Peter Lynch's Common Sense Approach

Peter Lynch is the legendary stock picker who from 1977-1990 managed the Fidelity Magellan Fund, the best performer in mutual funds over that period. The fund outperformed the S & P 500 Index by a compound annual rate of 10.3%. A $1,000 invested in Magellan in 1977, when Peter Lynch became the fund manager, was worth nearly $21,000 at the time he retired after thirteen years.

Peter Lynch believes that amateur investors can outperform Wall Street experts since the best investing clues can be found at the mall, on the school playground, or at people’s workplace. He explains that kids have a chance to learn about successful companies in their daily lives before Wall Street analysts find out about the companies.

The Wall Street guru says that the secret to his success is his ability to "think like an amateur." He offers a common-sense approach to stock picking: Know the "story," or everything about a company, before buying a stock; then follow the "story" after buying the stock. He says, "Don’t sell the stock if the 'story' is still good, whether the market is up or down."

To begin to select a "story," find publicly traded companies that provide good products and services. You can begin to gather information for your "story" every time you walk into a mall, go to a restaurant, or play with your friends. That is, wherever you go, do firsthand observations on companies or products to gauge whether the company is strong and growing. See for yourself whether the store is clean or messy. Are people lining up at the cash register or does the store look empty? Are the customers happy with the services or do they complain a lot? You are not likely to see an empty McDonalds or Wal-Mart.

On the playground, see what brand of soda your friends are drinking. Are most of them wearing Nike or Reebok shoes? Notice what new sports, such as roller hockey, have become popular. Then, look for companies that will benefit from the trend.

Also check with your parents, relatives, and neighbors who are doctors, engineers, and bankers. Your neighborhood doctor knows which companies make excellent drugs or the best medical equipment. Your engineer dad knows which companies have a dominant position in computer software or hardware. Your uncle banker knows which banks are the most profitable.

Once you begin to take notice of some of these companies, your next step is to learn more about the "story" of the company before you invest in it. You can learn more about the "story" from resources such as trade magazines, annual reports, and the Internet. As the "story" goes on, you will want to know what must happen for the company to continue its growth spurts, as well as the pitfalls that may slow its earnings.

Peter Lynch believes that, in the long run, there is a strong correlation between the success of the company and the success of the stock. So look for the success stories. He further suggests that every few months, it is worth while to recheck the company’s "story." That may involve checking the stores to see if there are still lines at the cash registers or new developments of the "story" from your neighbor’s workplace. Also, check the earnings and growth from the company’s quarterly reports or from the latest Value Line. As long as you own the stock, the "story" will never end.