Peter Lynch’s background

After graduating from Boston University, Peter Lynch joined the financial services firm Fidelity. 11 years later, he became a manager of the Magellan Fund. During the 13 years (1997-1990) that Peter Lynch managed the Magellan Fund, it had an average annual return of 29.2%.

Not only was Peter Lynch an outstanding value investor, but he was also very popular with small investors. As a result, he became the face of all Fidelity’s PR and advertising on TV and in newspapers.

But perhaps Peter Lynch is best known for his popular books, most notably One Up on Wall Street.

Peter Lynch’s book One Up on Wall Street

In which he divided stocks and stock trades into 6 different categories:

1. Fast-growers: Small companies with proven business models that can expand into new regions. The most common examples are software and franchise companies.
2. Slow-growers: companies that are no longer growing fast.
3. Cyclicals: Companies in cyclical industries, such as construction and real estate.
4. Asset Plays: Typical Benjamin Graham-style value investments, where the market value of the stock is less than the value of the company’s actual assets.
5. Turnarounds: Companies (preferably fundamentally sound companies) that have faced a temporary challenge they can overcome and return to their previous success.
6. Stalwarts: Large, safe companies with high dividends.

To this day, there is no one who has come up with a better methodology for categorizing stocks than this. Or perhaps there is, but not in comparison. By the time Peter Lynch shared this information it was easily the most important thing for all value investors. So this was probably Peter Lynch’s biggest innovation and contribution.

There are other types of stocks since then, but this still comprises 50-80% of publicly listed stocks.

Quotes by Peter Lynch on value investing:

“The very best way to make money in a market is in a small growth company that has been profitable for a couple of years and simply goes on growing.”

 

Peter Lynch’s top tip for private investors:

• Try to find investments related to your work or your main interests. Then it is easier to be motivated for the long term.
• Don’t fight your natural urges, but let interest guide your investment activity – but don’t forget to do the actual analysis too.

Peter Lynch’s strategies for value investing

• Peter Lynch was open to all types of investments, in fact his open-mindedness was stronger than most investors, but his best trades were in fast-growing mid-cap companies, and this is probably what he is best known for.
• Peter Lynch tried to time Turnarounds. And often succeeded – thanks to his extremely hard analytical work, numerous company visits and correspondence with CEOs.
• Start with a strong trend and think about how it might affect the value chain for a particular industry. For example: News that the turnover of
  construction firms are higher than people think could prompt Lynch to investigate their subcontractors such as forest products, cement, or
  roofing materials.
• Look for industries that are heading towards  consolidation and find the company that is best financed and likely  to buy up the others.
• Research insider trading in companies you are interested in.
• Buy companies that are so easy to run that even an idiot can be CEO and do well.
• Look for leading companies in smaller, profitable niches.
• Peter Lynch’s favorite: a profitable and growing company in an otherwise slow-growing industry.
• Avoid the most popular industries and companies, the most talked about and watched by analysts.
• Avoid large companies in popular industries where the fixed costs and  expansion costs (for growth) are going up at breakneck speed.
• Peter Lynch personally monitored about 100 stocks and their target prices in the short term. This allowed him to regularly rebalance his portfolio as one of these companies became cheaper relative to one another. Like John Templeton’s monitoring of many different markets at the same time, it is unusual for a value investor to have such a strong simultaneous ability.

Read more: About 20 other renowned value investors and their strategies.