Expert advice

Oct 04, 2013,16.01 IST

Peter Lynch's 6 basic checks every investor should follow

Nitin Vyakaranam
arthayantra.com

The last quarter for the current calendar year is round the corner. Globally and locally, investors are still puzzled about the future outcome of their investment. In uncertain times our judgment is affected and we make bad decisions – this statement holds good for investments as well.

Markets will find order from the disorder, but the common man fails to understand it. We can learn from the legendary investors like Peter Lynch who were not affected with market fluctuations. It’s time we pick a page from his life and investing ideologies.

Also read: How to control risk and reap rewards from your investments

Who is Peter Lynch? Peter Lynch was known for the consistent returns he generated for his investors at Fidelity’s Magellan mutual fund. When he started overseeing the portfolio of Magellan in 1977, the fund was less know and had only USD 18 million in assets.

Magellan’s assets were managed by Lynch from 1977 to 1990. During these thirteen years, the compounded average annual investment return generated by him was close to thirty percent. Lynch‘s success depended on his ability to adapt to different investment styles and go with whatever worked at that time.

Even if his styles of investment differed with changing times his fundamental checklist remained constant. At an investment conference in New York in 2005 Lynch shared his checklist. It is a good idea to revisit these checks to help our own perspective about investments.

1. Know what you buy

Lynch desired to know everything about the company and carried out his ground checks before investing in it. He also advocated investing in companies with which one is familiar with or whose business is relatively easy to understand. In the words of the legend himself – "Investing without research is like playing stud poker and never looking at the cards."

2. Before you purchase, explain why you are buying it

The reasons for our purchase should never be based only on someone else’s suggestions. In order to explain why you are buying something you need to know what you are buying.

3. It is futile to predict the economy and the interest rates

One needs to cut market noise and concentrate on core fundamentals when selecting investment options. Lynch quoted that "If you spend more than 13 minutes analyzing economic and market forecasts, you've wasted 10 minutes."

4. Good management is important- buy good businesses

Lynch invested in the ‘story’ a company has to offer. What a company is going to do to deliver the desired results formed the crux of his investment decisions. If a company has a business that anyone can relate to and the management has clear plan to deliver expectations, then this check is cleared.

5. Be flexible and humble and learn from mistakes

No one is perfect. Not living in a self denial that our bad investment choices will someday turn good is a humble start.

6. There is always something to worry about

Investments are subjected to various risks and market conditions. No investment plan can curtail all the risks. One can only mitigate risk to achieve higher degree of success with their investments. While picking securities, Peter Lynch stuck to what he knew or could easily understand.

He mostly invested for the long run and was unfazed by short term market volatility. Buying good business at reasonable price was his mantra. In order to pick good business he turned as many stones as possible to spot the hidden gems.

Attempt to understand the Peter Lynch approach to investing. You will realize that a share is not a lottery ticket but a part-ownership to a business.

The author is the founder and CEO of www.arthayantra.com

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