Peter Lynch managed the Magellan mutual fund at Fidelity Investments between 1977 and 1990. He averaged a 29% annual return and managed to increase his fund’s assets under management from $18 million to $14 billion. Magellan started as a private investment arm for Fidelity’ founding Johnson family. The fund didn’t open to outside investors until 1981. Between 1981 and 1990, Lynch managed to return 22.5% per year vs 16.5% for the S&P 500. During that period, the average investor at Lynch’s fund made 7% a year. Why the big discrepancy? Well, many investors sold Magellan fund when it had a down year and bought it back when it had a good year.

The majority of Peter Lynch’s returns came when he was managing a relatively small amount of capital. He was also lucky to start at Magellan at the end of one of the biggest and longest bear markets in financial history, which brought many stocks to extremely low valuations.

Peter Lynch is also one of the most prolific writers, whose market thoughts continue to be widely quoted and applied to these days. Here are some of my favorite:

The two biggest mistakes that investors make

There are two ways investors can fake themselves out of the big returns that come from great growth companies.  The first is waiting to buy the stock when it looks cheap.  Throughout its 27-year rise from a split-adjusted 1.6 cents to $23, Walmart never looked cheap compared with the overall market.  Its price-to-earnings ratio rarely dropped below 20, but Walmart’s earnings were growing at 25 to 30 percent a year.  A key point to remember is that a p/e of 20 is not too much to pay for a company that’s growing at 25 percent.  Any business that an manage to keep up a 20 to 25 percent growth rate for 20 years will reward shareholders with a massive return even if the stock market overall is lower after 20 years.

The second mistake is underestimating how long a great growth company can keep up the pace.

Let Your Winners Run

It’s easy to make a mistake and do the opposite, pulling out the flowers and watering the weeds.  If you’re lucky enough to have one golden egg in your portfolio, it may not matter if you have a couple of rotten ones in there with it.  Let’s say you have a portfolio of six stocks.  Two of them are average, two of them are below average, and one is a real loser.  But you also have one stellar performer.  Your Coca-Cola, your Gillette.  A stock that reminds you why you invested in the first place.  In other words, you don’t have to be right all the time to do well in stocks.  If you find one great growth company and own it long enough to let the profits run, the gains should more than offset mediocre results from other stocks in your portfolio.

Look for situations, where perceptions are worse than reality

The big winners come from the so-called high-risk categories, but the risks have more to do with the investors than with the categories.

Embrace market corrections

It is not entirely clear what causes deep market corrections (a clear prove that markets are irrational), but without them many of the best performing long-term investors would have never achieved their spectacular returns.

The biggest winners are usually a pleasant surprise

The point is, there’s no arbitrary limit to how high a stock can go, and if the story is still good, the earnings continue to improve, and the fundamentals haven’t changed, “can’t go much higher” is a terrible reason to snub a stock. Shame on all those experts who advise clients to sell automatically after they double their money. You’ll never get a ten-bagger doing that.

Frankly, I’ve never been able to predict which stocks will go up tenfold, or which will go up fivefold. I try to stick with them as long as the story’s intact, hoping to be pleasantly surprised. The success of a company isn’t the surprise, but what the shares bring often is.

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