If you're looking to make the most out of your time in the stock market, legendary growth investor (and author of the highly readable 'One Up on Wall Street') Peter Lynch is worth listening to.
During his 13 years at the helm of the Fidelity Magellan mutual fund, the now-retired Lynch achieved a staggeringly good average annual return of 29%, growing the fund's assets from $20m to $14bn.
But Lynch has been more than just a master investor. Like Warren Buffett, he has been keen to pass on his wisdom to others.
Don't time the market, beat it
Lynch isn't a fan of timing. He insisted that investors should forget about trying to predict where markets would be in the next week, month or year. Since economic wobbles come and go, he believes it is far better to exercise patience and focus on finding great companies to buy and hold for the long term -- just the sort of talk we like at the Fool.
Despite his aversion to timing, Lynch nevertheless believes that private investors are more than capable of beating the market thanks to being less constrained than professional money managers. Perhaps the best known of his suggestions is to buy what you know and understand.
According to Lynch, some of the most successful investing ideas come from being a consumer. One famous (and highly profitable) example of this was when he invested in Hanes Corporation after his wife was complimentary about the L'eggs brand of tights that the former was test-marketing in its stores. While undertaking research, Lynch discovered that Hanes was the only major company to stock the growingly popular brand in supermarkets, making them more accessible to shoppers who didn't visit department stores very often. He bought the stock which proceeded to six-bag before the company was taken over.
That's not to say you can become a millionaire purely by investing in things you like. This, for Lynch, has been just the start of the process. Only after conducting a thorough analysis of a business, its financials and growth prospects should you consider buying a slice of it.
Lynch is also a big fan of diversification and during his investing career, frequently held more than a thousand stocks in the Magellan fund. While few private investors have the time or energy to research and assemble such a sizeable portfolio (Lynch was known as a workaholic), a lot of success in investing comes from recognising that not all of your picks will be successful. Holding 20 or so quality stocks, as opposed to just a couple, is a far more sensible approach when it comes to growing your wealth.
So, what doesn't Lynch like? While all investing involves risk, Lynch has never been attracted to "longshot" companies -- many of which clutter the junior market. As far as Lynch is concerned, it's always better for investors to wait until a business has established itself before risking their capital.
Lynch also dislikes selling winners -- something most of us do only too quickly. As far as he is concerned, investors shouldn't attempt to improve their results by "pulling out the flowers and watering the weeds". So long as we don't become so attached to a great performing share that complacency sets in, the former Fidelity man believes in sitting tight, even if the company appears slightly overpriced.
Learn from the...worst
In addition to the above, Peter Lynch believes that recognising and responding to your own errors is vital in order to succeed as an investor. That said, learning from the blunders of others can be just as useful (and certainly less financially painful).
That's why the Motley Fool's analysts have produced a special report detailing the worst mistakes investors make. It costs absolutely NOTHING to download, comes with no obligation and could save you an awful lot of money over the long term.
Just click here and it's yours.
Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.