Picking rules - the Lynch method

2022년 12월 2일

Back in 1977, the still famous investment company Fidelity Investments entrusted the management of a small fund of $18 million to this very man. The next 13 years were impressive for the Magellan fund and its manager - the famous Peter Lynch. The fund's assets grew to $14 billion, more than doubling the average annual growth of the S&P500 stock index.

When he stopped actively managing assets, Peter shared his approach with the rest of us. Some of his thoughts inspired me to create my approach and may be useful to you as well.

1. The private investor has an objective advantage over institutional investors (e.g., funds) because he is more agile. He is not burdened by the need to coordinate his actions with the management of the company, and his purchase requests are easily satisfied by the market. Agreed, it's easier to buy for $1,000 than it is to buy for $1 billion. Thus, the private investor can catch prices that the big "players" will have a hard time getting.

2. Don't spend everything you have under your belt on stock investments. The trades will not be able to close "in the plus" just by your own volition. So first provide yourself with a financial safety cushion, a stable job and a place to live, and then start investing.

3. Admit to yourself: are you a patient person who is capable of making independent decisions, diving deep into analysis and soberly reacting to plus and minus changes? If not, practice, but on small volumes.

4. Never buy a company's stock if you can't explain what it does and can't talk about its financial performance. The stock market is no place for gambling. There are slot machines, etc., for that.

5. The company works for profit and grows because of it. So keep an eye on everything that affects profits. Evaluate the company not in monetary units, but in the number of profits.

6. Watch where the company invests its profits. If it's mostly capital investments that will probably make a profit someday, in the distant future - think about it. After all, the beautiful future as conceived may not come. If, on the other hand, the company is allocating its profits to buying its own stock, it means that management thinks the current stock price is attractive enough.

7. The success of the stock may be unrelated to the company's financial success. Beware of such investments.

8. A company's financial success may not be reflected in its stock price for a long time. However, the longer the period in question, the more direct the relationship. So if you select companies based on an analysis of financial performance, be prepared to make a long-term investment.

To this day, these thoughts help me look at assets consciously and not give in to spontaneous decisions.

What do you think of this approach?