We are confronted everyday with news that our economic environment is in turmoil. The key he says is not to get scared out of stocks. In particular, successful investors do not allow their day-to-day worries to dictate strategies or make impulsive decisions. He says you only need to select a handful of high-quality stocks after thoughtful research to be successful.
“People who prefer bonds do not know what they are missing” Peter Lynch, Beating the StreetĪt the time of writing (1993), Lynch notes that stocks have been more rewarding than bonds and cash deposits over the long run. In his book The Warren Buffett Way, author Robert Hagstrom describes how Buffett seeks companies with stable long-term economic propsects, strong balance sheets, honest and rational managers, and a stock price well below his estimate of intrinsic value. Lynch’s philosophy shares strong similarities with another legendary investor, Berkshire Hathaway’s Warren Buffett. He notes for example that capital gains tax will hurt the investor who switches too much. The Warren Buffett WayĪll things considered, Lynch suggests it is probably more reliable to stay with an investment vehicle that is steady and consistent than to attempt to catch the next wave of investment success. Significant accounts payable is okay if the company is paying its bills slowly and using cash in more effective ways. This is a potential symptom of deferred losses and an overstatement of earnings. Lynch also prefers to avoid balance sheets with too much inventory or receivables. Lynch may make some concessions if the debt is not due for many years and/or not owed to banks. He likes balance sheets with at least twice as much equity as debt given how problematic high leverage can be at the worst of times. Peter Lynch chooses companies with healthy balance sheets and favourable prospects, but are not of interest to Wall Street at the time. Management teams and economic conditions can change. As such, looking at past performance to evaluate stocks can be unreliable sometimes. Some companies will report phantom earnings through acquisitions and asset revaluations. Similarly, he says it is important to remain vigilent of companies that report phantom earnings. However, he says a company with a high P/E ratio that grows at a high rate will typically outperform a slow-growing company that is available at lower P/E ratio. Peter Lynch feels that any growth stock that sells at price to earnings level of 40 and beyond are typically in extravagant territory. The story is even better if the company is well placed to navigate industry downturns, and has a long runway for expansion. He says if we can find a 25% grower at a P/E ratio of 20 or less, it is most likely a buy. This can be thought of as a hurdle rate or margin of safety for selecting stocks with upside relative to its purchasable price.
Lynch’s rule of thumb is to look for stocks that sell at or below its earnings growth rate. They reject corporate bureaucracy, support their staff well, and capture profitable niches in often overlooked industries. Lynch’s favourite companies tend to be low-cost, low-leverage operators that avoid boardroom extravagance and managerial hierarchy. Finding undervalued stocks will usually involve looking for great companies in out of favour industries. Lynch says it is difficult to lose when we buy great companies that trade at 3-6 times earnings. Like most value-oriented investors, Peter Lynch likes to buy stocks at reasonable prices in companies whose sales and earnings per share are increasing at attractive rates.
“If you like the store, chances are you’ll love the stock” Peter Lynch, Beating the Street This includes what he looks for in investment opportunities, where to go prospecting and how he undertakes investment research. In this post, we will review some of the lessons we took away from Lynch’s book. The book offers an educational and accessible introduction into constructing a sound investment portfolio. Lucky for us, Peter Lynch has generously described his investment style in his 1993 book Beating the Street. The S&P500 achieved less than half of that during the same period (between 1977 & 1990). During his 13 years as money manager for Fidelity’s Magellan Fund, the fund achieved an annual return of 29% per annum. Fidelity’s Peter Lynch falls right into this category. To invest effectively, it probably helps to learn as much as possible from the very best investors.