Atul Sethi from Farnam Tree gives his insight.
A BRIEF SUMMARY:
• Peter Lynch was a famous investor that achieved an average annual return of 29 percent from 1977 to 2000.
• The principles behind his success have more to do with investors’ mindset and approach, rather than genius or mathematical wizardry.
• He popularised the idea that individual investors can find investment ideas all around them, including in their households. If something is a staple in your – and many – households, it could very well be from a great company.
• Peter also famously paid little attention to predictions about where the market or interest rates were going, and when the next crash was coming. Ignoring the noise to focus on fundamentals is a tried and tested approach.
Investing legend Peter Lynch was a successful investment manager with a remarkable 29 percent annual return for over two decades. Peter’s success was not a result of complex mathematics and number crunching. Much of his philosophy is about the approach investors take and can be easily replicated by all of us.
INVEST IN WHAT YOU KNOW
Peter popularised the idea that individual investors can easily source great investment ideas through what they encounter in their daily lives. He championed the idea that noticing trends, products and services you personally use and love could lead to great investment ideas. For example, he discovered Dunkin’ Donuts because he was a fan of their coffee. Finding investment ideas can be overwhelming when there are so many approaches one can take. Looking in your kitchen and around your house can give you some great ideas. Great products and services do not always come from great companies so remember to use this as a starting point for further research.
DO YOUR HOMEWORK
Peter was famous for saying, “Behind every stock is a company. Find out what it is doing.” He emphasised that understanding the fundamentals of a business was crucial to making informed decisions. One litmus test he encouraged people to use was to assess one’s understanding of a company is whether you could explain your investment thesis in just a few sentences.
EMBRACE MISTAKES AND DIVERSIFY
Even with his stellar record, Peter was not immune to making bad calls. He admitted that some of his investment decisions were total failures. However, his winners more than made up for them. His philosophy was simple: you do not need to be right every time. But when you are, make sure your winners count.
The two big takeaways for us:
1. Diversify and spread your eggs in different basket
2. Do not be discouraged by losses. Try to learn from the mistakes.
IGNORE THE NOISE
Peter stood out from many in the investment community by avoiding the prediction of interest rates, market crashes or economic trends. Instead, he focused only on fundamentals. For him, this was to find investable companies he could purchase a reasonable prices. I believe that one of the factors of his remarkable success was his ability to tune out market hysteria. This is relevant now more than ever in the information age. Avoid making decisions based on heightened emotions such as fear or euphoria.
KEEP IT SIMPLE
By following Peter Lynch’s principles, you do not need to be a finance or investment professional to succeed. Curiosity, discipline and practice will take you much further than any accreditations will.
Atul Sethi is the founder and CEO of Farnam Tree, a licensed boutique investment firm based in Bangkok. Atul has over twelve years’ experience working in investment banking and as a research analyst, prior to starting Farnam Tree.
