Peter Lynch was an American investor who managed the Magellan Fund at Fidelity Investments from 1977 to 1990, delivering annualized returns of 29.2% and making it the best-performing mutual fund. His 4 key investing lessons were: 1) Invest in what you know through consumer experiences and fundamental analysis; 2) Be patient and don't get scared out of stocks during downturns; 3) Diversify across industries and companies with different earnings growth rates; 4) Do thorough research by turning over many rocks.

1. Peter Lynch’s 4 Critical
Investing Lessons
With Nick McCullum from Sure Dividend

2. Who is Peter Lynch?
Peter Lynch is an American investor who is most well-known for managing
the Magellan Fund at Fidelity Investments between 1977 and 1990.
During this time period, Lynch delivered 29.2% annualized returns,
consistently more than doubling the S&P 500 Index and making Fidelity
Magellan the best-performing mutual fund in the world. During his tenure,
assets under management increased from $18 million to $14 billion.
Lynch also wrote 3 influential investing books:
• One up on Wall Street
• Beating the Street
• Learn to Earn

3. Lesson #1: Invest in What You Know
“Never invest in any company before you’ve done the homework on the
company’s earnings prospects, financial condition, competitive position,
plans for expansion, and so forth.”
Two examples:
1. Lynch invested in undergarment manufacturer Hanes after his wife
expressed satisfaction with their pantyhose L’eggs. When competitors
introduced new pantyhose products, Lynch purchased them and brought
them to the Fidelity office for his female colleagues to judge.
2. Lynch invested in Flying Tiger because he viewed air freight as the
transportation of the future. He profited tremendously when the Vietnam
War began and the company began transporting troops and supplies
overseas.

4. Lesson #1: Invest in What You Know
While Lynch did not always get his investment ideas from positive consumer
experiences, he did not blindly invest in these ideas without performing
fundamental analysis first. Lynch emphasized that shareholders are
business owners:
“Although it’s easy to forget sometimes, a share is not a lottery ticket…it’s
part-ownership of a business.”
Many of Lynch’s best-performing investments are household names:
• Ford (F)
• Philip Morris (PM)
• General Electric (GE)

5. Lesson #2: Be Patient
Like many other famous investors, Peter Lynch began investing at a young
age. The Flying Tiger investment we mentioned earlier paid for Lynch’s
studies at the Wharton School of the University of Pennsylvania.
“So while I was in college I did a little study on the freight industry, the air
freight industry. And I looked at this company called Flying Tiger. And I
actually put a thousand dollars in it and I remember I thought this air cargo
was going to be a thing of the future.”

6. Lesson #2: Be Patient
Starting at a young age helped Lynch to develop patience. This helped him
to make intelligent decisions during periods of market turmoil.
“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.”
“The real key to making money in stocks is not to get scared out of them.”
Lynch rarely sold, even when a stock appreciated far beyond his cost basis.
He likened this decision to “pulling out the flowers and watering the weeds.”

7. Lesson #3: Understand Diversification
Peter Lynch ran a tremendously diversified stock portfolio. By the end of
Lynch’s career, the Magellan fund was known to hold more than 1,000
individual stock positions.
Owning a large number of stocks does not mean you are adequately
diversified. Lynch was also diversified by industry.

8. Lesson #3: Understand Diversification
More uniquely, Lynch diversified his portfolio based on the expected
earnings growth of the underlying business. Namely:
1. Fast Growers: Companies with expected earnings growth between 20%
and 50%
2. Stalwarts: Large companies with multi-billion dollar sales and 10% to
20% expected earnings growth
3. Slow Growers: companies that had expected earnings growth below
10%
Fast growers provided outperformance while stalwarts and slow growers
provided stability.

9. Lesson #4: Do Your Research
Peter Lynch recognized that investing is a research-heavy endeavor. He
was a tireless worker during his tenure as the Magellan portfolio manager.
“The person that turns over the most rocks wins the game. And that’s
always been my philosophy.”
Another component of Lynch’s investment philosophy is that everyone has
the research skills required to succeed in the markets.
“Everyone has the brainpower to follow the stock market. If you made it
through fifth-grade math, you can do it."
The following video illustrates this component of Lynch’s investment style
nicely.

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