Peter Lynch: Master Stock Picker, On How To Beat The Market

by The Smarter Wallet on April 7, 2010

In order to know where you’re going, you need to know where you’ve been.

For anybody interested in the world of finance, knowing about the greatest investors in history will teach us how to be better investors. We’ve written about Warren Buffet, the value investing guru before, so how about we take a look at Peter Lynch this time?

Peter Lynch: Master Stock Picker, On How To Beat The Market

Peter Lynch attended Boston College from where he graduated in 1965 with a finance degree. He then served in the military for a couple of years, after which he graduated in 1968 from the University of Pennsylvania’s Wharton School with an MBA.

He was named manager of the little known but now famous Magellan Fund in 1977 and achieved higher than average portfolio results until he retired. He is most recognizable for his work with Fidelity Investments. As a financial analyst, he began covering the paper, chemical, and publishing companies and slowly worked his way up to mutual fund manager.

Also a best selling author, Lynch has written three books that are must reads for any business or finance enthusiast (available in various forms):

Rules keep us grounded, and like all of the best investors, Peter Lynch has his own list of investment rules.

  • Know what you own.
  • It’s futile to predict the economy and interest rates.
  • You have plenty of time to identify and recognize exceptional companies.
  • Avoid long shots.
  • Good management is very important — buy good businesses.
  • Be flexible and humble, and learn from mistakes.
  • Before you make a purchase, you should be able to explain why and what you’re buying.
  • There’s always something to worry about.

From this list, one of the statements that resounded with me the most is the one that states that we should stick with what we know and can understand. If you have a lot of experience in the health care industry, concentrate your efforts on health care stocks. Adding to that, stay away from the spec. stocks. This goes against the approach of many modern investors who are in and out of stocks, sometimes within hours. Investing in high quality companies may be a bit boring but in the end you should make money (especially if you are well diversified).

As Lynch says, invest in what you know. This principle resonates well with average non-professional investors who have very little time to learn complicated quantitative stock measures or read lengthy financial reports. Since most people tend to become experts in certain fields, applying this basic “invest in what you know” principle helps individual investors find good undervalued stocks. More on this on the

Being The Best At What You Do

As mentioned, one way to develop your investment prowess is by following the examples of master stock pickers and investment advisers whom you respect. I certainly employ this tactic.

As an analogy, let me bring up something I enjoy doing with my time: one of my favorite weekend activities is golf. Not playing it, just watching it. You may have heard of a lesser known golfer by the name of Tiger Woods (well, you may have heard of him a lot more now that he’s been all over the news recently). He has something in common with the second ranked player in the world, Phil Mickelson: they both have an academic knowledge of everything having to do with golf — the history, the theories, the playing styles. They know what their competitors are doing and they know the layout and distances of every golf course they play. That’s what it takes to be the best.

If you want to be the Tiger Woods or Phil Mickelson of investing, you must read about the best investors of our time. While things may have been different during Peter Lynch’s time, his investing principles still hold true today. He believes that the retail investor has greater potential to make money than the mutual fund manager because small investors are more able to move in and out of positions with more flexibility. How much do you subscribe to this premise?

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