With annual returns of 29% over 13 years running Fidelity's Magellan Fund, investing legend Peter Lynch is someone worth listening to. Here are just a few tips he's offered private investors over the years.
"Take advantage of what you already know"
Perhaps Lynch's best known bit of advice was to recommend that investors buy companies they actually know something about. This knowledge can come from purchasing its products or services or working within the field. In Lynch's opinion, a familiarity with what a business does and/or the industry in which it operates can put you at an advantage to institutional investors who don't have the opportunity to notice if a particular retailer looks busy or register a sharp spike in demand for a particular product.
There's a big caveat to this. Lynch was at pains to emphasise that you should never buy shares in a company just because you like their products and think others will to. This should merely be the catalyst for conducting further research.
Lynch was a fan of companies that do dull, depressing or disagreeable things. As he put it, anything "that makes people shrug, retch, or turn away in disgust is ideal". Think funeral providers, waste management firms or those engaged in pest control. For Lynch, our willingness to use these firms, but to avoid talking about their services, makes them far better stock picks than high-flying tech companies that might get you an audience at a cocktail party.
If you can find a great company that not only does something dull or disagreeable but is also small, that's even better. Lynch often reflected on how many fund managers were unable or unwilling to research businesses lower down the market spectrum. Even if they were, the objectives of the funds they managed prevented them from buying in. This can lead to serious mis-pricing and great opportunities for the infinitely-more-nimble amateur investor.
That said, Lynch also cautioned against buying in to any company before it had proven itself. Avoiding businesses with overly-burdened balance sheets was also key. As he noted, "companies with no debt can't go bankrupt".
Invest for the long term
Ah yes -- this one should ring loudly with Foolish investors. Lynch was a big advocate of ignoring short term market noise and investing for decades. As far as this star fund manager was concerned, trying to predict the direction of the market over the next one or even two years is impossible.
Instead, Lynch believed that holding a sufficiently diversified portfolio should allow you to ride out any short term crises. While cautioning investors from relying on a fixed number of holdings (he insisted each stock should be evaluated on a case-by-case basis), Lynch said that he'd be comfortable owning between three and ten stocks in a small portfolio.
Learn from your mistakes
In sharp contrast to some money managers, Lynch wasn't afraid to say when he'd got things wrong. Indeed, he saw a willingness to admit mistakes as being as important to investing success as qualities such as self-reliance, patience, detachment and flexibility.
According to Lynch, great investors often spend as much time studying their errors as their successes, regardless of how much money they've actually made or lost. Only by doing this could he/she be certain that a poor decision wasn't repeated.
But while it makes sense to learn from your errors as Lynch advises, it's even better (and cheaper) to learn from those of others.
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Paul Summers has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.