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Business News/ Money / Personal Finance/  4 key investing lessons from legendary investor Peter Lynch

4 key investing lessons from legendary investor Peter Lynch

Stock investing is serious business. It becomes more serious when you buy and sell stocks to earn considerable returns in future. Your decision will have a make-or-break effect on your ability to create wealth. 

Know what Peter Lynch says about investing in the stock market. (Unsplash)Premium
Know what Peter Lynch says about investing in the stock market. (Unsplash)

Peter Lynch is not just another average investor from your neighbourhood. The name is synonymous with the likes of some of the greatest minds in the world of investing like Warren Buffett and Charlie Munger. This former manager of Fidelity Magellan Fund who raked in nearly 20 per cent year-on-year returns for his investors from 1977 to 1990 went on to create America’s largest mutual fund worth $13 billion. One can find some snippets of his wisdom and experience in his much-acclaimed books “One Up on Wall Street" and “Beating the Street". We share some with you below

There will always be a bit of inherent risk

Stock selection is unlike pure science wherein you can always rely on evidence-based results. Irrespective of how much time and effort you have put in, you will always end up with some non-performing stocks in your portfolio. Besides, not all stocks will perform simultaneously. Some may just go up by 20-30 per cent while others would remain a dud for the first few years only to spring up like a bamboo shoot in the years to come. However, there will be others who would never budge or titillate within a certain range. These stocks will only water down the returns that you earn. They are like weeds that you must not be shy to rid of to allow you to invest in fundamentally better stocks in the long run. In the business of stock selection, you will succeed only 60-70 per cent of the time. Not all stocks will perform as expected. There is always a bit of risk involved.

READ MORE: Warren Buffett's 9 investment lessons for a volatile market

Don’t let fear override your insight

New investors on the block have an innate tendency to feel concerned with every news piece affecting their stock selection decision. Too much concern about stocks is synonymous with first-time investing, which is soon replaced with complacency as you get used to the frequent ups and downs in the market. Succumbing to fear is the most common emotion that refrains many from staying invested in the market.

Many investors suffer from a lack of conviction as macro-economic factors impede market movement or cause it to fall down drastically. Investors feel afraid and lose out on the opportunity to buy stocks of fundamentally sound companies at bargain prices. The subsequent bull market tends to ring in smugness among investors who unwittingly believe that the market would continue to go up sans any hurdles. This makes them greedy who then buy stocks at unrealistic high valuations. They turn greedy when they should be afraid, thus, spelling their downfall. And when the market crashes, these investors lose hope and sell their stocks in a jiffy.

Fear and callousness override sense and wisdom in most cases and this is what keeps them from turning into long-term investors.

READ MORE: 5 money lessons to learn from Netflix drama ‘Inventing Anna’

Focus on the stocks’ fundamentals

First, understand why you are buying stocks. Remember that when you are buying shares, you are actually owning a piece of that company. Check the company’s fundamentals like its earning potential, consistent performance, finances, moat (if any), expansion plans along with its long-term prospects. Stick to fundamentally sound stocks no matter the noise around. It is the fundamentals that count in the end so beware of making decisions in haste under peer pressure or unsolicited opinion from social media experts. You will experience recession at least once in your investment journey. Inflation will affect stocks’ value too. However, companies working on sound fundamentals will bounce back once the economy picks up. The market will eventually go north and stocks will gain value in the long run. Deal with the facts on the ground instead of speculating about the future.

Research is the key to success in stock markets

Ignore people who say that they are playing the market. Remember that you can never play the market, leave alone tame it. If you are looking to play the market based on what others tell you, beware that you are in for short-term gratification only. In the long run, you will only stand to lose. Investing in penny stocks hoping that their prices would go up with the bull run will ensure you limited excitement. Remember to analyse stocks and evaluate their fundamentals just like you spend time deciding on a new electronic device or a gift for your friend. Dabble in stocks only when you understand the basics; clueless manoeuvring will only cause the market to play you.

Don’t misconstrue investing in stocks as a ballgame that you enter to play and make merry. Stock investing is a serious matter, especially, as it decides your wins and losses and how your earnings would fare in future. Conscientious playing can help you not only earn but also create enough wealth that you can enjoy later or leave behind as a well-meant legacy for your loved ones.

A diversified portfolio neatly divides your assets into more than one asset class in order to reduce risk and maximize profits.
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A diversified portfolio neatly divides your assets into more than one asset class in order to reduce risk and maximize profits.

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Published: 28 Jun 2022, 09:04 AM IST
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