Dissecting The Greats: Peter Lynch

Dissecting The Greats: Peter Lynch

Peter Lynch is one of the greatest investors of all time. There is no question about that.

His name reigns up there with the likes of Buffett and Templeton. His first claim to fame was being the portfolio manager of the Magellan Fund at Fidelity Investments from 1977 to 1990. During those 23 years, he was able to manage an average return of 29.2%. Lynch beat out 99.5% of all mutual funds during his last 5 years managing the fund. In fact, one out of every 100 Americans was invested in it.

A return of 29.2% would be great for one year alone. The fact that he was able to produce this rate for a 23-year period is breathtaking. He handily beat out the S&P, which only produced a return of 15.5% during that time.

To give you an idea of how astonishing this number is, I will show you what would have happened if you invested 100 at the beginning and let it compound over the 23 years.

Graph Source: https://www.investor.gov/additional-resources/free-financial-planning-tools/compound-interest-calculator

Other than creating massive returns for his clients Lynch had an extreme passion for educating other investors. It was realized early on that he possessed a special gift and it would have only been right to make sure he passed it on to others.

His books have been helping individual investors for decades. But the one that has been of more help to investors is One Up on Wall Street. It has been a massive favorite among the investing community since it was published in 1993. In it, Lynch outlines his own belief that everyone has the potential beat out professional money managers.

His main investing philosophy is not that hard to follow or understand. It can be replicated by anyone who is willing to put in the time and effort. Nobody said it was easy, dedicate your time to learning the craft with his philosophy and you will be able to create tremendous returns for yourself.

His investment philosophy revolved around 4 main ideas:

  • Do your homework
  • Have a long-term time frame
  • Diversification is key
  • Invest in what you know

I will, of course, discuss each of these in more detail.


Do Your Homework

Investing overall is an extremely research heavy activity. Investing should be a research-heavy activity. If you don’t do the right amount of research, then you are setting yourself up for failure. Doing your homework is essential. Other than Warren Buffett, Peter Lynch is famously known for his intensive research habits, working a large number of hours while managing the Magellan Fund.

            “The person that turns over the most rocks wins the game. And that’s always been my philosophy.” – Peter Lynch

It was his main goal to ‘turnover’ as many rocks a possible. His time was spent investigating companies in different industries and different locations. This extreme amount of effort maximized the probability of him being able to find those companies with compelling investing prospects.

His portfolio was a testament to his philosophy. A plethora of companies would meet the eye as one scanned it. Noticing the extreme diversification. Diversification not only at a sector level but also a geographical level.

Lynch knew that great companies were found all over the world. You have to willing to look to find them, he was. There was no are in the financial markets he did not cover.

The common belief you need to be a financial wizard to understand the markets is wrong. Lynch made it very clear you do not need extensive training to understand the stock market.

Lynch made it clear that no one was intellectually incapable of investing in the stock market.

“All the math you need in the stock market you get in the fourth grade.” – Peter Lynch

The belief system of many revolves around the thought that the market is complicated. It’s not. If you need an in-depth overview of what the market is and basic terms I wrote an article to help you.

Related: Basic Stock Market Knowledge

Furthermore, Lynch believed everyone was not only smart enough to participate but smart enough to outperform institutional money managers.

An individual investor has certain advantages over money managers.

A professional money manager worries about making money everyday. If they don’t, they will be criticized. Individuals do not have this worry.

Institutions have to answer to their investors. Individuals have only one person to answer to, themselves.

Lynch taught that the main end goal was to identify high-quality businesses with strong growth prospects. However, a high-quality business with a strong outlook did not need to be a complicated one. Lynch wanted simple. The simpler the better.

                  “The simpler it is, the better I like it.” – Peter Lynch

If you want some examples of simple, yet strong, businesses check out the bulletproof portfolio. You will be able to sleep at night with these in your portfolio

If you want a riskier play check out my growth stock selections, If you are feeling lucky.

