Investing like Peter Lynch: 5 key tips

Peter Lynch is one of the most influential investors of all time. Discover 5 key lessons you can apply to your decisions.

Making good investments is easier when you can learn from the experts. Peter Lynch's wealth of knowledge, built up over decades in the financial sector, is not only an inspiration to those who want to start investing, but his insights are also valuable to the more experienced investors. Read on to discover 5 things you can learn from Peter Lynch and apply them to your next investment decision.

Who is Peter Lynch?

Peter Lynch is one of the world's most respected investors. He started working at an early age to help support his family – as a caddy at the local golf club, the person who carried the players’ equipment. He took his first steps into the world of investing as a student at Boston College, where he studied history, psychology and philosophy. Lynch used his savings to buy 100 shares in Flying Tiger Airlines at €6.50 each, which later rose to €75 per share, helping him pay his education. Strangely enough, he later realised that his initial investment had indeed been a mistake. "I believed that air freight would become the standard, but it didn’t”. In any case, the "mistake” didn’t become apparent until much later, and that didn’t stop him from continuing his career in finance.

He joined Fidelity Investments as a trainee in 1966 and he took over the management of the Magellan Fund 11 years later, which he ran for 13 years. Under Lynch’s tenure, the Magellan Fund grew from around €16 million to around €13 billion in assets under management. Peter Lynch's approach is characterised by meticulous research, the identification of long-term opportunities and in-depth analysis of the performance and management of the companies in which to invests. Although he is now retired, his experience and teachings continue to influence the capital markets. 

Peter Lynch: 5 investment lessons to keep in mind

Learn 5 valuable investment lessons from Peter Lynch that can help you improve your approach and make better investment decisions. 

1. Invest in what you know and understand 

For Peter Lynch, it is important to understand the business before buying shares in a company and to have an interest in the sector in which it operates. He admits he has avoided technology for this reason: "My experience has shown me that you don’t have to follow trends to be a successful investor. Most of the great investors I know, such as Warren Buffett, do not trade in anything they don’t understand.”  

What to do:  

• Consider investing in a company whose products and services you are familiar with and value (and even use or consume); 

• Invest in business models that you understand and appeal to you. 

2. Look beyond the benchmarks

How do you determine the potential of a future investment? Far from magic formulas or purely analytical analysis, Lynch believes in a thorough study of the market, the sector and the management team. The investor stresses the importance of looking beyond traditional benchmarks and of considering factors such as market trends, changes in the industry and the quality of the company's leadership.  

For example, after hearing his wife praise a Hanes Brands product several times, Lynch did his due diligence on the stock and invested in the company. His bet on the brand earned a return 30 times the amount invested. Conclusion: attentive observation of the environment and careful research are essential before making investment decisions.   

What to do:

• Take a holistic view of the company and the environment in which it operates;

• Assess the trends that could affect the stock’s performance;

• Carry out an in-depth market study to anticipate the growth potential of the sector in question;

• Ask investment experts to help you understand the company’s business model.

3. Analyse the company’s track record

Before you decide to invest in a company, do your homework. What is its financial history? How does it compare with its competitors? What are its expansion plans? 

Investing like Peter Lynch means being informed about the company's progress and trusting its strategic financial plan. Lynch also values simplicity in business – "The simpler it is, the better I like it”. When it comes to investing, Lynch prefers companies with accessible models and an efficient management. 

What to do: 

• Analyse the company's financial history, including, profit and growth over time;

• Assess the company's position in relation to its competitors;

• See how the company differs from others in the same sector;

• Keep abreast of expansion plans, new product development and future acquisitions.

4. Take a long-term approach

"You get recessions, you have stock market declines, If you don’t understand that’s going to happen, then you’re not ready. You won’t do well in the markets.” For less experienced investors, market volatility can lead to emotional decisions with negative consequences. According to Peter Lynch, market fluctuations are part of the business growth cycle, so the returns will be higher if you take a long-term approach, focusing on how shares will perform in 10 or more years’ time. 

What to do:

• Find companies with strong fundamentals, high growth prospects and significant competitive advantages;

• Analyse the company’s history of innovation and the pipeline of new launches;

• Avoid reacting emotionally to the occasional dip because, as Lynch says, "the real key to making money in stocks is not to get scared out of them.”

5. Diversify your investments 

For Lynch, as for most investors, diversification across different companies and industries is key. This allows you to better manage your risk when capital markets fluctuate.  "Normally I keep about 10-20 percent or so in the stalwarts, another 10-20 percent or so in the cyclicals, and the rest in the turnarounds”. The investor advises holding between 3 and 10 companies to allow close monitoring and increase the likelihood of rapid appreciation.  

What to do: 

• Consider a balanced number of companies that allow you to diversify without losing focus;

• Diversify your portfolio across different stock types;

• Keep an eye out for new opportunities.

Banco Carregosa, discover all our investment solutions 

Any financial investment involves risk and requires a strategic analysis tailored to your objectives. With Banco Carregosa’s services, you can benefit from the advice of experts with in-depth knowledge of the stock market to find the best investment solutions. Contact us.