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
As Ms. Morrissey explained, here was the first lesson:
1. Know What The Company Does
"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
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
Thesavings andloan 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...
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 way.
They must have been right...The Gap posted a 320% gain for
the model portfolio.
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 the company.
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
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 mantras.
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
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.
- You should not buy a stock because it's cheap, but
because you know a lot about 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 Wonders."
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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