Never invest in any idea you can’t illustrate with a crayon.” That is one of the simple tips Peter Lynch used to illustrate investment decision making for the unsophisticated investor.
There are several of such tips by Lynch which may serve as basic guide for investors with an eye on equities and other instruments. But before we consider them here, let us take a brief look at the background of Lynch.
Peter Lynch
He is a finance and investment expert who turned the fortunes of Magellan Funds between 1977 when he was appointed its Manager and 1990 when he retired. Assets grew from $20 million to $14 billion during his tenure.
Lynch graduated from Boston College in 1965 with a degree in finance, and served two years in the military before graduating from the Wharton School at the University of Pennsylvania with a Master of Business Administration in 1968.
Between 1974 and 1977, he rose to become the Director of Research at Fidelity Investments where he was primarily engaged as an investment analyst. From 1977 to 1990, he managed the little known Magellan Funds and achieved historic portfolio results in 11 out of the 13 years he managed the funds.
He is famous for several books. Two of them considered mandatory reading for investors are “One Up On Wall Street” (1989) and “Beating The Street” (1993).
Popular for uncommon skill in equities investment management, Lynch’s investment strategies worked like magic as he consistently beat the S&P 500 Index benchmark, posting average annual returns of 29 per cent.
He further advises investors thus:
• “Whatever the Queen is selling buy it.” In other words, if the government is privatising its entities, or selling fixed income instruments like bonds, treasury bills, et cetera, buy into it.
• “A sure cure for taking a stock for granted is a big drop in the price.” That is to say, when the share price of a stock drops to a ridiculous level, it is the appropriate time to buy, for the stock having bottomed out has eliminated the risk of further fall.
• “When even the analysts are bored, it’s time to start buying.”
• “When insiders are buying, it is a good sign unless they happen to be New England bankers,” another expression for compromised professionals.
• “When yields on long term government bonds exceed the dividend yield of the S&P 500 by six per cent or more, sell stocks and buy bonds.”
Much as these tips do not constitute the entire body of Lynch’s investment ideas, they are still relevant as basic skill for developing a culture of saving and investing by an average investor in equities.
Saving and investing requires knowledge and skill, and for anybody interested in planning for the future for retirement, education of children, or even for health challenge, the investment tips come handy.