Peter Lynch, Growth Investing Expert

Peter Lynch is one of the best-known names in investing. He ran Fidelity's Magellan Fund for thirteen years from 1977 and in that period, Magellan was up over 2700%. Lynch managed a vast portfolio, containing over fourteen thousand stocks at any time, and turned over the whole portfolio on average once a year. Yet even in difficult markets, he was almost always opposed to assets sitting in bonds and cash. Instead, he advocated holding good quality stocks with low volatility when going defensive.

Lynch's basic message is that an individual investor can actually find great stocks before Wall Street does: using a combination of intelligence, reflection, perseverance and discipline, it is possible for the average person to uncover great investments. His central point is that products and services you use and enjoy are often provided by excellent companies. If you research these companies and find out whether or not the stock that corresponds to them is priced favorably, you have an outstanding chance at compounding market-beating returns industries and businesses; investigating how a company treats its customers and vice versa. This is the only way I know to find great companies, and nothing beats the feeling when it pays off.

While a fund manager is more or less forced into owning a long list of stocks, an individual has the luxury of owning just a few. That means you can afford to be choosy and invest only in outfits that you understand and that have a superior product or franchise with clear opportunities for expansion. You can wait until the company repeats its successful formula in several places or markets (same-store sales on the rise, earnings on the rise) before you buy the first share.

If you put together a portfolio of five to ten of these high achievers, there's a decent chance one of them will turn out to be a ten-, a twenty- or even a fifty-bagger, where you can make ten, twenty or fifty times your investment. With your stake divided among a handful of issues, all it takes is a couple of gains of this magnitude in a lifetime to produce superior returns.

So what advice does Lynch give to the typical individual investor? Writing in his regular column in Worth magazine, he recommends:

Find your edge and put it to work by adhering to the following rules:

With every stock you own, keep track of its story in a logbook. Note any new developments and pay close attention to earnings. Is this a growth play, a cyclical play or a value play? Stocks do well for a reason and do poorly for a reason. Make sure you know the reasons.

Pay attention to facts, not forecasts.

Ask yourself: what will I make if I'm right, and what could I lose if I'm wrong? Look for a risk-reward ratio of three to one or better.

Before you invest, check the balance sheet to see if the company is financially sound.


Don't buy options, and don't invest on margin. With options, time works against you, and if you're on margin, a drop in the market can wipe you out.

When several insiders are buying the company's stock at the same time, it's a positive.

Average investors should be able to monitor five to ten companies at a time, but nobody is forcing you to own any of them. If you like seven, buy seven. If you like three, buy three. If you like zero, buy zero.

Be patient. The stocks that have been most rewarding to me have made their greatest gains in the third or fourth year I owned them. A few took ten years.

Enter early but not too early. I often think of investing in growth companies in terms of baseball. Try to join the game in the third inning, because a company has proved itself by then. If you buy before the line-up is announced, you're taking an unnecessary risk. There's plenty of time (ten to fifteen years in some cases) between the third and the seventh innings, which is where the ten- to fifty-baggers are made. If you buy in the late innings, you may be too late.

Don't buy cheap stocks just because they're cheap. Buy them because the fundamentals are improving.

Buy small companies after they've had a chance to prove they can make a profit.

Long-shots usually backfire or become no shots.

If you buy a stock for the dividend, make sure the company can comfortably afford to pay the dividend out of its earnings, even in an economic slump.

Investigate ten companies and you're likely to find one with bright prospects that aren't reflected in the price. Investigate fifty and you're likely to find five.