Another easy way to identify solid businesses are looking up the dividend aristocrats. These are companies that have increased their dividend for 25 straight years.

Simple analysis: The business has to be doing well, constantly, in order to increase the dividend for 25 straight years.

This list is not for the eager investor. There is not much excitement in dividend aristocrats. But remember, the simpler the better

Related: DRIP your dividends

If you do your thorough research on a list of stocks like the dividend aristocrats you will find a few solid companies worth the investment. Take the time and go find them.

Consistent investing success does not just come without any work. You have all the brain power and intelligence to do it.

Nothing good comes from something easy. All good things come from work. You can achieve investing success if you’re willing to work.

If Peter Lynch believes in you, you can believe in yourself.


Have a long-term time frame

Along with many other investors (Warren Buffett sticks out), Lynch began his investing career at a younger age than most. In fact, Lynch managed to pay for graduate school with the profits he made from his first investment

                  “While I was in college I did a little study on the freight industry, the air freight industry. And I looked at this company called Flying Tiger. And I actually put a thousand dollars in it and I remember I thought this air cargo was going to be a thing of the future. And I bought it and it got really lucky because it went up for another reason. The Vietnam War started and they basically hauled a lot of troops to Vietnam in airplanes and the stock went up, I think, nine- or ten-fold and I had my first ten bagger. I started selling it, I think, at 20 and 30 and 40, sold all the way up to 80 and helped pay for graduate school. So I almost had a Flying Tiger graduate school fellowship.”- Peter Lynch

Lynch’s early success in the stock market undoubtedly helped him to develop the skills and passion needed to have a successful investing career.

It sparked the flame inside Lynch. Without that burning fire, one can simply not succeed in the business of investing.

By beginning at an early age Lynch also saw how powerful time invested can be. He was able to understand the magic of compound interest earlier than most.

He could see that the 8th wonder of the world truly would be the difference maker.

 “The single greatest edge an investor can have is a long-term orientation.” – Seth Klarman

Investors who do not have a long-term time frame have many advantages over those who do not.

A long-term time frame allows for deferred capital gains tax, lower brokerage commissions, and a better ability to withstand market downturns.

Out of all of them, the last one is the most powerful. If you can not withstand market downturns, it will eat you alive.

“People who succeed in the stock market also accept periodic losses, setbacks, and unexpected occurrences. Calamitous drops do not scare them out of the game.” – Peter Lynch

Do not get scared out of the game.

A long-term time horizon will grow your money to unimaginable amounts. Constantly building on itself. (Thanks to compound interest)

It requires little effort from you. Let this magic take care of itself.

Lynch’s long-term time frame allowed him to boost his performance, especially during market downturns.

He knew that when markets were tanking by 5% to 10% they would prove to be higher in 5, 10, 20 years. Understanding that a correction is a short-term time frame thing.

You get recessions, you have stock market declines. If you don’t understand that’s going to happen, then you’re not ready, you won’t do well in the markets.” – Peter Lynch

The best time to buy solid companies is during these times. Buying solid companies during panics set you up for a solid amount of returns come 5-10 years down the road.

Another thing that made Peter Lynch famous was his ability to hold his winners longer than normal money managers.

When asked about selling his winners, he related it to gardening. Selling his winners to search or other potential winners were like pulling out the flowers to water the weeds.

You want to let your winners run.

We as individual investors are able to exploit this massive advantage over money managers. Institutional investors get measured on a quarterly basis. Individual investors don’t get measured at all.

With that being said don’t feel bad for holding onto a company that you have a strong view on. You have no one to answer to other than yourself. An enormous advantage over money managers.

This allows you to buy the companies others might look over. Simply, because they won’t produce returns during the course of a quarter.

One thing we can all take away from Lynch is, the longer the time frame the better. Be patient with your investments.

Allow the magic of compound interest to do its thing. Time is needed if you want to grow your wealth to as large as it can be.

