One should always be equipped with the right knowledge and mindset before investing. There are some of you who requested for guides and book recommendation for kick-starting investment. Aside from the well-known Benjamin Graham’s “The Intelligence Investor” also known as the bible for value investor, Peter Lynch best-selling book - “Beating the Street” is also one of my personal top pick for investment readings. Since I'm nobody while Peter Lynch managed one of the most successful mutual fund i.e Fidelity’s Magellan Fund (1977 to 1990), here are the 25 golden rules for investment shared by the legendary investor which you may appreciate:-
- Investing is fun, exciting, and dangerous if you don’t do any work.
- You can outperform the investment experts if you use your edge by investing in companies or industries that you already understand.
- Over the past three decades, the stock market has come to be dominated by a herd of professional investors. Contrary to popular belief, this makes it easier for the amateur investor. You can beat the market by ignoring the herd.
- Behind every share is a company. Find out what it’s doing.
- Often, there is no correlation between the success of a company’s operations and the success of its shares over a few months or even a few years. In the long term, there is a 100 percent correlation between the success of a company and the success of its shares. This disparity is the key to making money; it pays to be patient, and to own successful companies.
- You have to know what you own, and why you own it. “This baby is a cinch to go up!” doesn’t count.
- Long shots almost always miss the mark.
- Owning shares is like having children – don’t get involved with more than you can handle. The part-time share picker probably has time to follow 8 to 12 companies, and to buy and sell shares as conditions warrant. There don’t have to be more than 5 companies in your portfolio at any one time.
- If you can’t find any companies that you think are attractive, put your money in the bank until you discover some.
- Never invest in a company unless you understand its finances. The biggest losses in shares come from companies with poor balance sheets. Always look at the balance sheet to see if a company is solvent before you risk your money on it.
- Avoid hot stocks in hot industries. Great companies in cold, non-growth industries are consistent big winners.
- With small companies, you’re better off waiting until they turn a profit before you invest.
- If you’re thinking about investing in a troubled industry, buy the companies with staying power. Also, wait for the industry to show signs of revival. Buggy whips and radio tubes were troubled industries that never came back.
- If you invest $1,000 in a share, all you stand to lose is $1,000. However, you stand to gain $10,000 or even $50,000 over time if you’re patient. The average person can concentrate on a few good companies, while the fund manager is forced to diversify. By owning too many stocks, you lose this advantage of concentration. It only takes a handful of big winners to make a lifetime of investing worthwhile. (This is very similar to Warren Buffet’s advice to: “Keep all your eggs in one basket – but watch that basket!”)
- In every industry and every region of the country, the observant amateur can find great growth companies long before the professionals have discovered them.
- A stock market decline is as routine as a January blizzard in Colorado. If you’re prepared, it can’t hurt you. A decline is a great opportunity to pick up the bargains left behind by investors who are fleeing the storm in panic.
- Everyone has the brainpower to make money in shares. Not everyone has the stomach. If you are susceptible to selling everything in a panic, you ought to avoid shares and equity unit trusts altogether.
- There is always something to worry about. Avoid week-end thinking and ignore the latest dire predictions of the newscasters. Sell a share because the company’s fundamentals deteriorate, not because the sky is falling.
- Nobody can predict interest rates, the future direction of the economy, or the stock market. Dismiss all such forecasts and concentrate on what’s actually happening to the companies in which you’ve invested.
- If you study 10 companies, you’ll find 1 for which the story is better than expected. If you study 50, you’ll find 5. There are always pleasant surprises to be found in the stock market – companies whose achievements are being overlooked on Wall Street.
- If you don’t study any companies, you have the same success buying shares as you do in a poker game if you bet without looking at your cards.
- Time is on your side when you own shares of superior companies – even if you missed Wal-Mart in the first five years, it was a great stock to own in the next five years. Time is against you when you own options.
- If you have the stomach for shares, but neither the time nor the inclination to do the homework, invest in equity unit trusts. Here, it’s a good idea to diversify. You should own a few different kinds of funds, with managers who pursue different styles of investing: growth, value, small companies, large companies etc. Investing in six of the same kind of fund is not diversification. And, if you’ve invested in one fund or several funds that have done well, don’t abandon them on a whim – stick with them.
- Take advantage of faster-growing economies by investing some portion of your assets in an overseas fund with a good record.
- In the long run, a portfolio of well-chosen shares and/or equity unit trusts will always outperform a portfolio of bonds or a money market account. In the long run, a portfolio of poorly chosen shares won’t outperform the money left under the mattress!
(Source: Beating the Street, Peter Lynch with John Rothchild)
