Peter Lynch is arguably one of the greatest investors in the world. Here are his twenty golden investment rules.
Rule 1: Know what you own – You have to know what you own, and why you own it. When you know what you own, you’ll be able to take better investment decisions.
Rule 2: Never invest in companies without understanding its finances. The biggest losses in stocks come from companies with poor balance sheets. Only invest in good companies and your return will increase dramatically.
Rule 3: Everyone has the brainpower to make money in stocks. Everyone has the brainpower, but not everyone has the stomach. If you sell stocks in panic, the stock market is not for you. Bear market and crashes are great investment opportunities.
Rule 4: Make use of your edge. Your investor’s edge is not something you get from JSE or Wall Street experts. It’s something you already have. Stock information can be found everywhere. In your work, when you go shopping, … Make use of it.
Rule 5: Amateur investors have big advantages compared to professionals. The stock market is dominated by a herd of professional investors. When you ignore them and think rationally, you have the advantage compared to professionals.
Rule 6: Focus on the long term. There is no correlation between the success of a company’s operations and the success of a stock over a few years. However, in the long term stock prices will always follow the underlying fundamentals of the company. If the company does well, you will also do well as an investor.
Rule 7: Long shots always miss the mark. Don’t invest in hypes or the next big thing. Instead, invest in quality companies with a healthy balance sheet, high profitability, and good capital allocation.
Rule 8: Don’t over diversify. Owning stocks is like having children, don’t get involved with more than you can handle. You should be able to analyse and follow up on every stock you have in your portfolio. When you know what you are doing and made your homework, you’ll be able to take good investment decisions when they matter most.
Rule 9: Have some cash on the side-line. If you can’t find attractive companies, put your money in the bank until you discover some. It is always a good idea to have some cash on the side-line. This allows you to invest strategically when Mister Market has become too pessimistic.
Rule 10: ROIC is key. You want to invest in companies with a good capital allocation. The Return On Invested Capital (ROIC) is one of the most important metrics for quality investors. The higher, the better.
Rule 11: Avoid hot stocks. Great companies in cold, non-growth industries are consistent big winners. For quality investors, the margin of safety lays in the competitive advantage of the company. Invest in great companies with a strong track record.
Rule 12: Only invest in profitable companies. When you can find a small cap quality company which is a market leader in a niche, you have found a potential multibagger.
Rule 13: Let your winners run. If you invest R1.000 in a stock, all you can lose is R1.000 but you stand to gain R10.000 or even R50.000 over time if you’re patient. You need to find a few good stocks to make a lifetime of investing worthwhile.
Rule 14: Small is beautiful. In every industry and every region, the observant amateur can find great growth companies long before professionals have discovered them. Do you notice something very interesting at your work or in the shopping mall? If the company is still small and listed on the stock market, this might offer great opportunities for you.
Rule 15: Stock market declines are opportunities. If you’re prepared, corrections can’t hurt you. Corrections are great opportunities to pick up the bargains left behind by investors who are panicking.
Rule 16: There is always something to worry about. There will always be uncertainty in the economy and on the stock market. Sell a stock because the company’s fundamentals deteriorate, not because the sky is falling. Time in the market is way more important than timing the market.
Rule 17: Don’t look at macro-economic factors. Nobody can predict interest rates, the future direction of the economy, or the movement of foreign currencies. Dismiss all such forecasts and concentrate on what’s actually happening to the companies in which you’ve invested.
Rule 18: There are always pleasant surprises to be found in the stock market. If you study ten companies, you’ll find one for which the story is better than expected. If you study 50, you’ll find five. The best thing that can happen to you, is buying a stock that goes up 100x.
Rule 19: Do your homework. If you speculate in stocks, you have the same chance of success as playing a poker game without looking at your cards. The stock market rewards people who do their homework.
Rule 20: Time is on your side when you own stocks of great companies. Time is on your side when you buy quality business. When the earnings of a stock goes up 10x, the stock price will follow.
The Way 