“Never invest in any idea you can’t illustrate with a crayon, and Although it is easy to forget sometimes, a share is not a lottery ticket, it’s part-ownership of a business.” Peter Lynch
Peter Lynch, is a wildly successful investor wrote two wonderful books: One Up on Wall Street and Beating the Street, both of which were resounding calls for the empowerment of small investors.
By sharing his commonsense and philosophy, Lynch convinced a generation of investors that they didn’t need an MBA or a white-shoe stock broker to invest in the stock market.
The core drivers of Lynch’s growth-centric strategy are pretty straightforward:
Invest in growing, easy-to-understand companies.
Here’s how it works:
Buy what you know
Lynch believes that the average investor knows more than they think.
Not only do you consume an array of products and services on a daily basis, but you’ve developed unique career insights that can give you a leg up on the Street.
Put them to use, invest in what you know and understand.
Seek hidden gems
Lynch highlights that individual investors have a huge opportunity when it comes to small- and micro-cap stocks.
Most Wall Street research houses can’t afford the time or staff to cover small- and micro-cap stocks, and most mutual funds are too large to comfortably trade in and out of them.
Meaning small caps are frequently mis and under-priced, leaving enterprising investors the chance to buy into small, growing businesses on the cheap.
Diversify
Lynch’s Magellan Fund held an incredible 1,000+ stocks when he finally handed off the reins in 1990.
For perspective, that’s roughly five times the average number held by U.S. equity funds. Lynch spilled coffee on the Ivory Tower of Modern Portfolio Theory. How? By choosing small, growing, well-managed companies and letting them run.
Another master in the world of investing, Warren Buffett.
No offense to the father of value investing, Benjamin Graham, but his student Warren Buffett is the Man when it comes to the practice and theory of value investing.
Value investing is the art of buying stocks for less than their fair, or “intrinsic” value.
For Buffett value investing strategy involves three steps:
Buy great businesses
Buffett looks for businesses that have strong brands, management teams, cash flow, and durable competitive advantage.
The kinds of businesses that you think will outlive you such as Coca-Cola, Procter & Gamble, and Johnson & Johnson.
Once he finds these great businesses, he looks to buy them at margin of safety, and then patiently holds on for years upon years as these beauties compound wealth.
Be contrarian
It takes some courage to buy stocks that everyone else is down on, but Buffett has made a living by going against the grain. His well know quote, “Be fearful when others are greedy, and greedy when others are fearful.”
Invest for the long term
As Buffett once said, “Our favorite holding period is forever.” And if you can’t tell from our section on investor temperament, we feel the same way!