Few of Peter Lynch's Investment Principals

Now retired, Lynch secured his reputation as one of the most successful fund managers in history while in charge of the Fidelity Magellan fund between 1977 and 1990. During the 13 years until his retirement in 1990, Magellan was the top-ranked general-equity mutual fund. A $10,000 investment in Magellan in 1977 would have grown to $288,000 by 1990. During this period Lynch achieved and average annual return of 29%.

When Lynch assumed the management of Magellan in 1977, the fund had $20 million in assets. By 1990, when he decided to take early retirement, its value had grown to $14 billion. During the 13 years that Lynch ran the fund, Magellan failed to outperform the S&P 500 stock index only twice. No fund manager in history has ever ran so large a fund, so successfully, for so long. What is truly exceptional is that Lynch was able to maintain such high returns even after their fund's assets had swelled.

Although it is very difficult to emulate Lynch's portfolio management style, Lynch insists that small investors can research stocks better than most professionals. This is because individual investors are often better positioned to spot profitable investments earlier. Moreover, they are always free to act independently. By contrast, many Wall Street professionals are constrained by committees, trustees and superiors.

Below are a few of Peter Lynch's investing principals

Invest in What You Know

Lynch's key concept is that you can spot investment opportunities all around you by concentrating on what you already know and are familiar with. Lynch always invested in industries he understood, even if that business operated in a sector or industries that was forecasted to deliver lackluster performance. One such example was his investment in Chrysler in the 1980s. Chrysler was near bankruptcy at that time, but after seeing prototypes of its new minivan, Lynch made Chrysler one of Magellan's top holdings. Chrysler more than tripled in price in subsequent years.

Seize a Good OpportunityLynch was always on the hunt for above-average profit opportunities. Although he liked value stocks like Chrysler, he also invested in fast-growing up-and-comers such as Hanes Co. Hanes' stock appreciated six-fold while Magellan held it.

Profitability, Price, and a Good Business

ModelLynch generally looked for three qualities in a good company: profitability, price, and a good business model.

Check the key numbers.

1. If you are excited by a particular product or service, ensure that it accounts for a sufficient percentage of total company sales and that it makes a significant contribution to profits.

2. Favor companies with a strong cash position

3. Favor companies with a forward PE ratio well below their forecasted EPS growth rate

4. Avoid companies with high debt-to-equity ratios.

5. Avoid slow growers and cyclical stocks.

Do Not Hold Cash

You should always stay fully invested, otherwise you will likely miss out on market upswings. Ignore the ups and downs of the market. Your profits and losses do not depend on the economy as a whole. Buy whenever you come across an attractive idea with a compelling story behind it.

Know When to Sell

Sell your bellwether holdings when their PEGs (calculated as PE dividend by a firm's projected earnings growth rate) reach around 1.2-1.4, or when a company's long-term growth rate starts to slow.

Sell fast growers when there appears to be no further scope for expansion, or when expansion starts to produce only disappointing sales and profits growth, or when their PEGs reach around 1.5-2.0.

Sell asset plays when they are taken over, or when assets that are sold off fetch lower-than-expected prices.