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Lessons from Peter Lynch - I

Oct 16, 2012

In this age of information overload, picking the wheat from the chaff is difficult. And that is so true in the world of investing. Hot stock tips, recommendations and run of the mill research reports leave a common man clueless as to where to begin, what to follow and what to ignore.

And here to his rescue is Mr. Peter Lynch, the man who believes that 'Everyone has the brainpower to follow the stock markets. If you made it through fifth-grade math, you can do it'.

Invest in what you know

It is human nature to discount what one already knows, and put a premium to what is unknown and esoteric. That perhaps is the biggest irony as far as investing is concerned. Because this behavioral pattern makes one ignore the basic tenet of investing - Invest what you know/understand.

Keep your eyes and ears open

And it really is as simple as it sounds. The first step to investing is screening stocks. And the power of common knowledge at this stage can help you get that 'multibagger' - a term made famous by none other than Mr. Lynch. It's all about keeping eyes and using a bit of logic. Next time you visit a shopping mall, keep an eye for the products that are popular and attract mob. The next step would be to check out if the company making the product is listed. Keep an ear open for what a direct consumer has to say about a product. For every stock has a company tagged to it, and each company is associated with either the products or services. So, the starting step to stock analysis can be as simple as product/service analysis for which one needs not be a financial expert. The point is well validated when applied to stocks of companies associated with popular products such as Titan Industries (10 years CAGR is 52% versus 20% returns of Sensex) or Bata India's (10 year stock price CAGR returns 40% versus 20% CAGR returns of Sensex) or VIP Industries (10 year stock price CAGR returns 38% versus 20% CAGR returns of Sensex).

Source: Ace Equity, Equitymaster

Your edge over a fund manager

Investing is more of an art combining logic than numbers and statistics. It is the power of common knowledge that counts. And as far as that is concerned, a common investor is as good as or may be even better than a fund manager. Even if you can pick up one multibagger, it can make a huge positive difference to your small portfolio. So much so that you can afford to sleep a bit on the rest and still outdo the markets and the experts. And that's your advantage over a mutual fund manager. This is because while a multibagger can make a huge difference to your 'small' portfolio, the economies of scale are unlikely to work the same way for your fund manager.

Hence before becoming an investor, step into the shoes of a customer and try to know the potential of the product. Over a period of time, you will know what's good and what isn't, what sells and what doesn't.

The common perception is that best investment ideas are a rare commodity that gets exchanged amongst privileged people surrounded by stock quoting terminals. But the fact is - it is the ground level knowledge that counts. You just need to be alert and use common sense to make use of this knowledge.

Using this approach, you will avoid falling for recommendations blindly. And that is likely to pay off in the long run. It will also keep you shielded from the herd mentality that more often than not leads to losses, and at times when right, limits the gains .

Some caveats....

So far, the impression that one gets is that what is popular today and has the potential to remain so could be a good option. However, there is nothing sacrosanct about it. And what can be better example to prove this than Facebook that despite being immensely popular (and holding the promise to remain so) has not been a smart investment. So how can we avoid falling for such stocks? We will know more about it in our next article.

Lessons from Peter Lynch - Series - Next article | 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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