Billionaire investor Warren Buffett is well known as one of the world’s richest people. He’s had a long investment career and he’s achieved compound annual gains of around 20% since 1965.
But philanthropist and mutual fund manager Peter Lynch beat that rate of return over a 13-year period from 1977 to 1990. And that was when he managed the Magellan Fund at Fidelity investments.
Lynch scored a compound annual return of just over 29% during that period.
However, in Buffett’s earlier career when he was dealing with smaller amounts of money, his returns were even better than Lynch’s.
Nevertheless, Lynch was very successful investing in stocks and his wisdom is worth exploring.
Perhaps the only reason we hear more about Buffett than of Lynch today is because Lynch retired young after making his money and Buffett kept going!
7 of Lynch’s nuggets of wisdom
“You have to say to yourself, If I’m right, how much am I going to make? If I’m wrong, how much am I going to lose? That’s the risk/reward ratio.“
That’s Lynch advising investors to think about risk as well as potential gains when entering a stock position. And here’s why…
“In this business, if you’re good, you’re right six times out of ten. You’re never going to be right nine times out of ten.“
Being wrong about stock investments is a fact of investing life. But survival in the investment business depends on what we do next. Here’s what Lynch said:
“There’s no shame in losing money on a stock. Everybody does it. What is shameful is to hold on to a stock, or worse, to buy more of it when the fundamentals are deteriorating.“
There’s little discussion going on in the investment community about what to do when an investment turns sour.
But some investors have talked about it. For example, Britain’s first publicly outed ISA millionaire, Lord John Lee, mentioned that he tends to sell a losing stock when it drops 20% below his purchase price.
And Warren Buffett has declared selling losing investments such as Tesco and his airline holdings when the pandemic struck.
But sometimes it’s wise not to invest at all.
“If you can’t find any companies that you think are attractive, put your money in the bank until you discover some.“
With cash interest rates riding high again, being in cash can be a relatively attractive choice these days.
“If you can follow only one bit of data, follow the earnings.“
Earnings – or the anticipation of earnings — tend to drive stock prices in most situations. Enough said.
The art of investing
“Investing in stocks is an art, not a science, and people who’ve been trained to rigidly quantify everything have a big disadvantage.“
Those gut feelings about stocks and businesses can be worth paying attention to. And it’s unnecessary to be a closet accountant to succeed in stock investing – thank goodness!
“Owning stocks is like having children — don’t get involved with more than you can handle.“
Well, owning zero stocks isn’t really an option for many investors! But concentrated portfolios with relatively few stocks will likely provide the best shot at beating the markets.