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Legendary fund manager Peter Lynch signed off with this advice.
BY Kevin Godbold
Published in Investing (www.fool.co.uk) on 14 December 2011
If you'd invested £10,000 in Peter Lynch's Fidelity Magellan fund when he took over its control in 1977 it would have grown to £280,000 in just thirteen years.
That's a whopping overall return of 2,700% or, to put it another way, a compounded annual return in excess of 29% per year! A phenomenal investment record like that, if possible to replicate, suggests life-changing potential. That's why it's worth listening to Lynch.
Fortunately, the growth oriented investor signed off his last book, Beating The Street, with 25 Golden Rules for Investment. Describing them as insights rather than strict rules works well and, after some editing for clarity, I've reproduced them below with a little additional commentary.
Lynch's 25 nuggets
1. Investing is fun, exciting and, if you don't do any work, dangerous.
The Fool is well known for its 'do your own research' mantra. As well as researching potential new investments, it's important to keep abreast of events within those companies whose shares you already own.
2. You can outperform the experts if you invest in companies you understand.
This parallels Warren Buffett's advice to invest within a 'circle of competence.' If you stick to industries and companies you understand, you potentially reduce the risk of making big mistakes. However, it's possible to expand the circle, as many Fools have proved by successfully investing in oil company shares, for example.
3. You can beat the market by ignoring the herd.
Popularity often leads to overpricing. Sometimes the road less travelled leads to the best opportunities.
4. Find out what the company behind a share is doing.
5. Often, and for long periods, company performance can remain disconnected from its share price performance. Long term, there is correlation and the temporary disparity is the key to investment success. It pays to own successful companies, with patience.
6. You have to know what you own, and why you own it.
Peter Lynch famously asserted that you should be able to describe the investment 'story' in one, or two, short sentences. If you are unable to, perhaps you shouldn't be holding the shares.
7. Long shots mostly miss the mark.
8. There needn't be more than five companies in a portfolio. A part-time share picker has time to follow roughly eight to twelve companies.
Both Peter Lynch and Warren Buffett recommend a carefully chosen, concentrated portfolio for building wealth.
9. If there are no attractive companies, put your money in the bank until you find some.
10. Never invest in a company without understanding its finances, particularly the balance sheet.
A company's balance sheet will tell you whether it is solvent. Weak balance sheets are a notorious source of investor losses.
11. Avoid hot shares in hot industries. Great companies in cold industries are consistent winners.
The latest share craze, like tech companies at the turn of the century, often leads to overpriced shares, which can disappoint investors in the longer term. A good company operating in a stable, if unexciting industry can serve you better.
12. Wait until a company turns a profit before you invest.
Tomorrow's jam may never come; go for jam today.
13. Wait for troubled industries to show signs of recovery before investing in them. Even then, pick resilient companies and be aware that some industries never do recover.
14. It only takes a few big winners to make a lifetime of investing worthwhile. If you invest £1,000 in a share, that's all you can lose, but you
stand to gain multiples of that amount. Don't diversify that advantage away with too many shares.
A few big winners are all you need. If you spread your money between too many shares, the big wins become little wins, after all.
15. The observant amateur may discover great growth companies long before the professionals.
16. Stock market declines are common: they are great opportunities to buy bargain shares.
17. Successful investing requires modest brainpower and a strong stomach.
Stock markets are volatile but, if you hold your nerve, volatility can present great buying and selling opportunities as companies become alternatively under or over valued.
18. Trade shares according to the companies' fundamentals and not according to wider concerns, as there's always a source of external worry.
19. Ignore economic predictions and follow what's happening in the companies you own.
There is a lot to worry about in the world right now. However, good companies keep reporting steady financial, operational and strategic
progress, whilst wider concerns keep their share prices held down. That's potentially a good time to be buying undervalued companies.
20. There's always an over-looked company on the stock market, where share prices are undervaluing its prospects. All you have to do is discover
it.
21. If you don't study the companies behind your investments, it's gambling.
22. Time is on your side when you own shares in great businesses.
23. If you do not have time to invest actively, buy a few share funds with differing strategies.
24. Overseas focused funds can provide access to faster-growing economies.
25. In the long run, a portfolio of well-chosen shares and/or funds will out perform most assets classes. However, a portfolio of badly chosen share investments underperforms cash under the mattress.
What do you think?
