Invest like Peter Lynch
Track record: 29% over 13 years, my favourite advice, think like an amateur, search for boring names that make people turn away in disgust.
Hi, I am Trung. I deep-dive into market leaders that passed my sleep-well checklist. I follow up on their performance with my Thesis Tracker updates, and when the right price comes, I buy them for the Sleep Well Portfolio, which I am building for my daughters to redeem in 2037. I disclose my reasoning for all BUY and SELL (ideally never). Access all content here.
Hi, sleep well friends,
Sleep Well Investments was initially built on the ideas of three wise investors:
Anti-fragility borrowed from Nassim Taleb,
Irreplaceability from Anthony Deden,
Mundanity from Matthew McLennan.
I took a few leaves from Terry Smith and Ralph Wanger’s playbook. Today, I want to bring your attention to Peter Lynch, who compounded 29% CAGR over 13 years at the Magellan Fund of Fidelity Investments between 1977 and 1990. His track record is the best-performing mutual fund in the world.
His books, Learn To Earn, One Up On Wall Street, and Beating The Street, are the most practical investment books I have ever read. I’ll focus on One Up on Wall Street, which discusses an underappreciated part of investing: developing an investor's mind. I then share Peter Lynch’s simple criteria for picking winners.
How do you develop a mind for investing?
First, what do you need? According to Peter Lynch:
studying history and philosophy is much better preparation for the stock market than, say, studying statistics.
and,
all the math you need in the stock market you get in the fourth grade.
This means that everyone with a curious mind can be an investor.
Second, you must believe you can learn and even beat the professionals. Because you can!
Peter Lynch says the stock market is rigged in your favor compared to professionals, i.e., the banks and hedge funds.
You are not limited to the size or location of your investments. You can make unpopular decisions and invest in overlooked businesses. There is little groupthink and no job security to worry about.
“Between the chance of making an unusually large profit on an unknown company and the assurance of losing only a small amount on an established company, the normal mutual-fund manager, pension-fund manager, or corporate-portfolio manager would jump at the latter. Success is one thing, but it's more important not to look bad if you fail.”
Plus, you are in control of your capital. When the market is down, you can put more to work; this contrasts with professional funds, where clients often withdraw money in a down market, limiting the opportunity to take advantage of volatility.
Operating like an amateur helped Peter Lynch achieve such an illustrious track record:
"The stocks I try to buy are the very stocks that traditional fund managers try to overlook. In other words, I continue to think like an amateur."
If you like the business, chances are you will love the stock.
Your direct experience using a product is your best research tool about a business that a Wall Street analyst may never fully understand despite spending hundreds of hours learning. So, if you are a doctor, you would have an edge in pharma businesses, and if you are a builder, you should be positioned better to study housing stocks. The bottom line is that you should invest in what you know better than others, and much like buying groceries, read the label.
Next, how would Peter Lynch find suitable investments?
He divides stock into six categories:
Slow growers - large and often pay dividends, unlikely to beat the market.
Stalwarts - 10-12% earning growth.
Fast growers - are expensive; however, if you can answer how many more years it can keep growing, you will likely beat the market here.
Cyclicals - businesses with revenue and earnings that follow the business cycles. Often, they are consumer products that users can postpone spending on in uncertain financial times.
Turn around - businesses with issues, the key is identifying whether they are temporary or permanent.
Asset play - companies with undervalued assets such as real estate, patents, or natural resources.
Not all companies fit in one, of course; McDonald's, for example, moved from fast growers to stalwarts to an asset play, then now to a slow grower.
Ralph Wanger, Scott Fraser, and quality investors would avoid slow growers, turnaround, and cyclical. For Peter Lynch, he avoids
Hot industry - where competition is intense
The next something - the next Amazon?
‘Diworsifying’ - Business entering unrelated industries
Dependent on single customers/suppliers
Whisper stock - curing cancer / removing addiction, etc.
He advocates a simple screen of ten traits to look out for winners / ten-baggers.
Dull name
Dull product
Dominate a niche
Disagreeable business
Depressing (mortuary business)
Insiders buying
Recurring revenue
Company buying back shares
Not in fast-growing/sexy industries
Not owned or followed by institutions
All valid points are easily applicable to any investor’s checklist. I particularly like the first two points
“A company that does boring things is almost as good as a company that has a boring name, and both together is terrific. Both together is guaranteed to keep the oxymorons [institution investors] away until finally good news compels them to buy in, thus sending the stock price even higher.”
Peter Lynch goes further to day boring business with boring names that make people turn away in digust is even better.
At Sleep Well Investments, we have quite a few of these companies, such as:
dull products (building homes - NVR, vacuum valve - VAT Group)
dominate a niche (deliveries - Grab, convenience stores - Dino Polska, Helmet protection - MIPS, Logistics Saas - Wisetech, Excess and Surplus Insurance - Kinsale)
recurring revenue (Crowdstrike, Veeva)
high insider ownership (Mercardo Libre and Sea Limited)
rumour abound - Wisetech’s CEO sex scandals
Check them out in this directory of Sleep Well writeups.
That’s it for today.
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High success rate stock picks—33% money-weighted gain per pick since Oct 2023 (61% time-weighted).
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Promote yourself to 6000+ stock market investors (47% open rate) — Contact me: trung.nguyen@sleepwellinvestments.com