There is no separate introduction required for the maestro and one of my gurus Peter Lynch. His tremendous capability of consistently beating the street by a good margin can be found all over the internet. Lynch believes in investing for the long term. Lynch thinks individual investors can perform well by investing in companies they know or by getting to know a company and it’s products, then its business model, and its fundamentals. Lynch wasn’t just a great investor/fund manager but for retail investors like me, he is a great mentor. In many of his lectures, conferences, and books Lynch has been very kind to put his secrets in a very simplified manner and everyday language.

Beating The Street by Peter Lynch

In his book, Lynch has summarized his approach in 25 investing principles outlined as Peter’s Principles. Lynch in his best efforts has shared his real-life experience while relating to different aspects of investing. Below, I have tried to extract some of his tips and principles chapter wise most of which are self-explanatory and are most important for any value investor, so let’s dive into them right away!

Never invest in any idea you can’t illustrate with a crayon.

Peter has always emphasized on choosing stocks of the company which one understands. One should know about the products this company has to offer and understand them very well. Based on this understanding, one should be able to illustrate his/her idea about this company using crayons on paper.

St. Agnes Portfolio

Peter in his book talks about an energetic group of 7th grader portfolio managers from St. Agnes school. Yes, you read that right! These 7th graders from the school in Massachusetts worked under the guidance of their teacher to launch a model portfolio. Little did they know, they were subject to the study of their teacher who was reluctant to prove that no Wharton or Quotron degree is needed to pick stocks. Their model portfolio delivered massive returns of 70% over a period of two years. I am sharing their framework below, which can be used by anyone who wants to start investing.

  1. Come up with a list of potentially attractive companies.
  2. Research each one of these companies to check their earnings and their relative strength.
  3. Sit down together and review data, only then choose stocks.
  4. Choose 2 dividend stocks.
  5. Chosen stocks will need to be explained with the service that the company provides and/or products it sells.
  6. Pick a company that has room to grow.
  7. Always buy what you know!

The students also shared some of their learnings below:

  1. Good company increases its dividend every year.
  2. Always diversify your investments in different companies.
  3. Never fall in love with a stock! Always keep an open mind.
  4. You will make more money in a growth stock.
  5. Do not buy a stock because it’s cheap, but buy the stock because you know a lot about the company!

N.A.I.C. Way

National Association of Investors Corporation (N.A.I.C) based in Michigan is an organization that represents 10,000 stockpicking clubs. The clubs invest on a regular timetable, taking out the guesswork of timing the market. Rules are not always a good thing, but Peter mentions that these clubs never used to act impulsively on any buy or sell decisions. The groups had a rule to collectively decide on buying and selling stocks, which also brings upon more responsibility on members and helps to bring wise ideas on the table.

Certainly, N.A.I.C had a better framework from those St. Agnes portfolio managers. I have tried to put up a few pointers which I thought are useful and good to know for each one of us trying our hand at an organized investing approach. Below is the list.

Investors Manual

Peter was kind to share the N.A.I.C. investors manual, it contains several important maxims that can be an extension to the above learnings in St. Agnes episode. In one of such fact, Peter resonates with the N.A.I.C’s learning that says, “If you pick five different growth companies, three will perform as expected, one will run into some unforeseen trouble and the fifth will do better than you could have imagined.”. Now let’s go over the other maxims.

N.A.I.C. Investor Manual

  1. Hold no more stocks than you can remain informed on.
  2. Invest regularly.
  3. See first that sales and EPS are moving forward at an acceptable rate and second that you buy the stock at a reasonable price.
  4. It is well to consider the financial strength and debt structure to see if a few bad years would hinder the company’s longterm progress.
  5. Buy or do not buy the stock based on whether or not the growth meets your objectives and whether the price is reasonable.
  6. Understanding the reasons for past sales growth will help you form a good judgment as to the likelihood of past growth rates continuing in the future.

Next in this series » Click here for the next chapter in this series.

Let me know what you think in the comments below. The more you share, the more knowledge we spread together! Kudos! Peace!