So there we have twenty-five experience-based insights from a very successful stock-picker and investment strategist. Why not tell us what you think of them, and maybe add a few of your own, in the comment box below.
http://www.fool.co.uk/news/investing/2011/12/14/25-golden-rules-for-investing.aspx?source=uhpsithla0000001
BY Kevin Godbold
Published in Investing (www.fool.co.uk) on 14 December 2011
If you'd invested £10,000 in Peter Lynch's Fidelity Magellan fund when he took over its control in 1977 it would have grown to £280,000 in just thirteen years.
That's a whopping overall return of 2,700% or, to put it another way, a compounded annual return in excess of 29% per year! A phenomenal investment record like that, if possible to replicate, suggests life-changing potential. That's why it's worth listening to Lynch.
Fortunately, the growth oriented investor signed off his last book, Beating The Street, with 25 Golden Rules for Investment. Describing them as insights rather than strict rules works well and, after some editing for clarity, I've reproduced them below with a little additional commentary.
Lynch's 25 nuggets
1. Investing is fun, exciting and, if you don't do any work, dangerous.
The Fool is well known for its 'do your own research' mantra. As well as researching potential new investments, it's important to keep abreast of events within those companies whose shares you already own.
2. You can outperform the experts if you invest in companies you understand.
This parallels Warren Buffett's advice to invest within a 'circle of competence.' If you stick to industries and companies you understand, you potentially reduce the risk of making big mistakes. However, it's possible to expand the circle, as many Fools have proved by successfully investing in oil company shares, for example.
3. You can beat the market by ignoring the herd.
Popularity often leads to overpricing. Sometimes the road less travelled leads to the best opportunities.
4. Find out what the company behind a share is doing.
5. Often, and for long periods, company performance can remain disconnected from its share price performance. Long term, there is correlation and the temporary disparity is the key to investment success. It pays to own successful companies, with patience.
6. You have to know what you own, and why you own it.
Peter Lynch famously asserted that you should be able to describe the investment 'story' in one, or two, short sentences. If you are unable to, perhaps you shouldn't be holding the shares.
7. Long shots mostly miss the mark.
8. There needn't be more than five companies in a portfolio. A part-time share picker has time to follow roughly eight to twelve companies.
Both Peter Lynch and Warren Buffett recommend a carefully chosen, concentrated portfolio for building wealth.
9. If there are no attractive companies, put your money in the bank until you find some.
10. Never invest in a company without understanding its finances, particularly the balance sheet.
A company's balance sheet will tell you whether it is solvent. Weak balance sheets are a notorious source of investor losses.
11. Avoid hot shares in hot industries. Great companies in cold industries are consistent winners.
The latest share craze, like tech companies at the turn of the century, often leads to overpriced shares, which can disappoint investors in the longer term. A good company operating in a stable, if unexciting industry can serve you better.
12. Wait until a company turns a profit before you invest.
Tomorrow's jam may never come; go for jam today.
13. Wait for troubled industries to show signs of recovery before investing in them. Even then, pick resilient companies and be aware that some industries never do recover.
14. It only takes a few big winners to make a lifetime of investing worthwhile. If you invest £1,000 in a share, that's all you can lose, but you
stand to gain multiples of that amount. Don't diversify that advantage away with too many shares.
A few big winners are all you need. If you spread your money between too many shares, the big wins become little wins, after all.
15. The observant amateur may discover great growth companies long before the professionals.
16. Stock market declines are common: they are great opportunities to buy bargain shares.
17. Successful investing requires modest brainpower and a strong stomach.
Stock markets are volatile but, if you hold your nerve, volatility can present great buying and selling opportunities as companies become alternatively under or over valued.
18. Trade shares according to the companies' fundamentals and not according to wider concerns, as there's always a source of external worry.
19. Ignore economic predictions and follow what's happening in the companies you own.
There is a lot to worry about in the world right now. However, good companies keep reporting steady financial, operational and strategic
progress, whilst wider concerns keep their share prices held down. That's potentially a good time to be buying undervalued companies.
20. There's always an over-looked company on the stock market, where share prices are undervaluing its prospects. All you have to do is discover
it.
21. If you don't study the companies behind your investments, it's gambling.
22. Time is on your side when you own shares in great businesses.
23. If you do not have time to invest actively, buy a few share funds with differing strategies.
24. Overseas focused funds can provide access to faster-growing economies.
25. In the long run, a portfolio of well-chosen shares and/or funds will out perform most assets classes. However, a portfolio of badly chosen share investments underperforms cash under the mattress.
What do you think?
So there we have twenty-five experience-based insights from a very successful stock-picker and investment strategist. Why not tell us what you think of them, and maybe add a few of your own, in the comment box below.
http://www.fool.co.uk/news/investing/2011/12/14/25-golden-rules-for-investing.aspx?source=uhpsithla0000001
Cheers!
