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Why Should You Go Grocery Shopping With Peter Lynch?

No modern-day investment “sage” is better known than Peter Lynch. Not only has his investment approach successfully passed the real-world performance test, but he strongly believes that individual investors have a distinct advantage over Wall Street and large money managers when using his approach. Individual investors, he feels, have more flexibility in following this basic approach because they are unencumbered by bureaucratic rules and short-term performance concerns. (Source: AAII Journal)

Mr. Lynch developed his investment philosophy at Fidelity Management and Research, and gained his considerable fame managing Fidelity’s Magellan Fund. The fund was among the highest-ranking stock funds throughout Mr. Lynch’s tenure, which began in 1977 at the fund’s launching, and ended in 1990, when Mr. Lynch retired. (Source: AAII Journal).  Peter Lynch is known to most as a ‘story seller’ type investor.   Although he used a bottom up fundamental analysis to pick companies, most can remember a famous quote he once said, “I’d rather invest in pantyhose rather than communications satellites” .

Many prospects and clients alike will often ask me about the best way to go about picking stocks.   With the maze of information available to you today on the internet, it can be difficult to know where to begin.   Although we can’t discuss specific stocks in this blog, if Peter Lynch were hanging out with you grocery shopping this weekend he might advise to start with companies you buy when checking out your Sunday shopping list at the checkout counter.   Here are three good rules to consider when you first start stock investing:

  • Buy Things In Your Comfort Zone –    The simplest part of being in the grocery store is to buy what you know.  Stocks are the same way.    It’s smart to avoid putting money in companies that you have never heard of before even if it sounds like the story of a lifetime.    What are items that you couldn’t live without when you go grocery shopping?  What clothing or apparel items are a must buy on your holiday list?  What technology gadget do you think is heads and above anything else that you have seen?
  • Do Your Homework – With the past decade of investing behind us, it is clear that no company can ever say it won’t go out of business.   Spend some time on Google Finance, Yahoo Finance, or doing other research to see the last six to twelve months of news stories on the company.  Has something changed in the business model?  Does the company plan to expand?  Is it gaining market share in its industry?   Are sales and profits growing?    Is the same management team in place?  All questions that can help you learn a little bit more about the company beyond what your instincts tell you.
  • Patience Is A Virtue – Often, there is no direct correlation between the success of a company’s operations and the success of its stock over the course of a few months.    In the long term, there is a much greater correlation between the success of a company and the success of the underlying stock.   Far too often, investors expect to pick a company and get a quick hit or an instant spike in their investment pulling out money far too often before they see the real growth in the stock.    If you buy stock, remember that you are really buying a company for its long term growth.

Peter Lynch had a miraculous record when he was the manager of Fidelity Magellan (not to mention he was a Boston College grad).  You can learn a lot about how to invest in stock by understanding the philosophies used by some of these long time successful money managers.   If you happen to go grocery shopping this weekend maybe it pays to take a closer look at what you really put inside your cart, figure out what company makes that product, and then start talking with your financial advisor on Monday.

Written by:

Ted Jenkin, CFP®, AAMS®, AWMA®, CRPC®, CMFC®, CRPS®

Co-CEO and Founder of oXYGen Financial, Inc – The Leaders in Gen X & Y Financial Advice and Services

Ted Jenkin  is one of the foremost knowledgeable professionals in giving financial advice to the X and Y Generation.

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6 Comments

  • Avatar
    John gubanich
    December 10, 2012

    Where you shop would be just as important. The wal mart / SAMs retail selection will give you a larger scope and volume projections.

  • Avatar
    December 10, 2012

    I’ve seen plenty of investors fail “following” Peter Lynch’s advice. What’s funny is that when you dig deeper, they only follow the “buy what they know” piece. They don’t do any homework. Hey, it’s Apple, right? What could go wrong?

  • Avatar
    December 11, 2012

    Those are some great tips and follow a lot of other great investor’s ideas as well, like Warren Buffett. He will wait years to find the right stocks, and he does a ton of homework, and only invests in what he knows.

  • Avatar
    December 11, 2012

    These are some great tips but they can also lead you down the wrong path. But I have seen it happen a few times where someone purchases shares in a company they know…or they shop at regularly to be pleasantly surprised that it heads south…

  • Avatar
    December 11, 2012

    Great points shared in all of your comments. If you think people don’t do homework on stocks, how little homework do you think they do on their 401(k) choices.

  • Avatar
    March 5, 2013

    Also keep in mind that Lynch was highly diversified. He held hundreds, even thousands of stocks in his fund. Given that as a backdrop, I understood his advice as mainly meaning not to get involved in anything too exotic.

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