The Motley Fool

How I’d invest like Peter Lynch

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Woman looking sideways at credit card
Source: Getty images

Peter Lynch is one of the greatest investors of all time. As a fund manager for Magellan at Fidelity, Lynch increased the fund’s size from $18m to more than $14bn. That’s like me taking a modest £5,000 and spinning it into £3.8m.

So how did he do it? Peter Lynch had a certain set of rules he always followed, come rain or shine.

5 Stocks For Trying To Build Wealth After 50

Markets around the world are reeling from the coronavirus pandemic… and with so many great companies trading at what look to be ‘discount-bin’ prices, now could be the time for savvy investors to snap up some potential bargains.

But whether you’re a newbie investor or a seasoned pro, deciding which stocks to add to your shopping list can be a daunting prospect during such unprecedented times.

Fortunately, The Motley Fool UK analyst team have short-listed five companies that they believe STILL boast significant long-term growth prospects despite the global upheaval…

We’re sharing the names in a special FREE investing report that you can download today. And if you’re 50 or over, we believe these stocks could be a great fit for any well-diversified portfolio.

Click here to claim your free copy now!

Sure, there are more financial products and investing methods to consider these days. CFDs, shorting, crypto trading. Crazy, risky stuff. To Peter Lynch these are just more ways to lose hard-earned money. Here are some mistakes he aims to avoid and some actions he likes to take.

Buying stocks just because they’re cheap

Lynch always said investors had to think first about how much money they could lose. That comes long before I think about how much money I could make. Cheap stocks are sometimes cheap for good reason. They make no money and have no prospects!

He said: “If your neighbour buys $10,000 worth of a stock at £$50, it plummets, and you put $25,000 in at $3, and it goes to zero, who loses the most? A lot of people cannot answer this question.”

It doesn’t matter if the FTSE is at 7,000, 5,000 or 10,000. If a company’s earnings are great, if it can make a lot of profit, it will do well over the long term. If a company is unprofitable, it’s still technically possible it will succeed, but far less likely. And even Peter Lynch didn’t have infinite money to bet on every single stock that came along.  

His point is that every stock, no matter how hot, or how many headlines it gets, can go to zero. But it’s more likely with stocks that are unprofitable. Companies can run out of money, just like I do towards the end of every month!

Not doing enough research

One of the first things I heard as an investor was “Invest in what you know”. Peter Lynch coined that phrase.

And understanding what I’m buying is the most important part of the game.

I just buy a company to grow,” he said in 1992. “And whether it’s a textile company or a software company, you’d better understand what they do. And if they do well, the stock will do well, no matter what happens to the market.”

Peter Lynch thinks long term

Share prices will go up and down day to day. But if I’ve done my research, I understand what the company does. I understand how the business makes money today. And I understand how it will make money in the future.

You have to find out why you bought a stock,” says Peter Lynch, using the case study of Walmart.

You could have bought the stock 10 years after it went public and still made 500 times on your money. So you have to say to yourself: ‘In this stock, I have a 10-year story, a 20-year story’. Write that down, and follow that. That’s what I do with a company.”

Physically taking a journal or a diary and writing down the reasons why you bought a stock makes it more real, says Peter Lynch. It helps keep your mind focused on the long-term.

To Peter Lynch the rules stay the same. I’d follow his advice over my neighbour’s any day.

Is this little-known company the next ‘Monster’ IPO?

Right now, this ‘screaming BUY’ stock is trading at a steep discount from its IPO price, but it looks like the sky is the limit in the years ahead.

Because this North American company is the clear leader in its field which is estimated to be worth US$261 BILLION by 2025.

The Motley Fool UK analyst team has just published a comprehensive report that shows you exactly why we believe it has so much upside potential.

But I warn you, you’ll need to act quickly, given how fast this ‘Monster IPO’ is already moving.

Click here to see how you can get a copy of this report for yourself today

TomRodgers 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.

Our 6 'Best Buys Now' Shares

Renowned stock-picker Mark Rogers and his analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.

So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply click below to discover how you can take advantage of this.