The 7 Investing Rules By Peter Lynch To Get A 29% Yearly Return For 10 Years

This week, our focus will be some investing principles adopted by Peter Lynch.

With these principles, he achieved a yearly return of 29%.  

Peter Lynch, who was a Fund Manager at Magellan from 1977 to 1990 for 14 years, earned an annual return of 29%. So if you invested 1000 when he started, after 14 years you would have 28,000.

In this article, we’ll go through seven rules derived from Peter Lynch. The rules are pretty simple and straightforward as Peter Lynch says - everybody can apply them. 

1. YOU ONLY NEED A FEW GOOD STOCKS in your lifetime and that's it.

So Peter Lynch says that what most investors do is sell stocks after a 20-40% gain instead of holding them for very long periods. Apple's stock in 2006 was trading at around $2, now it's above $150. Just a few investors like that, and you're set for life. So if you have a long-term view and you like to pick great excellent investments that have the potential to be huge, Amazon will grow further, Alibaba, all those stocks, where will those stocks be in 15 years? Pick a few of them if just one does well of the five you pick, you'll have an extremely good return picking great stocks and holding onto them is good.

2. THE PERSON THAT TURNS THE MOST STONES WINS

So the more stocks you look at, the better you will be at finding those ones that will give you huge returns in the long term. If you turn around a hundred stones, hundred stocks, you will find one. If you turn around a thousand you will find ten and of those ten, one will be something amazing and then you buy that one out of a thousand. The more you research, the more you learn, the higher your knowledge is, the lower your risk, and the higher your return. 

For 14 years at Magellan, Peter Lynch was working for more than 15 hours a day for six days a week and then after 14 years, he retired because the rhythm was too strong for him, for his health and he decided to look, slow down a little bit. But now, we have the internet. 40 years ago, Peter Lynch had to sit at the conference call for an hour, he had to call people or go there to get the financial reports. Now you can get everything in one second from your laptop or phone.

So we have a huge advantage and we really should dig into tens of thousands of stocks to find a few good investments.  

3. BUY WHAT YOU KNOW

Many misunderstand this advice thinking, oh I like stock Starbucks. I like their coffee, so let's buy Starbucks. Lynch is discussing “Buy What You Know” to stay in your area of specialty. So for example, if you are working in the meat industry, in the semiconductor manufacturing industry, really try to dig into that area. What is going on? What is your company doing? What are they looking into? What technologies are they invested in? When you find something that you think is special, the market will recognize it in the next six months, a year, two years, or even longer, but stay with your convictions.

4. STAY AWAY FROM SURPRISES, STOCKS ARE REALLY PREDICTABLE OVER 20-YEAR PERIODS.

In the next year too, you can flip a coin as to where stocks will go; up and down. Even though everybody thinks stocks will go up, Lynch says that if you take a long-term approach to investment, you can know where you will land. And we have seen Jack Bogle saying 4% is the return from stocks you can expect now. So if you're not happy with 4%, you have to look for better stocks.

5. INVEST IN THE COMPANY WITH FEWER COLOR PICTURES ON ITS ANNUAL REPORT.

Every CEO is a marketing genius. His or her job is to sell you the stock so that the stock price goes higher. So you really have to be careful about buying into flashy companies that don't have real tangible value behind them. Again going back to the research part, the more you do the better chances you won't fail.

6. WHEN EVEN ANALYSTS ARE BORED, START BUYING

So when everybody's bored, when everybody capitulates, in a sector; then it's time to start buying. Remember that stock analysts are looking for the next hot thing, and you’re looking for the get rich over time opportunity. Ignore the hype, and focus your investing and analysis on long-term trends.

7. OWNING STOCKS IS LIKE HAVING CHILDREN - DON'T HAVE MORE THAN YOU CAN HANDLE

So Lynch says, each to be a do-it-yourself investor you should follow eight to twenty-twelve stocks not more, and own five of them in their portfolio and rebalance accordingly or hold them for the very long term. Holding more, you're just doing what the market is doing and you will probably perform as the market; then, better buy an index fund and leave it to grow by itself.

So in general to conclude about Peter Lynch, do a lot of research, do even more research, buy when things are cheap, and stick with them for a long term until the value unlocks. Very simple, he invested in lots of sectors, waited for them to be cheap, bought them, and then sold them high. Looks easy, however, you need to have a very strong mind to follow that simple philosophy.

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