Peter Lynch is one of the greatest investors of all time. He managed the Magellan Fund at Fidelity, generated more than 29% of annual returns during his 13 years in office, and retired at 46.
He sat down with Fidelity for a 2021 interview to offer wisdom that every investor can benefit from. Here are three key tips from Peter Lynch that can help you reconsider and improve your investing style.
Hack #1: Know what you have
Peter Lynch talks about how careful people usually are with their money. He says:
The public is cautious when buying a house, when they buy a refrigerator, and when they buy a car. They’ll work hours to save a hundred dollars on a round trip airline ticket. They’ll put $5,000 or $10,000 on a ridiculous idea they heard on the bus.
Retail investors often look for the ‘next big thing’, which can make them fear they may miss them (FOMO), so they act impulsively and irrationally. But having a shallow understanding of the stocks you own can leave you uncertain about volatility. How will you know what to do if your stock drops 10%, 20% or 50%?
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If you can’t explain why you own a particular stock to a child in less than two minutes, Lynch said, you probably wouldn’t own the stock in the first place.
Hack #2: When to sell stocks
Volatility will eventually create uncertainty. Peter Lynch said that during his 13 years in the Magellan administration, the stock market declined nine of those years.
Knowing the difference between a damaged stock and a broken company is the fine line between accidentally chasing stock or taking advantage of great buying opportunities.
Deciding when to sell is exactly the same as when you buy it. You have a certain story – why did you buy this. This company is going from lousy to near lousy to improving. And the company has a lot of cash, so they won’t go bankrupt.
When work goes from semi-bad to better to good, I’ll probably be out of the house. You sell the company that was the growth story when there is no room for growth. When Taco Bell was only in Southern California, where would they go? Well, they’ve gone to Central California. Then they were everywhere. I mean, it’s a 70-year story.
You have to determine when the company is nearing maturity, and that’s when you’re going out. Or the story deteriorates. If the story is in order, wait.
In other words, you have investment thesis Why own the stock? Get to know the thesis inside and out so you know how to respond to ups and downs when they come up. Sell because your investment thesis is no longer strong, not because the stock price goes up or down.
Hack #3: It’s OK to Fail
People generally don’t like pain, and the fear of losing money can be a barrier to success for many investors. know yourself; If you can’t stand the idea of investing in stocks, you should invest in them index funds. However, mathematics can be in your favor for those who are willing to take risks.
You don’t always need to be “right” to make a lot of money in the stock market. Peter Lynch says:
You are probably right 5 or 6 times out of 10. But if your winnings go up 4, 10 or 20 times, that makes up for those who lost 50%, 75% or 100%.
Remember that the shares can only go down so far, but the winners can grow many times their original value. You can pick ten stocks and make nine of them go to zero. But if that one stock grew to ten times its value, it crashed even in spite of all the losers. Your mindset changes for the better once you realize and accept that losses are part of investing.
Investors often get in their way, and this is the common link between these three investment tips. Successful investing requires the right mindset because identifying a good stock is often easier than holding it through all the inevitable ups and downs.
Understand the companies you are investing in and focus on why you bought the stock in the first place. Accept the volatility that comes with investing, and keep a stable head during the ups and downs. Do these things and you’ll stand a better chance of investing in success over the course of your life.
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