Peter Lynch ran the Magellan mutual fund for 13 years in the late 70s and through the 80s. The fund’s performance during this time was astounding, earning him a stellar reputation in the industry. Lynch encourages the reader to seek out ‘ten baggers’ and offers insights into ways the average investors has, or can have, one up on professional investors.
His first point is that investors should leverage their day-to-day observations of industries, companies, brands and their products or services in order to generate investment ideas. If, as a customer, you feel a company’s business picking up there might be an opportunity to make money as an investor – you may see a surging opportunity before analysts report on it.
Investors should do their own research and explore the ideas they strongly believe in based on what they know. Lynch urges readers not to trust the experts, to avoid trying to time the market (or predict the economy) and to develop the personal qualities required to be a successful investor such as discipline, independent thinking, self-reliance and being able to remain calm under stress.
In terms of risk, the author suggests you shouldn’t invest unless you can afford to lose (and already own a home).
Lynch dedicates about one third of the book to explaining what you should be looking at when you do fundamental research on a specific company and, more importantly, how to interpret the numbers so you can form a view on ‘why’ things are happening. He offers several great examples, and it all boils down to learning as much about the company as you possibly can – qualitative and quantitative analyses are equally important.
Lynch finishes the book off by offering suggestions on how to put together and maintain a portfolio, including how long to hold a position for and how to identify when it might be time to sell. He shines a light on the importance of being patient and also having the confidence to take the path no one is taking – in other words, if everyone is selling there might be an opportunity to buy. Don’t just follow a trend. You need to think independently.
At Cadence, we also believe fundamental analysis is one of the cornerstones of stock picking. However, we believe combining technical analysis (timing the market) with our own fundamental research can help us achieve superior risk adjusted returns – learn more about the Cadence Investment Philosophy here.
This book is an excellent read for anyone with an interest in the stock market and investing. We consider it a must-read.