every stock there is a business
The core of Lynch's investment philosophy, which is discussed in the book, is that 'behind every stock, there is a business' and, thus, the performance of a stock would ultimately reflect the performance of the business, namely earnings dynamics. Lynch reiterates a few times that understanding business prospects through first-hand knowledge of a particular product (that you may be consuming every day) is the key to success. Trying to time the market or spend time thinking about future market direction is a waste of time, according to the investment guru.
The book focused on three main ideas: 1) Personal circumstances before you start investing, 2) How to find the best investment ideas, and 3) Portfolio management. The main investment tool introduced by Lynch is the six categories of investment cases for various companies, which help to decide on key issues to focus on in each case as well as make decisions on when to buy and sell such companies. It also helps in portfolio management deciding on specific weights for each stock. The book also has a few useful checklists for best companies and typical mistakes in investing. Finally, another very useful analytical tool introduced by Lynch is the share price vs earnings chart, where two lines for each indicator are put together (when share price significantly deviates from the earnings line, it is normally a signal to buy or sell the shares).
The first part highlights that you should allocate that part of your savings that you don't need to spend for the next few years and could even afford to lose, and it is better to own a property where you live before you start allocating a significant part of your capital on stock investments. Lynch also emphasises that a person has to have certain qualities to be a successful investor, including making decisions with incomplete information. Other key qualities include patience, common sense, self-reliance, a tolerance for pain, open-mindedness, detachment, persistence, humility, flexibility, willingness to admit mistakes, ability to ignore general panic.
An amateur has a few advantages over professional investors, according to Lynch, not only because he/she is not constrained by formal rules policies and can be more flexible with the weights for individual stocks, but most importantly because an amateur can focus on real products around him that either he enjoys and are popular with his friends and act quickly (after doing his own research first). As long as the valuation is reasonable and the balance sheet is not stretched, companies with great products would likely end up generating strong earnings growth pushing prices for their stock along the way.
This section of the book also has a short summary of key behavioural challenges as every investor passes in and out of three emotional states: concern, complacency, and capitulation. He's concerned after the market has dropped or the economy seemed to falter, which keeps him from buying good companies at bargain prices. Then after he buys at higher prices, he gets complacent because his stocks are going up. This is precisely the time he ought to be concerned enough to check the fundamentals, but he isn't. Then, finally, when his stocks fall on hard times, and the prices fall to below what he paid, he capitulates and sells in a snit.