Editor’s note: This article was first published in December 2013, about a then-recent Bloomberg interview with Peter Lynch. His comments on high-frequency trading and online information reflect that moment.
Peter Lynch is considered one of the best investors in history: he achieved an average annual return of 29.2% for 13 consecutive years, which makes him a true legend.
He was recently interviewed by Bloomberg about philanthropy and the madness of the market, and he shared his “three Cs” of investing: complacency, concern and capitulation. Lynch says complacency is the worst of the three, although you can avoid it if you put in the hard work.
When you look at an investment, he explained, you should ask yourself whether it is still early to buy into the company, whether it is a good investment because it has many years of growth ahead, or whether, on the contrary, it is too late to get on board (a train that has already left the station). Using a baseball analogy, Lynch’s “secret”, if you want to call it that, would be to get into a stock in the “first or second inning”.
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Don’t rush into an investment. Make sure you have all the information about the company, because in the stock market it is not true that you have to be one of the first to invest. As Lynch points out, you could have bought Wal-Mart shares 10 years after its IPO and still done very well.
When the host asked him what had changed in the markets, the only thing Lynch singled out was high-frequency trading, which he described as harmful.
He also joked about the amount of information that is now available online to everyone: you no longer have to wait for the mail to see Nike’s sales and forecasts.
As for which side of the market he prefers, Lynch clearly favours investing on the long (bullish) side, for a simple mathematical reason: a short (bearish) investor can only make a gain of about 90%, while a bullish investor’s return can be unlimited. (Read: 8 tips for being a rich and happy short seller)
Naturally, all the investment advice Lynch can give us is very much focused on value investing.
Some of his best investment advice:
- In the short and medium term, share prices often move in the opposite direction to a company’s fundamentals, but in the long run the company’s ability to generate recurring profits, together with smart management, will win out over the share price.
- It is not always a good idea to invest in a company whose shares have become cheaper because it is doing badly. Remember that things can still get much worse.
- If the price of the shares you invested in rises in the short term, that doesn’t mean you made a smart investment, just as a falling price doesn’t mean you got it wrong.
- The loser’s technique in the stock market is buying shares in a mediocre company with poor prospects simply because they are very cheap.
Featured image: Jules Verne Times Two, CC BY-SA 4.0, via Wikimedia Commons.
