Peter Lynch Portfolio

Peter Lynch is heralded as one of the most successful investors of all time.

He was the manager of Magellan Funds at Fidelity Investments from 1977 to 1990. During these years, Peter Lynch grew the fund from US$ 20 million (m) to over US$ 14 billion (bn) in 13 years.

He averaged a 29.2% annual return on investment (before fees) which was substantially better than the S&P 500 Index, making Magellan the best performing mutual fund in the world.

Lynch has authored several classic books on investing, including One Up on Wall Street, Beating the Street, and Learn to Earn (with the latter co-authored with John Rothchild).

His books contain many invaluable investing tips. Lets have a look at his investing philosophy.

Peter Lynch's investing philosophy

His philosophy of investing is truly unique, yet it has a lot of common sense behind it.

Lynch believes in 'investing in what you know'. According to him, investors should invest in only those companies in which they understand the business model and fundamentals.

He is also a strong advocate of investing in undervalued companies. He believes companies with a price to earnings ratio below the industry average have the potential to perform better than others.

However, in a recent interview with the Wall Street Journal, Peter Lynch complained that investors apply his advice too loosely.

Buying what you know holds good only when the knowledge of the company is all-encompassing. Moreover, nothing - not even your long familiarity with the business - should overshadow the price you pay for the stock.

He is also credited with inventing the price-to-earnings-growth (PEG) ratio, which helps investors determine whether a stock is inexpensive given its growth potential, along with other stock valuation methods popular with value investor.

Peter Lynch's portfolio

When Peter Lynch joined Magellan, he had about 60 stocks and was advised to trim that number to 25-30.

He instead bought hundreds of stocks he believed were bargains, including the then-unusual step of owning multiple stocks from the same industry.

In 1989, Magellan held an unheard-of 1,400 stocks.

Although he was successful in juggling so many stocks, he is wary of over-diversification just the same.

Lynch says investors should own however many exciting prospects that they are able to uncover. On the other hand, Lynch warns against investment in a single stock.

One of Lynch's first successful investments was in an air-freight company called Flying Tiger, which helped him pay for graduate school.

Lynch's portfolio currently contains some of the largest winners during the 80s, including Apple, Fannie Mae and Eastman Kodak.

How to pick stocks like Peter Lynch?

Here are some of the key criteria that Lynch suggests investors consider before investing in a stock -

1. Earnings Growth - A pattern of earnings growth reveals the stability and strength of a company. Ideally, earnings should move up consistently.
2. The Price-Earnings ratio - This compares the current price to most recently reported earnings. Studying the pattern of PE ratios over a period of several years should reveal a level that is "normal" for the company. Comparing the ratio to the industry's may help reveal if the company is a bargain.
3. Debt to equity ratio - A low debt to equity ratio provides manoeuvring room as the company expands or experiences trouble. Lynch is especially wary of bank debt, which can usually be called in by the bank on demand.
4. Net cash per share - Net cash per share is calculated by dividing the net cash by the number of shares outstanding. High levels indicate financial strength.
5. Dividend payout ratio - Lynch suggests that investors who prefer dividend-paying stocks should seek firms with the ability to pay during recessions and companies that have a 20-year or 30-year record of regularly raising dividends.
6. Inventories - Lynch notes that, for manufacturers or retailers, a high level of inventory is a bad indicating that inventories are growing faster than sales. On the other hand, if a company is depressed, the first evidence of a turnaround is when inventories start to be depleted.

In conclusion,

Lynch never tried to time the market nor predicted its direction. If he believed in the company, he would invest in it.

If you wish to participate in the stock market and invest like Peter Lynch, it is essential that you do your homework.

Ensure you check the fundamentals and valuations of the business and stay updated on what the business does.

Also, aim for long term investments if you believe in the business. Don't try to time the market.

These small guidelines can take you a long way in your investing journey.

Happy Investing!

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...