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Lessons from Peter Lynch - III

Mar 12, 2013

In our previous article on Peter Lynch investment philosophy, we spoke about behavioral aspect of finance and insisted on focusing on your requirements, attitudes, psychology and emotions before investing in markets.

What not to predict....

Once as an investor you have done a self assessment, there is one fact that you are better off knowing from the start. That there is no good market. Infact, no one can predict good or bad market. It may sound quite discouraging to some. But the good news is - this is not what you need to know to make money in the stock markets. Mr. Lynch believed that it is a futile exercise to predict the economy and interest rates. Making money in the stock markets is all about buying underappreciated companies, irrespective of the markets. In short 'Invest in companies, not in stock market'.

Look for specific edge....

For picking up underappreciated companies, one needs to have an edge. The specific edge will be different for different investors. It could be a knowledge or news that can give you significant headstart. For example, if you are employed as a sales person at cosmetic store, you will know which brands are in fashion and likely to remain in demand. The next step will be to find which company they belong to.

By virtue of your job, you will have a better idea of the sales trends than an analyst covering the industry. If the stock satisfies other criteria, you will be able to pick up stock before the premium starts getting reflected in the stock price.

One of the very simple examples of how to spot an opportunity is using online shopping websites. For e.g., Flipkart offers the option to sort products under categories 'most viewed' and 'best selling'. It also offers users reviews and product comparisons on quality and price. Such websites could be a good option to begin your research.

The 'homework' phase...

Mr. Lynch has drawn an interesting comparison between stock markets and game of stud poker. So while there is no winning formula, the player always has some open cards that can offer you insight and tilt the odds in your favor. Investing without research is like playing stud poker and never looking at the cards.

Now that you have a lead, start building on your story. At the same time, remain emotionally detached and unbiased while you research.

We will cover more on research in the next article.

Lessons from Peter Lynch - Series - Previous article | Next articles | All articles

Richa Agarwal

Richa Agarwal (Research Analyst), Managing Editor, Hidden Treasure has over 7 years of experience as an equity research analyst. She routinely scours the small cap universe for fundamentally strong companies trading at attractive prices. Having degrees in both finance as well as engineering has served her well in analysing business models across the small cap space.

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