Investing in stocks can bring great rewards but it comes with its share of risks and uncertainty. A first time investor and a veteran alike can sometimes get fazed by market volatility. However, we can learn to handle our investments better from legendary investors like Peter Lynch who was not affected by market fluctuations.
The following checks can help us invest better and safer
Know what you buy: Mr Lynch desired to know everything about the company and carried out his ground checks before investing in it. He also advocated investing in companies which one is familiar with or whose business is relatively easy to understand. In the words of Mr Lynch himself- "Investing without research is like playing stud poker and never looking at the cards."
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.
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. Mr Lynch said, "If you spend more than 13 minutes analysing economic and market forecasts, you've wasted 10 minutes."
Good management is important, buy good businesses: Mr Lynch invested in the 'story' a company offered. 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 a clear plan to deliver on expectations, then this check is cleared.
Be flexible, humble and learn from mistakes: No one is perfect and we all make mistakes. Not living in in a make-believe world that our bad investment choices will someday magically turn good is a humble start.
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.
Be unfazed by short-term market volatility: 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 businesses at reasonable prices was his mantra. In order to pick good businesses 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.
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 a lesser known one and had only $18 million in assets. Magellan's assets were managed by Mr Lynch from 1977 to 1990. During these thirteen years, the compounded average annual investment return generated by him was close to thirty per cent. Mr Lynch's success was largely owing to his ability to adapt to different investment styles. Even if his styles of investment differed with changing times his fundamental checklist remained constant. At an investment conference in New York in 2005 Mr Lynch shared his checklist.
ArthaYantra provides personal finance advice online.
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