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Peter Lynch’s Investment Strategy | The Motley Fool

Peter Lynch’s Investment Strategy | The Motley Fool

Peter Lynch is a legendary investor often mentioned in the same context as Warren Buffett, Benjamin Graham, Charlie Munger, and other billionaires who made their fortunes through the stock market. In this article, we’ll take a look at why Lynch has become such a famous investor, some of the key aspects of his investment style, and how you can learn more about Lynch’s stock-picking philosophy.

Mutual funds performance report in newspaper.

Image source: Getty Images.

Who is he?

Who is Peter Lynch?

Peter Lynch is one of the most highly respected investors of all time, and for good reason. He is widely considered the most successful mutual fund manager ever.

From 1977-1990, during his career at Fidelity Investments, Lynch managed the firm’s Magellan Fund, where he averaged a 29.2% annualized return, a remarkable level of performance to sustain for 13 years. To put this level of performance into perspective, a $10,000 investment at the time Lynch started managing the fund would have grown to almost $280,000 by the time he left.

Lynch is also one of the most widely read authors of investing books, with several best-selling books on value investing, including the massively successful 1989 book One Up on Wall Street.

Personal stats

Peter Lynch’s personal stats

  • Age: Born Jan. 19, 1944
  • Source of wealth: Investment management
  • Marital status: Widower
  • Residence: Boston, Massachusetts
  • Children: Three
  • Education: Boston College (BA), The Wharton School of the University of Pennsylvania (MBA)

Strategy

Peter Lynch’s investment approach

Peter Lynch has written three major books on investing, so his strategy and philosophy aren’t exactly a secret. Lynch’s most popular investment philosophy is “invest in what you know,” which was a major theme of his best-selling book One Up on Wall Street.

Lynch believes that contrary to popular opinion, smaller investors have an advantage over Wall Street professionals. The idea is that smaller investors can find real-world investment opportunities before they land on Wall Street’s radar.

In recent years, Lynch has specifically mentioned Apple (AAPL 0.5%) as an opportunity he noticed when his daughter bought an iPod at a higher price than most other portable music players on the market. However, he never acted and bought the stock.

Lynch is not a market-timer. He believes in finding great opportunities and holding on to them. In other words, Lynch didn’t buy or sell stocks in anticipation of the market going up or down.

He also used a combination of growth and value investing, using the latter to find stocks trading at reasonable value but using growth principles to find opportunities for rapid business growth. His strategy is often referred to as growth at a reasonable price (GARP).

When it comes to growth stories, Lynch advises investors to determine what “inning of the ball game” a company is in. One example he gives is a big position he opened in McDonald’s (MCD 0.1%), which at the time was unpopular with many investors, who saw limited room for growth.

However, McDonalds surprised many people as it spent the next two decades building its international footprint. During the 20-year period starting in the mid-1980s, when Lynch invested, McDonald’s generated a 3,000% total return for investors.

The lesson: Don’t assume a big, successful business has no room to grow. A similar situation unfolded with Chipotle Mexican Grill (CMG 0.72%) more recently.

Although he retired from the Magellan Fund in 1990, Lynch occasionally gives interviews and makes television appearances. In recent years, he has said that in today’s market, investors aren’t “careful” enough; too many are buying a stock simply because they heard about it from a friend or at a party.

Lynch cautions against trading, which has become far easier in today’s world of commission-free trading, but also says there is much more information available today for investors who want to learn how to invest properly and do their homework.

Investments

Peter Lynch’s investments

One of the more remarkable aspects of Lynch’s investment strategy is that, unlike most highly successful investors, Lynch achieved his returns without a concentrated stock portfolio. For example, Berkshire Hathaway’s (BRK.A 2.24%)(BRK.B 1.99%) stock portfolio is worth about $315 billion and is mainly run by Warren Buffett, but it contains fewer than 50 stocks.

Not only that, the bulk of the portfolio’s assets are concentrated in its five largest positions. On the other hand, when Lynch resigned as the manager of the Magellan Fund in 1990, it had more than 1,000 individual stocks in its portfolio.

The portfolio was also skewed toward small companies where Lynch saw lots of growth potential. To name a few, Ford (F 1.15%), General Electric (GE 1.74%), and Lowe’s (LOW -0.91%) were some of Lynch’s most profitable stocks that still trade on public markets today.

Related investing topics

More

More from this investor

As mentioned, Peter Lynch wrote three books (with co-author John Rothchild):

  • One Up on Wall Street
  • Beating the Street
  • Learn to Earn

One Up on Wall Street is a primer on Lynch’s investment philosophy and the advantages he feels individual investors have over Wall Street experts. Beating the Street takes it a step further and shows investors real-world examples of how Lynch uses his philosophy to pick stocks. Finally, Learn to Earn is geared toward newer investors, especially those who are relatively young.

Peter Lynch compiled a legendary performance record at Fidelity’s Magellan Fund and then retired in 1990 at the young age of 46. Lynch is often thought of as one of the best stock investors of all time, and rightfully so.

FAQ

Peter Lynch FAQ

What is Peter Lynch’s investing style?

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Peter Lynch uses a combination of value investing principles, growth investment principles, and investment techniques to find excellent opportunities. He doesn’t limit his strategy to any particular sector, nor does he have an upper limit on the number of stocks he’s willing to hold at a time.

However, he firmly believes in thoroughly analyzing investment opportunities and using everyday observations to find them before they are on Wall Street’s radar.

What companies did Peter Lynch invest in?

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When he retired from the Magellan Fund in 1990, the portfolio contained more than 1,000 stocks. Notable investments Lynch made include McDonald’s, Ford, General Electric, and Lowe’s, all of which were quite profitable for Lynch and his investors.

How many stocks did Peter Lynch own?

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If we include stocks he bought more than once, Lynch purchased more than 10,000 stocks in the Magellan Fund’s portfolio. At any given time, it was common for there to be more than 1,000 stocks in the portfolio, and at one point, the Magellan Fund held as many as 1,400 stocks in it.

Matt Frankel has positions in Berkshire Hathaway. The Motley Fool has positions in and recommends Apple, Berkshire Hathaway, and Chipotle Mexican Grill. The Motley Fool recommends Lowe’s Companies and recommends the following options: short September 2024 $52 puts on Chipotle Mexican Grill. The Motley Fool has a disclosure policy.

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