Related: Patience article


Diversification is Key 

Peter Lynch ran an extremely diversified portfolio. Extremely diversified.

By the end of his tenure at the Magellan Fund was known for having more than 1,000 individual positions at any given time.

Crazy, right? Over 1,000 individual companies and still averaged 29.2%. Incredible.

He had a massive number of stocks diversified in each industry. More uniquely, he diversified his portfolio based on the potential earnings growth of the underlying companies.

There were 3 categories:

  • Fast growers: companies that had an expected earnings growth of 20% and 50%. (He stayed away from companies with growth over 50%, stating the number was unsustainable)
  • Stalwarts: Large companies with multi-billion dollar sales and 10% to 20% expected earnings growth. (Blue Chips)
  • Slow growers: Companies that had expected earnings growth below 10% but paid a healthy dividend

Lynch believed Stalwarts and Slow growers anchored the portfolio. These provided the stability. The fast growers were the source of generating the benchmark-beating returns.

This approach to diversification can strike any of us as crazy. The big difference between his diversification and other investors was, he did not buy companies to simply reduce the volatility.

Lynch called this “diworsification”.

He despised the idea that an investor would forgo his best idea for his ‘nth idea; just to be safer.

For example, let’s say you have been deep in the technology sector. You have a very good understanding of it and know it well. Looking at your portfolio you think, I should reduce the volatility to be safer.

You currently have a great idea for an investment, you have done extensive homework and love it.  You have the capital required to invest in it. Instead, though, you want to be safer so you buy a bigger blue chip.

If Lynch saw this, you better duck. Fists will be thrown.

If you have spent a lot of time researching a company, there is no excuse for backing out at the last minute to opt for the safer play. Your most recent investment should be on a company you have the most knowledge about at that point in time.

The amount of stocks in Lynch’s portfolio, combined with his extensive research of each is a true testament to his stock picking ability. Don’t worry though, you do not need to be invested in 1,000 companies in order to be well diversified.

Normal people, do not have the time required to extensively research 1,000 companies. An individual investor can achieve the benefits of diversification through owning and having a well understanding of 20-30 companies.

The key term here is understanding.

I recommend keeping an investing journal. Each company deserves its own place with an in-depth analysis.

For the regular individual investor, understanding diversification is important. 20-30 companies is a perfect number to reduce risk but also improves the chances of buying a high performing stock.

Lynch was able to invest in thousands of companies because of his time commitment to the craft. You do not need 1,000 companies to be a successful investor.

Related: Diversification Article

Invest in what You Know

The biggest lesson Lynch can individual investors is to invest in what we already know.

“Invest in what you know.” – Peter Lynch

Extremely simple yet effective.

One of the most famous qualities of Lynch was that he constantly invested in businesses he knew deeply on a consumer level, not just an investor.

He had a deep understanding consumers are the core of the economy. One man’s spending is another man’s income. With this in mind, he was always on the lookout for shifts in consumer demand.

Some of his biggest winners have come from some of the simplest analysis. For example, one of his biggest winners was Hanes brand (HBI).

He found this company after his wife came home expressing satisfaction with their pantyhose. After doing the research he concluded that they were going to be superior. Hanes turned out to be a ten bagger for Lynch. (It likely could have been more had it not been bought out)

Now, make sure you understand this. He did not just buy the company because his wife liked the product. Lynch did his homework and extensive research, then made the decision.

“I’ve never said, ‘If you go to a mall, see a Starbucks and say it’s good coffee, you should call Fidelity brokerage and buy the stock.”- Lynch

While Lynch often gets his ideas from a consumer standpoint, he doesn’t blindly buy companies. He taps into his investor mindset before taking a position in the company.

There needs to be a fundamental analysis of every company that is bought. At the end of the day owning a share of a company is owning a business.

