Peter Lynch: Finding Investments Hiding in Plain Sight

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Peter Lynch: Finding Investments Hiding in Plain Sight | GIO4X

Peter Lynch argued that ordinary people can beat professionals by paying attention to what is in front of them. He had the record to say it. He ran Fidelity's Magellan Fund from 1977 to 1990, returned about 29% a year, and grew it from $18 million to $14 billion.

Invest in what you know

Lynch found some of his best ideas outside the office. His wife Carolyn liked L'eggs tights, sold in supermarkets, which led him to their maker, Hanes. He noticed the queues at Dunkin' Donuts before he read its accounts.

You meet good businesses as a customer, employee or supplier long before analysts write about them. A doctor sees which drugs work. An engineer knows which supplier is winning orders.

The part people forget

"Invest in what you know" is the start of the work, not the end. Lynch was clear that liking a product is only a reason to begin research. He then studied earnings, debt, growth and price.

A great shop can be a bad stock if the price already assumes perfection. A popular product can belong to a company where it is 2% of sales.

Six kinds of stock

Lynch sorted every company into a category, because each needs different expectations:

Category	What it is	What to expect
Slow growers	Large, mature firms	Dividends, little growth
Stalwarts	Big, steady companies	Moderate gains, protection in downturns
Fast growers	Small, expanding firms	The source of big winners
Cyclicals	Profits rise and fall with the economy	Timing matters most
Turnarounds	Troubled firms that may recover	High risk, high reward
Asset plays	Hidden assets the market overlooks	Patience

The mistake is treating one type as another, for example holding a cyclical as if it were a steady grower.

Tenbaggers and price

Lynch coined "tenbagger" for a stock that rises tenfold. A few of them can carry a whole portfolio, which is why he held winners far longer than most managers.

He also popularised comparing the price-to-earnings ratio with the growth rate. A company growing at 20% on a P/E of 20 is fairly priced by his rough rule. One on a P/E of 40 is not.

Tell the story in two minutes

Before buying, Lynch wanted to explain in plain words why the company would succeed. If he could not, he did not understand it. He checked the story every few months to see whether it was still true.

He sold when the story changed, not when the price fell. He called selling winners to keep losers "pulling the flowers and watering the weeds".

What to take from it

Use what you see in daily life as a source of ideas, then do the research.
Know which type of stock you own.
Compare the price you pay with the growth you get.
Let winners run while the story holds.

Part 9 of 15 in the series Lessons From the Masters. Next: Benjamin Graham and the Margin of Safety.

Independent educational commentary, not investment advice. References to people and firms do not imply affiliation or endorsement. The picture is an illustration, not a photograph. Past results say nothing about future ones. Trading leveraged products carries a high risk of loss.