The Financial markets provides various financial instruments which could be

leveraged by the Firms and investors to raise the capital at a much lower cost.
Given the dynamic nature of the markets, it ...

The Financial markets provides various financial instruments which could be

leveraged by the Firms and investors to raise the capital at a much lower cost.
Given the dynamic nature of the markets, it is upon the investors to understand the
market dynamics, get right set of tools for analyzing the behavior of the
securities at various scenarios and make a wiser investment decision. As a
beginner, the art of selecting a viable investment could be overwhelming. However,
treading on the path charted out by the well-known investors could help the
beginners in mitigating the substantial risks and maximize the probability of
gaining sustainable returns from the various investment avenues. We are here to
present some of investing strategies adopted by Peter Lynch, who is widely known
for reaping gains through his investment principles.

As a fund manager at Fidelity investments, Peter Lynch helmed the legendary

Magellan Fund which was known for its stellar performance of achieving an average
of 29% of annual return. Under the reign of Peter Lynch, Magellan Fund turned out
to be one of the best performing mutual funds. Apart from Magellan fund, Peter
Lynch was able to identify few other stocks which earned significant profits. Let’s
have a look at the key investment tenets proposed by Peter Lynch.

Principle 1: Look beyond the visible

“During the gold rush, most would-be miners lost money, but the people who sold
them picks, shovels, tents, and blue-jeans made a nice profit. Today, you can look
for non-internet companies that indirectly benefit from internet traffic or you can
invest in manufacturers of switches and related gizmos that keep the traffic
moving.”

- Peter Lynch

This principle emphasizes that an anecdotal evidence and clear-cut observations

must supplement the investment analysis but shouldn’t be the sole basis upon which
the investment decisions are made. A well-known example which stands as a proof to
this tenet is the Dotcom bubble. During 1990s, the internet and technology industry
witnessed a boom as a result of which the technology stocks were growing multifold
and investors dismissed the idea of losing all the value in a shorter span of time.
But in the early 2000s, several dot-com and Telecom stocks have lost almost 95% of
their investment value and the value deterioration is mainly driven by the
speculation of the investors who had pumped the capital in several internet-based
startups based on the speculation that stocks of these companies would be feasible
without a sound rationale.

You can see the Upcoming IPO List of 2021 & can apply Peter Lynch Lessons while
selecting the IPO to apply.

Investors must look beyond the obvious indicators like price while considering
various investment options. Since market works on the assumption that Market
discounts everything, the investor must have a good eye for detail in terms of
identifying key growth drivers, industry analysis, underlying opportunities and
threats, macroeconomic fundamentals which can potentially influence the performance
of stocks.

Principle 2: Invest in what you know

Never invest in any idea you can’t illustrate with a crayon.”

Peter Lynch.

As a strong proponent of value investing, Peter Lynch relied on a simple investment

principle of investing in the financial instruments which he is aware of. Having a
sound expertise of how an investment works laid a strong foundation to his
investment decisions. He leveraged the concept of Local Knowledge to identify the
undervalued stocks which has the potential of making big bucks. In addition to
this, he emphasized that the investor must understand the existing trends, Key
players in the industry, the firm’s operating model, its corporate governance
framework and its dividend payout structure in order to make right investment
decisions.

Principle 3: Investing for Long term

"Far more money has been lost by investors preparing for corrections or trying to
anticipate corrections than has been lost in the corrections themselves."

- Peter Lynch

Peter Lynch emphasizes on the concept of Long-term investing. The markets are
dynamic in nature. When new announcement and surprises are available, the market
undergoes correction the moment it processes newly available the information. In
general, the investors are subjugated by the market corrections and resort to panic
selling with a view to avoid losses. But the ultimate result turns out to be
contrary to their assumption and they incur significant losses by adopting to sell
their stocks. Peter Lynch stood against the concept of market timing.

He conducted a study to explain the relevance of market timing with respect to

investment made on same period on two different days. The conclusion are as follows

Period

Investment amount

Day of which the investment is made

Return (Compounded)

1965 – 95

$1000

Absolute high day for 30 years

10.6%

1965 – 95

$1000

Absolute low day for 30 years

11.7%
He strongly believed that volatility in the short run has nothing to do with the
value an investment generates. In addition, he didn’t expend his energy in trying
to forecast the direction in which the overall economy was heading. He propounded
that as long as the Firm’s financials are strong, the investment will create a
value in long terms for the investors.

Peter Lynch coined a term known as TenBagger which had its origin from the Baseball
game to measure the success rate of the runner’s hit. Ten bagger indicates the
stock whose market price can reach up to 10 times its intrinsic value. The
underlying rule to identify a ten bagger is to hold on to the investment even if it
reaps gains above 100%.

Principle 4: Do your research

The investor must pro-actively examine the financials of the company, various risks
involved and choose the strategy to offset the risks associated with the financial
instrument.

The investors must research and take calculated risks of investing in the relevant
financial instrument according to their level of risk tolerance. A risk-averse
investor could opt for investing in fixed income instruments like Bonds and
Debentures. When an investor is inclined to take risks, then he could look for the
investments with higher returns since the risk and returns are directly related.
The investors must incorporate framework to sense the risks associated with various
investment avenues. For example, fixed income securities like Deposits and Bonds,
are subjected to inflation risks which significantly reduces the purchasing power.
Bond market is subjected to liquidity risk where the buyers and sellers are not
readily available. This limitation can even lead to lower prices than anticipated.
Default risks indicates the company’s inability to meet their debt obligations.
Apart from this, the investments are also subjected to systematic risks and
unsystematic risks. As far as unsystematic risks are concerned, they could be
mitigated by Diversifying the portfolio. But the systematic risks are inevitable.
Thus, various risks need to be taken into account while making the investment
decision.

Conclusion

Peter Lynch familiarized the strategy known as GARP (Growth at Reasonable Price)
which aimed at identifying undervalued stocks with higher growth potential. He also
contributed to the field of investment research by authoring three books on
investing. As per Peter Lynch, a sound investment decision should be aimed for long
termFree Web Content, supplemented by effective research and should be free from
emotions in order to earn significant returns.

Source: Free Articles from ArticlesFactory.com

ABOUT THE AUTHOR

I am a SEO Professional.

Health
Business
Finance
Travel
Technology
Home Repair
Computers
Marketing
Autos
Education
Entertainment
Family
Law
Other
Communication
ECommerce
Sports
Home Business
Internet
Self Help

Partners

California Bail Bonds Bounty Hunters

Immigration Attorney

Moving Relocation Services

Alpine Car Audio

Carpet Cleaning Los Angeles

Free Articles Home | Register | Submit an Article | Links | Contact | Archive |

XML/RSS Feed
Terms of Service | Privacy Policy
Page loaded in 0.037 seconds