The Initial Investing Rule according to Peter Lynch

by | Apr 9, 2023 | Invest During Inflation




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Peter Lynch is widely regarded as one of the most successful investors of all time. Known for his expertise in the stock market, Lynch was the manager of the legendary Fidelity Magellan Fund from 1977 to 1990. During his tenure, Lynch achieved an average annual return of 29.2%, making him one of the most famous and revered investors in history.

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There were many reasons for Lynch’s remarkable success, but perhaps the most important was his adherence to a simple rule that he believed was the key to investing success. This rule, which Lynch called the “first rule of investing,” was incredibly simple: invest in what you know.

It may seem obvious, but the key to successful investing is to put your money into companies you understand and believe in. Too often, amateur investors get caught up in hype and speculation, chasing after the next hot stock without really understanding the business or the industry. They rely on tips from friends, rumors on the Internet, or the latest hot trend in the news.

Peter Lynch, however, never invested based on or tied to the current hype, as he understood that short-lived hype would not be able to sustain long-term profits. He always advised investing in what one knows and believes in.

For Lynch, this meant doing extensive research into the companies he was interested in, learning everything he could about their operations, their financial status, and their competitive position within their industry. He believed that by investing in companies that he knew inside and out, he could avoid the common pitfalls that trap many inexperienced investors.

By focusing on companies he understood, Lynch was able to identify stocks that the market had overlooked or undervalued. He famously referred to these as “tenbaggers,” or stocks that multiplied tenfold in value. In other words, Lynch would invest in companies he knew and had faith in, allowing him to watch them steadily grow.

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Lynch also placed a heavy emphasis on investing for the long term. He believed that many investors got bogged down in short-term fluctuations and lost sight of the bigger picture. Instead, Lynch recommended buying and holding investments for years, or even decades, allowing the power of compounding to work its magic. As he said, “Time is on your side when you own shares of superior companies.”

In conclusion, Peter Lynch’s “first rule of investing” may seem simple, but it is absolutely critical to successful investing. Rather than chasing after short-term trends or fads, Lynch emphasized investing in what you know and understand. By doing your homework and investing for the long term, you can avoid the mistakes that doom so many amateur investors and achieve the kind of success that made Lynch one of the most celebrated investors of all time.

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