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How I’d invest like Peter Lynch

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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.

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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.

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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.

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