In 1990, in a suburb outside of Boston, something unusual
As part of their schoolwork, seventh graders at the St. Agnes
School in Arlington, Mass. were asked to pickstocks for a model
In the following two years, the students'stock picks produced a
70% gain while the S&P 500 gained 26% during the same time
What was even more impressive, however, was that during the same
time period, the students' stock picks outperformed 99% of
allequity mutualfunds .
The story came to the attention of legendary investor Peter
Lynch. At the time, Lynch was in charge ofinvesting more than $14
billion through the MagellanFund . After receiving a scrapbook from
the students' teacher, Joan Morrissey, he made an appointment to
meet with the class to learn the secrets behind their success.
As Ms. Morrissey explained, here was the first lesson:
"Before my students canput any stock in the portfolio, they
have to explain exactly what the company does. If they can't tell
the class the service it provides or the products it makes, then
they aren't allowed to buy."
What if every investor had to follow this rule?
My guess is alot fewer people would have lost their shirts
buyingshares of companies that specialize in
"collateralizedmortgage obligations" or "reverseindex amortizing
Following this rule led the kids to stocks like
The Walt Disney Co. (
Nike Inc. (
Gap Inc. (
-- all companies that make easy-to-understand products.
Companies that create products (and brands) that even
13-year-olds can understandwill , in the long run, outperform
companies that depend on a lot of financial hocus-pocus.
The savings and loan crisis of the 1980s and 1990s, and more
recently, the collapse of Lehman Brothers, demonstrate what happens
when investors forget lesson No. 1.
Which leads us to lesson No. 2:
2. Invest in brands you know and love
The kids loved to shop at the Gap. They reasoned their selection
saying that other kids around the country probably felt the same
They must have been right...The Gap posted a 320% gain for the
Another clear winner was Pentech International (acquired by
Semcon Ab in 2005), a maker of pens and markers. One of the kids'
favorite products was a pen with a marker on one end and a
highlighter on the other. Along with the model portfolio, the
students sent Lynch a Pentech pen and recommended that he look into
He didn't, and later regretted it when the stock nearly doubled
to $9.50 a share.
The kids also invested in Topps baseball cards (taken private in
2007) for a 55% gain,
for a gain of 64%, and
for a 164% gain.
Not all the picks were winners. Savannah Foods (taken private in
2004) fell 38%. But in making this pick, the students broke rule
No. 2. They hadn't picked the stock because they knew the company;
they selected it because they had read Investor's Daily.
Now, critics and naysayers might point out that it wasn't
realmoney being invested.
But as Lynch said, "So what? The pros ought to be relieved that
St. Agnes wasn't working with real money-- otherwise, based on St.
Agnes's performance, billions of dollars might be pulled from the
regularmutual funds and turned over to the kids."
Other critics might say, "Anybody could have picked those
And toquote Lynch again:
"If so, why didn't anybody?"
After visiting the classroom and inviting the kids to his office
for pizza, Lynch was happy to receive in the mail one day, a
cassette on which the students had recorded some of their investing
Here are three of my favorites:
- You can lose money in a very short time, but it takes a long
time to make money.
- You shouldn't just pick a stock -- you should do your
- You should not buy a stock because it's cheap, but because
you know a lot about it.
The last two mantras simply reinforce lesson No. 3. Kids hear
this lesson every day, and the irony is many experienced investors
often overlook it.
3. Do your homework
In the following years, Ms. Morrissey continued to teach her
students how to pick stocks, but she was also inspired to start an
investing group made up of other teachers, with Peter Lynch serving
as an honorary member. The group called themselves the "Wall Street
One day, after going over the numbers with Lynch, she realized
that while the group's returns were good, they were still not as
good as the students' results.
"Wait until I tell the other teachers that the kids' stocks have
done better than ours," she said.
Action to Take -->
Making money in the stockmarket isn't hard. But making significant
and consistent returns over the years is a different story. When it
comes to successful investing, you don't need complex formulas and
solutions. These three simple investing rules are so effective,
even Wall Street's brightest minds want to learn them.
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