Investment Guru Peter Lynch: ‘If You Can’t Explain To An 11-Year-Old In 2 Minutes Or Less Why You Own The Stock, You Shouldn’t Own It’

Highly esteemed investor Peter Lynch, known for his extraordinary track record as a fund manager at Fidelity Investments, once revealed his “10 Commandments” for prosperous investing.

What Happened: Lynch, who drove Fidelity’s Magellan Fund to an average annual yield of 29.2% from 1977 to 1990, imparted his investment insights in a 1997 speech.

First and foremost, Lynch stressed the significance of comprehending the business behind the stock. He counseled, “If you can’t explain to an 11-year-old in 2 minutes or less, why you own the stock, you shouldn’t own it.”

This principle resonates with the investment approach of Warren Buffett, who only invests in what he understands and falls within his area of expertise.

 “If you can’t explain to an 11-year-old in 2 minutes or less, why you own the stock, you shouldn’t own it. Understanding the business behind the stock is the most important principle of investing in the stock market. This is why Buffett only invests into what he understands and what falls in his circle of competence. I buy stuff like Dunkin Donuts, Stop and Shop and made money on them,” Lynch said during the speech.

In addition, Lynch rejected the concept of forecasting the economy. He identifies as a “bottom-up” investor, concentrating on individual stocks through company and industry analysis. He holds the belief that attempting to predict interest rates or the economy is pointless.

Also Read: Warren Buffett’s Career Advice: ‘Don’t Think About Money, Take The Job That You Would Take If You Didn’t Need The Job’

“it’s futile to try and predict interest rates or the economy. If you spend 13 minutes per year on economics, you’ve wasted 10 minutes,” he added.

Lynch underscored the importance of patience in investing. He noted that one could have purchased Walmart a decade after its initial public offering and still reaped substantial returns. He emphasized that investing is a marathon, not a sprint, and there’s no need to hastily jump into buying stocks.

“A decade after Walmart when public in 1970, it only had 15% penetration across the U.S. Thus, one could assume they had plenty of runway ahead to expand across the country, but success wasn’t guaranteed, so some investors might have though they already missed the bus,” Lynch said while talking about the Walmart stock option.

Why It Matters: Lynch’s principles serve as a valuable guide for both novice and seasoned investors. His emphasis on understanding the business, focusing on individual stocks, and practicing patience aligns with the strategies of successful investors like Buffett.

These principles remind investors that successful investing is not about quick wins but about making informed decisions and playing the long game.

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This content was partially produced with the help of Benzinga Neuro and was reviewed and published by Benzinga editors.