Peter Lynch has been one of the most admired Mutual Fund CIO across the globe. His 1994 lecture is a classic on understanding "What to do" and "What not to do" while investing money in equity markets.
Please read our summary of the lecture below
Peter Lynch starts off by saying one of the fundamental truths of investing; he says don’t buy what you don’t know. But still he says 80% of people do that only.
It amazes him that people will inquire a lot about which fridge to buy, which apartment to rent, which car to buy but they will never think twice before buying the company if someone gives them a tip.
He says he has earned a lot of money from Dunkin Donuts which is a very simple business to understand. The stock has gone on to make huge loads of money for investors.
He says even in recession people were standing at the doorstep of the shop of Dunkin Donuts which means the company is here to stay.
He says the stocks are not lottery tickets. There is a company behind that stock. If the stock is doing well it means that company must be doing something fundamentally right.
He takes the example of Coca cola which has made a lot of wealth for investors; it was able to do that because t was performing well on financial parameters, the business was very simple to understand.
He talks about how one can never predict stock markets, interest rates and macro economy. If we are able to predict interest rates correctly three times in a row then there will be a lot of billionaires but that is not the case.
He presents an interesting fact; he says there have been 50 declines of 10% or more in one century. It means that there has been a correction of 10% or more every two years.
History does suggest Markets go down a lot. Out of those 50 declines, 15 were responsible for more than 25% correction; (Known as recession) this means that there is a recession in every 6 years.
Focus on Micro Economics and the facts that are suitable for the industry you are going to invest in. He takes the example of Automobile sector; if you want to invest in Automobile sector, the knowledge of car prices is critical. But you cannot essentially how the car prices will be in the next three years.
He talks about the notion of “time”. He says that people are not patient enough when they are buying the stock. He takes the example of Walmart and Microsoft; Walmart came up with its IPO in 1970 and already had 15 years of proven history but even if you didn’t invest at that time and invested after 10 years you still would have made 30 times more money. Microsoft too has grown a lot and the stock has grown multi-fold.
He talks about a behaviour in investing; when a stock goes down from say 22 to 16 people think that let’s wait for the stock to fall more without really knowing what may have caused the decline. They are just speculating on the price level without really knowing the fundamentals.
He also gives another example wherein a stock has fallen to 3$; people start asking him whether they should buy it or not because the stock has to go up right, he says the stock doesn’t have to go up; if the fundamentals of the company have deteriorated than whether the company is at 3 or 20 doesn’t make sense to buy it.
Another Major thing he says is that don’t get too attached to a particular stock. A stock doesn’t know that you own it. If the fundamentals deteriorate, sell and move on.
He talks about how everyone of us has an edge and we just give it away. He takes an example of automobile sector; wherein if you are a dealer who deals with cars and knows about the information which is crucial, you can basically make the money off it.
He takes the example of products that we use in day to day life and we never seem to invest in the company that makes those products instead of that we just around buying oil companies.
He talks about how people are worried all the time. He talks about people have always worried about depression, World wars, recessions and they basically make excuses before investing.