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Golden Rules From One Of History's Greatest Stock Pickers


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I recently finished remaking one of the rooms at my house into a personal office. After rearranging and unpacking boxes, I found myself thumbing through an old copy of "Beating the Street," by Peter Lynch. It had been a while since I've read it, and I can faithfully report that most of what Lynch writes about still holds up in today's market.

I'm sure you're familiar with Lynch, but his track record bears repeating. While at the helm of the Magellan Fund at Fidelity, Lynch delivered a 29.2% average annual return from 1977 to 1990. Probably the greatest mutual fund manager of all time, we have Lynch to thank for popular investing phrases like "invest in what you know," "10-bagger" (a stock that gains 1,000%), "GARP" (growth at a reasonable price), and more.

But what you might not know about Lynch is the story behind his exit from the Magellan Fund...

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After 13 years on the job at Fidelity, Lynch found himself doing some serious soul searching one day. He figured that he could probably recall 2,000 stock symbols, but admitted that he had forgotten the birthdays of his young children on more than one occasion.

In the fall of 1990, his daughter Mary played in seven soccer games. He attended one.

Lynch also recounted how, due to his social position, he had seen three operas in the last two years -- but not a single football game. (In the book, this led Lynch to cite Peter's Principle #1: "When the operas outnumber the football games three to zero, you know there is something wrong with your life.")

He hadn't read a single book in the last 18 months, either. Then Lynch remembered while celebrating his 46th birthday that his father had died at the exact same age.

After considering all of this, it was clear that it was time to say goodbye to Fidelity. Time to downsize his obligations and focus on what really mattered.

Here's how Lynch put it in Beating the Street:

You start to feel mortal when you realize you've already outlived your parents. You start to recognize that you're only going to exist for a little while, whereas you're going to be dead for a long time. You start wishing you'd seen more school plays and ski meets and afternoon soccer games. You remind yourself that nobody on his deathbed ever said: "I wish I'd spent more time at the office."

And with that revelation, Lynch managed to avoid a version of what some call "lifestyle creep" -- the condition where the more successful you become, the more discretionary things have a habit of turning into obligations, and thus weigh you down over the long-run.

Peter Lynch wouldn't be around at the Magellan Fund to capture the enormous wealth created during the dot-com bubble -- not that he cared, anyway. His track record speaks for itself (so does his estimated $300 million net worth).

If you're looking for a good investing read, a paperback of "Beating the Street" goes for 10 bucks on Amazon -- a steal for the amount of insight you'll gain reading it.

To close things out, I'd like to touch on just a few of Peter Lynch's 25 Golden Rules , which can handily be found at the end of the book. These pearls of wisdom should be at the front of the mind of any successful investor.

A Few Of Peter Lynch's Golden Rules...
-- Your investor's edge is not something you get from Wall Street experts. It's something you already have. You can outperform the experts if you use your edge by investing in companies or industries you already understand.

This goes along with the "invest in what you know" mantra that Lynch popularized, but it goes further than that... To be a successful investor, you need to examine yourself.
What are your best qualities (patience, discipline, a curious mind, etc.)? Your worst (impulsive, quick to frustrate, poor time management, etc.)? Really think about it.

Chances are your qualities and shortcomings "in real life" (or IRL as the kids say) will bleed over into how you behave as an investor.

-- Behind every stock is a company, find out what it's doing.

-- If you have the stomach for stocks, but neither the time nor the inclination to do the homework, invest in equity mutual funds...

-- Owning stocks is like having children - don't get involved with more than you can handle. The part-time stock picker probably has time to follow 8-12 companies, and to buy and sell shares as conditions warrant. There don't have to be more than 5 companies in the portfolio at any time.

Understand the company before you invest. If you're looking into a hot new biopharma stock with a promising new treatment, and you can't succinctly explain it to a seventh-grader in a way that she'll understand, then you probably shouldn't invest.

Lynch believes individual investors have several advantages that fund managers don't... The individual investor doesn't have fund holders or bosses to answer to, no mandate to be diversified. By limiting yourself to researching a handful of stocks -- but no more than you can handle, you're already at an advantage.

-- Often, there is no correlation between the success of a company's operations and the success of its stock over a few months or even a few years. In the long term, there is a 100 percent correlation between the success of the company and the success of its stock. This disparity is the key to making money; it pays to be patient, and to own successful companies.

-- Time is on your side when you own shares of superior companies. You can afford to be patient - 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.

Patience is the most underrated quality a successful investor needs. Not every good idea will pan out immediately. Similarly, don't fall into the trap of thinking you missed the boat on a great company just because the stock has gained a lot recently.

After watching Apple's stock rise for years, I lamented the missed opportunity. But then, I tried to rationalize not buying at that moment by telling myself that the company's best days were already behind it. I finally snapped out of it and bought in. And while, sure, I missed out on the most historic part of the stock's run, I've more than doubled my money.

-- Everyone has the brainpower to make money in stocks. Not everyone has the stomach. If you are susceptible to selling everything in a panic, you ought to avoid stocks and stock mutual funds altogether.

-- There is always something to worry about. Avoid weekend thinking and ignore the latest dire predictions of the newscasters. Sell a stock because the company's fundamentals deteriorate, not because the sky is falling.

This goes back to two things Lynch harps on repeatedly: patience, discipline, and focus. If you don't have them, then you're better off staying out of the game. As Dirty Harry said, "man's got to know his limitations..."

Also, nobody ever made a million dollars by watching cable news and working themselves into a tizzy about the economy or the political climate. Just concentrate on the companies you own and are following right now. That's enough to keep you busy. You're not going to bring peace to the Middle East, but you just might come across that one stock that could change everything for you and your family.

Closing Thoughts
If you would like to get a better understanding and really "get to know" the companies behind the ticker symbol, then I urge you to check out Top Stock Advisor . As one of our flagship publications, my colleague Jimmy Butts takes many of Peter Lynch's philosophies and uses them to identify wonderful companies trading at fair prices.

His picks aren't fly-by-night companies, or small biotech firms on the brink of bankruptcy. He looks for superior companies that readers can buy and hold onto for the long run. For instance, Jimmy has held CME Group (Nasdaq: CME ) since August 2014, and it's rewarded him and his subscribers a total return of more than 190%, easily beating the S&P 500's 39% over the same time period. And there's plenty of other stocks in the portfolio with a similar story.

Again, if you want to put some of Lynch's principles into practice, then Top Stock Advisor is a great place to start. Go here to see how you can get started...

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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