Compounders & Quality
Peter Lynch
Classify the business first, know its story, and let ten-baggers run - but know where "buy what you know" misleads.
Peter Lynch ran a very famous American mutual fund (a big pool where many people’s money is invested together) called Magellan, from 1977 to 1990. Under him the fund grew enormously, averaging around 29% a year, which is why he became one of the best-known investors in the world. He was special because he wrote simple, plain-English books for ordinary people, not just experts. His whole message was that everyday people can understand investing if they use what they already see in daily life and do their homework.
The method
Lynch first sorted every company into six kinds (slow grower, stalwart, fast grower, cyclical, turnaround, asset play) and read each kind differently. He used everyday clues - a crowded new shop, a loved product - as a starting point, then did real homework: checking profit, loans, and price. He compared price to growth using P/E and PEG, insisted you be able to tell a company’s ‘two-minute story’, and watched what bosses did with their own money rather than what they said.
The record
As manager of Fidelity Magellan he turned a small fund into one of the largest, with returns that averaged roughly 29% a year over 13 years. But these numbers are old, from the American market of the 1970s and 80s, and past results are never a promise of the future.
Where they were wrong
Lynch’s famous ‘buy what you know’ is very often misused - people hear it as ‘if you like the product, buy the shares’, when he actually meant use it only as a first clue before doing homework. He also ran a huge, widely-spread fund holding hundreds of companies, not a tidy handful, so copying him as a small concentrated investor misreads what he did. And not every clue works: many of his own picks disappointed.
Studies
10- Study 01The six types of companiesBefore you read a company, ask what kind of plant it is - a mango tree is not a creeper.Read this study →
- Study 02Ten-baggersWater your flowers and pull your weeds - don’t cut down the guava tree while it is still a shrub.Read this study →
- Study 03Buy what you knowWhat you see is only a clue - do the homework before you decide.Read this study →
- Study 04The PEG ratioNever judge a price alone - hold it up next to how fast the profit is growing.Read this study →
- Study 05The two-minute storyIf you cannot explain in two minutes why you own it, you own a guess, not an investment.Read this study →
- Study 06DiworsificationWatch that a great jalebi shop does not burn its jalebis chasing things it does not understand.Read this study →
- Study 07Reading cyclicalsFor a cyclical, cheap-looking at the peak is the trap and dear-looking in the gloom may be the chance.Read this study →
- Study 08Do your homeworkThe boring evening of reading that almost nobody does is the advantage anybody can have.Read this study →
- Study 09The small investor’s edgeBeing small and free is a real advantage - but only for the one who turns an early sighting into homework and patience.Read this study →
- Study 10Watch what they doWhen you want to know what people truly believe, watch their wallet, not their microphone.Read this study →
Primary sources
full register →Read Peter Lynch in their own words. We reproduce none of it - these are the real things to go to.
Beating the Streetbook
Lynch's follow-up walking through how he actually researched and picked stocks at Fidelity Magellan. - available wherever books are sold - please buy the book
One Up on Wall Streetbook
Peter Lynch's guide to using everyday observation as a starting point, then doing the homework, to find good businesses. - available wherever books are sold - please buy the book