“Behind every stock is a company. Find out what it’s doing.”- Peter Lynch

This can often be forgotten in the investing process. You can find yourself getting excited and then blinded by emotions. The investors kiss of death.

Consumers can love a product but if the company is terrible it isn’t worth it.

Think of it like this, would a company acquire a product simply because it is popular? No, there would be deep analysis of the product before the acquisition. Big decisions all require a second level of thinking. All investments are big decisions. Lynch used this mindset for his investments.

It takes a thorough analysis from both ends of the spectrum to find great investments.

As an investor, you need to take on a consumer mindset. This will give you the insight into the consumer trends. There is nothing stopping you from observing the behavior of people.

Then, switch back to the investor to do a deep analysis of the company. Dig through the financial statements, annual reports, and the SEC filings.

To be a successful investor you need to have a sound analysis from both a consumer and investor standpoint. The former is not easy but is not impossible.

By opening your eyes and seeing what consumers are buying, and not buying, we can begin to uncover what could be great investing gems.

Peter Lynch used this mindset during his tenure at Fidelity. Having the same process could potentially help us find a little investing magic of our own.



When it comes the dissecting the greats, I try to be like a sponge. I just absorb everything possible. The knowledge that they have to bestow on us is like gods reaching down and giving us the keys to a better life.

Peter Lynch is giving you the keys to a better-investing career.

His philosophy is not hard to emulate, it requires characteristics that have nothing to do with talent. You have no excuses. It only requires your desire. I know there was a lot of information to absorb, here is a quick recap:

Do your homework.

There is no company out there that is a sure bet. Risk is everywhere. You have to be able to find it and weigh it with the potential reward.

Remember to ‘turnover’ as many rocks as possible. You never know when you turn over the rock that has gold under it.

Doing your research and homework requires no talent, just the willingness to do it. This separates the average individual investors from the great investors. You most certainly have the ability to be a successful investor.

Have a long-term time frame

Investing is without question a long-term activity.

Lynch was exposed to this at an early age allowing him to have the best ally in the investing game, time.

If you haven’t started investing yet, have no fear. The best time to plant a tree is ASAP. Start as soon as you can and continue to do your homework.

Put compound interest on your side and let good investments be. Think in terms of decades not days, months, or years.

Diversification is key

You should never put all of your eggs in one basket.

Lynch was able to diversify through 1,000 companies. When you’re a normal investor, however, this might not be possible.

20-30 companies for the individual investor will give you the diversification you need.

Build your portfolio with stable companies (the stalwarts and slow growers) and sprinkle it with a few ‘fast growers’. The former will give you the stability. The latter will potentially put you over the top.

Invest in what you know

The biggest lesson Lynch wanted to teach us was to invest in what we know.

Sometimes the biggest advantage we can have as potential investors is our ability to assess companies from a consumer standpoint.

Consumers drive the economy.

If you see something you like, don’t automatically go buy shares. Do a thorough analysis of the company before you add it to your portfolio.

Closing Thoughts

Peter Lynch is one of the greatest investors to ever live. Check your ego at the door and allow him to fill your brain with investing greatness.

I do want to add one thing that I didn’t add in above, simply because it is the most important thing above all.

Make sure your having fun

Peter Lynch has since retired from managing the Magellan fund but still keeps his eyes on the market. When he was asked why he didn’t want to stop and pursue other leisure activities he replied: “It’s a fun exercise, beats the hell out of golf”.

He has a burning passion for the stock market. It will never die.

Lynch is successful because he is having fun doing what he loves.

If you want to be a great stock picker like Lynch you have to love the stock market. A burning passion is required if you desire to emulate the returns of Mr. Lynch. You have to enjoy investing to do well over the course of a lifetime.

If you combine all the information above then add in a burning passion you will be an unstoppable human investor.

Do your homework, think in terms of decades, diversify, invest in what you know, and enjoy every second of it.

Lynch did.

Peace and Love,

Let me know below what you think about Peter Lynch!

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