A lot of people look to Warren Buffett when it comes to investing advice or inspiration. He’s long been considered as one of the most successful investors but he isn’t the only legendary one.
Another man worthy of the title is mutual fund manager Peter Lynch. The best proof of his unmatched understanding of the market is his management of the Fidelity Magellan Mutual Fund.
Taking over the fund in the late ‘70s, he managed to grow its assets from a mere $20 million to a mind-boggling $13 million in just 13 years. Under Lynch’s leadership, the fund saw an annual return of almost 30%.
With that kind of achievement under his belt, Lynch has been looked up to by many in the investing world. Here are two of the most important lessons newbie investors can learn from his wisdom.
Know Your Investments
You can easily buy shares from a variety of publicly-traded companies thanks to a concept called market liquidity. While this gives regular people the opportunity to get into the stock market, it can lead them to bet their money on investments they haven’t studied yet.
In contrast, Lynch advises investors to always know everything there is to know about the companies or funds you put your hard-earned money in. To test whether you’ve developed a good enough understanding of an investment, see if you can explain it to a fifth-grader and not have them bored.
Getting to know a company, especially its long-term goals, will equip you with the knowledge you need to interpret news releases about its short-term price actions.
Develop a Strong Stomach
As Lynch said, it’s the stomach that is the most important organ in the stock market and not the brain. By this, he meant that you should prepare yourself to handle the volatile nature of the market.
He also believed that the key to making money in stocks is to not be afraid of them. If you’re truly knowledgeable about the things you invest in, you can learn to tune out the ‘noise’ of a bear market to enjoy the long-term benefits of investing in a company.
In this sense, using your research is something that’s both an imperative and a challenge.
And while the act of stock investing may appear overly complicated, Lynch said that no investor would need more than fourth-grade level math skills to succeed.