By Aldwin Keppens - reviewed by Kristoff De Turck
Last update: May 24, 2023
In the book One Up on Wall Street, Peter Lynch, an American investor and fund manager, describes the rules of his investment strategy, which we will discuss in more detail in this article.
The investment strategy of Lynch is based on fundamental analysis and is a long term buy and hold strategy. It focusses on finding growing companies with reasonable to low valuation. So although it has some factors of growth investing, it leans more towards a value investing approach.
Pure growth investing strategies often have a technical analysis and market timing component, while Lynch advises to ignore the volatility of the market (and instead use it for opportunities) and build a diversified portfolio to hold for the long term. Lynch will also exclude companies which are growing too fast and does take into account valuation, health and profitability.
Does that work? Well ... it certainly worked for him:
As the manager of the Magellan Fund, Lynch managed to achieve an average yearly return of 29,2% in the period 1977 to 1990, doubling the average return of the S&P500.
According to Lynch, many good investment ideas can come from things you use, like or buy in your everyday life. The company does not need to be active in the next hot or growing thing, but just provide goods or services which are appreciated in their specific field. Companies can perfectly be involved in relatively dull areas. In fact: often the more dull and understandable, the better.
Often, as a retail investor you can use your first hand experience to your advantage. Companies which have not been discovered by Wall Street yet and will often have low analyst coverage and institutional ownership, can often be very interesting. So when you notice a specific product, service or item turning up more and more, always check out the company which creates it.
The next step is to dig into the company. Long term investors can not run the stock screener and just buy the companies that come out. Before actually buying you need to do your homework and make sure you understand the business of the company. So the screener will just give you a list of companies to research.
After buying shares of a company, the next step is patience. Lynch stated that you can not make any sensible prediction on the price of the company or the market in the next 1 or 2 years, but over 10 or 20 years the price is more predictable. A portfolio of 10 to 30 well selected and diversified stocks should perform well over a period of 10 to 20 years.
The Peter Lynch Screen is available in our trading ideas section. In this section we will go over the rules of the screen.
In the screen, we also put the requirement of a minimum daily average trading volume of 100K shares to ensure liquidity. Note that you could leave this filter out as liquidity is less important when buying for a long term hold and could cause you to miss interesting companies which have really not been discovered yet.
Additional things which are not included in the basic filters we provided in the example screen, but could be:
The screen provides a list of growing companies, which are healthy, profitably and trade at reasonable prices. Further digging, sorting and filtering could be done by: