In This Article:
Peter Lynch is a legend in the mutual fund industry. The fund he managed -- Fidelity Magellan (NASDAQMUTFUND: FMAGX) -- generated returns of approximately 29% annually from 1977 to 1990, creating fortunes for investors along the way.
Yet Lynch's greatest contributions to individual investors may, in fact, be his timeless works One Up on Wall Street and Beating the Street. Within these classics are countless pearls of wisdom from one of the greatest investors of all time.
It was difficult to narrow them down to just 10, but here are some of Lynch's most valuable investment tips -- all of which can help you create long-term wealth.
Image source: Getty Images.
1. "Invest in what you know."
This is perhaps the most famous of all of Lynch's quotes, but it's often misunderstood. Lynch is not advising you to buy stock in a company simply because it makes your favorite product or service. This can be an excellent starting point, but Lynch also recommends diving into the business's competitive position, financials, and growth prospects before investing in its stock. When Lynch says to buy what you know, he's referring to staying within your circle of competence and investing in industries that you understand well.
2. "This is one of the keys to successful investing: focus on the companies, not on the stocks."
Stocks are not just pieces of paper or blips on a computer screen. They represent partial ownership of real businesses. As such, it's the business's fundamental drivers -- revenue, profits, and cash flows -- that will ultimately determine the value of its stock.
3. "What the stock price does today, tomorrow, or next week is only a distraction."
For a long-term investor, volatility and risk are two very different things. A stock's day-to-day movements are irrelevant. Investors would be better served by striving to reduce risk -- defined as a permanent loss of capital -- over their investment time horizons. In this regard, a keener focus on quarterly -- and, even better, yearly -- operating and financial results would be of greater use than a cursory look at often-misleading daily headlines.
4. "The typical big winner...generally takes three to ten years to play out."
Truly life-changing wealth is made over years and decades. As such, investors should be prepared to hold their stocks for long periods of time in order to maximize their gains.
5. "The real key to making money in stocks is not to get scared out of them."
The biggest challenge to holding on to your stocks is fear. Frightening headlines and fear-mongering pundits can cause even ardent bulls to question their views. That's why it's so important to know why you own your stocks. That way, as Lynch says, you can "stand by your stocks as long as the fundamental story of the company hasn't changed."