Peter Lynch
 

Is a world-renowned American investor who managed the "Magelland fund" from 18 million$ to 14 billion$ between 1977 to 1990. He has become an icon in investment, both as a mentor for stock analysts and as a writer of books on the subject.

Peter Lynch has not released the specific strategy used. He has given out an advisory/guiding explanation of what you should look for as a fundamental investor. He has a famous quote that says; "Buy what you know". He believes that you can find good companies in industries you know before they become a "public stock" that all analysts are recommending in the media.

History investor

Peter categorized himself as a "history investor". Through extensive analysis, he built a "story" around a company and its further growth potential, before making an actual investment. In these "stories" he asked himself questions such as:

Lynch who was Peter Lynch he was good he Peter Lynch value investor Peter Lynch

  • What is the company doing now?

  • What will the company do in the future?

  • What does it do to achieve its goals?  

He did not sell his shares in a company until the "growth history" of the company had changed for the worse.

His most famous book has become a bestseller in finance:

Invest in small undervalued quality companies

According to Peter, small companies are generally better investments than large companies, this is because you have a greater chance of achieving higher returns in small companies. He also points out that each share you own is your own stake in a real company. He believes that the market has already priced the company at what the masses think it is worth. If you expect a price increase in the share, one of these three things must happen:

  • The company needs to expand. This is preferably done via organic growth in sales/turnover, or via several new stores/locations where the industry carries out its business model.

  • The market underestimates the stock, or the quality of the company has not yet been discovered.

Small quality companies often have two of these traits. Since they are relatively small, they are not on the analysts' watch list yet. The chance of an underestimation of the share price is thus great. Institutional investors often avoid small companies in the beginning. This is because they can not buy large enough positions where changes in the stock price will drive any particular change in their bottom lines. When they finally start buying shares in these small "quality companies", the share price will increase sharply. This is due to the fact that there is little availability of shares in relation to the demand from the institutions.  

Peter's advice and warnings

If you want to avoid taking big chances with your funds, you can follow Peter's philosophy of what good quality companies do. Peter insisted on knowing what the company had for plans around expansion, what pressure the expansion could have on costs, other pitfalls related to this, as well as other special characteristics the companies had. He believed that all quality companies have some of these features in common:

  • The company operates in a sustainable industry that will not change drastically, or attract aggressive competitors.

  • The company's earnings grow at a level that can be maintained (10-30%).

  • It operates within its niche and has satisfied customers.

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  • The company is under the radar of most people. You do not see any analysts recommending it or neighbors speaking about the company.

  • The products that the company delivers have high demand.

  • The company buys back its own shares to show that it has large cash holdings and solid earnings.

Peter also has some advice for stocks you should avoid trading. He believes that stocks that get great growth and lots of publicity in the beginning, often have a share price that grows from their fundamental assessments. He, therefore, says that you should avoid trading the most popular stock in a particular industry for this reason. This is because he believes that these companies are experiencing an unfortunate "hype" and FOMO, which will only provide short-term joy for those who get out in time. 

He also believes that there will soon be competitors who will only make money on the temporary "hype" that is ongoing. These competitors make copies of the product (as long as it is not patented), and this will cause the original company to get even less growth and sales.

You probably can not expect to match Peter's return. In any case, you may choose better companies/stocks, and get better returns by following his philosophy and methods. Looking for small quality companies that are ignored by the masses and analysts, is something that can give you good gains over time. In any case, you must do your own analysis to find out which stocks you think have the highest upside potential based on Peter's theories.

A combination of Peter's strategy and other fundamental factors can give you as a modern fundamental investor insight and returns. Below are other pages that you can use to further build on your fundamental strategy: