A Dozen Things I’ve Learned About Investing From Peter Lynch

A Dozen Things I’ve Learned About Investing From Peter Lynch

1. “Nobody can predict interest rates, the future direction of the economy, or the stock market.  Dismiss all such forecasts and concentrate on what’s actually happening to the companies in which you’ve invested.” It is far more productive for an investor to focus their time and energy on systems which are potentially understandable in a way which might reveal a mispriced asset. George Soros said once: “Unfortunately, the more complex the system, the greater the room for error.” The simplest system on which an investor can focus is an individual company. Trying to understand something as complex as an economy in a way which outperforms the markets is not a wise use of time and is unlikely to happen.   

2. “The way you lose money in the stock market is to start off with an economic picture. I also spend fifteen minutes a year on where the stock market is going.” and “If you spend more than 13 minutes analyzing economic and market forecasts, you’ve wasted 10 minutes.”  The media’s objective is to convince you that obsessively following the news cycle is necessary for an investor. In short, the media’s interest is to to convince you to watch their advertising. While you don’t want to be oblivious to the state of the economy, listening to talking head pundits and incessantly following the news cycle is actually counterproductive to profitable investing. Instead, focus on the companies  you chose to follow.

3. “The GNP six months out is just malarkey. How is the sneaker industry doing? That’s real economics.” The difference between the predictive power of microeconomics and macroeconomics is “night and day” since with the former vastly fewer assumptions are required and the systems involved are far less complex. The best investors make investing as simple as possible, but no simpler.  Lynch is saying he may pay attention to the economics of an industry, but only to understand the economics of the companies he chooses to follow.

4. “To make money, you must find something that nobody else knows, or do something that others won’t do because they have rigid mind-sets.” It is mathematically certain that you can’t beat the market if you *are* the market. You must find bets that are mispriced, be right about that mispricing and when you do find a mispriced bet, by definition, your view will be contrarian. 

5. “A share of a stock is not a lottery ticket. It’s part ownership of a business.” Many people love to gamble since it gives their brain a dopamine hit. They gamble even though it is a tax on people with poor math skills. The right thing for an investor to love is the process of investing, not the bet itself.  The right process for an investor is to understand the value generated by the underlying business. 

6. “Investing without research is like playing stud poker and never looking at the cards.” You can’t understand a business and its place in an industry without doing research. And in doing research you must find something that the market does not properly discount into the price of the stock or bond. If you spend more time picking out a refrigerator than researching a stock, you should instead be buying a low fee index fund.

7. “Owning stocks is like having children—don’t get involved with more than you can handle. The part-time stock picker probably has time to follow 8-12 companies.” The time in any given day, week etc. is a zero sum game. If you work at a day job and you have a life, only so much time is left to follow stocks and bonds.  It is better to be a mile deep in understanding 8-12 companies than an inch deep on many more.

8. “Everyone has the brainpower to follow the stock market. If you made it through fifth-grade math, you can do it.” Addition, subtraction, multiplication and division is all the math skill you need. Investors should ignore formulas with Greek letters in them.

9. “People seem more comfortable investing in something about which they are entirely ignorant.” Suspending disbelief about an investment is easier for many people for some reason when you know less rather than more, especially if the story is well crafted and told by the promoter.  When confronted with someone touting a stock, imagine them holding a megaphone at the circus and then think about what they are saying. 

10. “If you can’t convince yourself ‘When I’m down 25 percent, I’m a buyer’ and banish forever the fatal thought ‘When I’m down 25 percent, I’m a seller,’ then you’ll never make a decent profit in stocks.” and “Bargains are the holy grail of the true stock picker. We see the latest correction not as a disaster, but as an opportunity to acquire more shares at low prices. This is how great fortunes are made over time.” Who doesn’t like it when something like a hamburger is cheaper to buy? Stocks and bonds are no different.  Also, don’t put yourself in a position where you may need to sell at the wrong time.

11. “A market player has 50 percent of his portfolio in cash at the bottom of the market. When the market moves up, he can miss most of the move.” Markets over long period of time inevitably rise. They always have and always will. That is the good news. The bad news is that you can’t “time” when the rise in a market will happen. By trying to “time” the market you can miss a big move up and if you do, your returns will show it.  

12. “Only invest what you could afford to lose without that loss having any effect on your daily life in the foreseeable future.” Nothing is worse than not being able to care for people you love. Don’t take that risk. And don’t put yourself in a position where you are likely to panic more than usual due to the pain of something normal and inevitable (e.g., a 20% correction in the stock market). Peter Lynch said once: “Small investors tend to be pessimistic and optimistic at precisely the wrong times.”

Do you sometimes lack confidence?

Do you sometimes lack confidence?  Good.  Because truly confident people sometimes feel insecure.  They sometimes feel uncertain.  

Show me someone who claims they are confident all the time and I'll show you someone who's not truly confident. First things first: Confidence is not bravado, or swagger, or an overt pretense of bravery. Confidence is not some bold or brash air of self-belief directed at others.

Confidence is quiet: It’s a natural expression of ability, expertise, and self-regard.

I’m fortunate to know a number of truly confident people. Many work with me at HubSpot, others are fellow founders of their own startups some of whom I've met through my angel investment activity. But the majority are people I’ve met through my career and who work in a variety of industries and professions.It comes as no surprise they all share a number of qualities:

1. They take a stand not because they think they are always right… but because they are not afraid to be wrong.

Cocky and conceited people tend to take a position and then proclaim, bluster, and totally disregard differing opinions or points of view. They know they’re right – and they want (actually they need) you to know it too.

Their behavior isn’t a sign of confidence, though; it’s the hallmark of an intellectual bully.

Truly confident people don’t mind being proven wrong. They feel

finding out what is right is a lot more important than being right. And when they’re wrong, they’re secure enough to back down graciously.

Truly confident people often admit they’re wrong or don’t have all the answers; intellectual bullies never do.

2. They listen ten times more than they speak.

Bragging is a mask for insecurity. Truly confident people are quiet and unassuming. They already know what they think; they want to know what you think.

So they ask open-ended questions that give other people the freedom to be thoughtful and introspective: They ask what you do, how you do it, what you like about it, what you learned from it… and what they should do if they find themselves in a similar situation.

Truly confident people realize they know a lot, but they wish they knew more… and they know the only way to learn more is to listen more.

3. They duck the spotlight so it shines on others.

Perhaps it’s true they did the bulk of the work. Perhaps they really did overcome the major obstacles. Perhaps it’s true they turned a collection of disparate individuals into an incredibly high performance team.

Truly confident people don’t care – at least they don’t show it. (Inside they’re proud, as well they should be.) Truly confident people don’t need the glory; they know what they’ve achieved.

They don’t need the validation of others, because true validation comes from within.

So they stand back and celebrate their accomplishments through others. They stand back and let others shine – a confidence boost that helps those people become truly confident, too.

4. They freely ask for help.

Many people feel asking for help is a sign of weakness; implicit in the request is a lack of knowledge, skill, or experience.

Confident people are secure enough to admit a weakness. So they often ask others for help, not only because they are secure enough to admit they need help but also because they know that when they seek help they pay the person they ask a huge compliment.

Saying, “Can you help me?” shows tremendous respect for that individual’s expertise and judgment. Otherwise you wouldn't ask.

5. They think, “Why not me?”

Many people feel they have to wait: To be promoted, to be hired, to be selected, to be chosen... like the old Hollywood cliché, to somehow be discovered.

Truly confident people know that access is almost universal. They can connect with almost anyone through social media. (Everyone you know knows someone you should know.) They know they can attract their own funding, create their own products, build their own relationships and networks, choose their own path – they can choose to follow whatever course they wish.

And very quietly, without calling attention to themselves, they go out and do it.

6. They don't put down other people.

Generally speaking, the people who like to gossip, who like to speak badly of others, do so because they hope by comparison to make themselves look better.

The only comparison a truly confident person makes is to the person she was yesterday – and to the person she hopes to someday become.

7. They aren’t afraid to look silly…

Running around in your underwear is certainly taking it to extremes… but when you’re truly confident, you don’t mind occasionally being in a situation where you aren't at your best.

(And oddly enough, people tend to respect you more when you do – not less.)

8. … And they own their mistakes.

Insecurity tends to breed artificiality; confidence breeds sincerity and honesty.

That’s why truly confident people admit their mistakes. They dine out on their screw-ups. They don’t mind serving as a cautionary tale. They don’t mind being a source of laughter – for others and for themselves.

When you’re truly confident, you don’t mind occasionally “looking bad.” You realize that that when you’re genuine and unpretentious, people don’t laugh at you.

They laugh with you.

9. They only seek approval from the people who really matter.

You say you have 10k Twitter followers? Swell. 20k Facebook friends? Cool. A professional and social network of hundreds or even thousands? That’s great.

But that also pales in comparison to earning the trust and respect of the few people in your life that truly matter.

When we earn their trust and respect, no matter where we go or what we try, we do it with true confidence – because we know the people who truly matter the most are truly behind us.

So, what do you think?  Are there qualities of truly confident people that I've missed?  Would love to read your thoughts in the comments.

The Intelligent Investor: Saving Investors From Themselves

Editor’s note: Jason Zweig recently wrote his 250th “Intelligent Investor” column for The Wall Street Journal and shortly thereafter won a Gerald Loeb Award, considered the most prestigious in business journalism, in the Personal Finance category.

I was once asked, at a journalism conference, how I defined my job. I said: My job is to write the exact same thing between 50 and 100 times a year in such a way that neither my editors nor my readers will ever think I am repeating myself.

That’s because good advice rarely changes, while markets change constantly. The temptation to pander is almost irresistible. And while people need good advice, what they want is advice that sounds good.

The advice that sounds the best in the short run is always the most dangerous in the long run. Everyone wants the secret, the key, the roadmap to the primrose path that leads to El Dorado: the magical low-risk, high-return investment that can double your money in no time. Everyone wants to chase the returns of whatever has been hottest and to shun whatever has gone cold. Most financial journalism, like most of Wall Street itself, is dedicated to a basic principle of marketing: When the ducks quack, feed ‘em.

In practice, for most of the media, that requires telling people to buy Internet stocks in 1999 and early 2000; explaining, in 2005 and 2006, how to “flip” houses; in 2008 and 2009, it meant telling people to dump their stocks and even to buy “leveraged inverse” exchange-traded funds that made explosively risky bets against stocks; and ever since 2008, it has meant touting bonds and the “safety trade” like high-dividend-paying stocks and so-called minimum-volatility stocks.

It’s no wonder that, as brilliant research by the psychologist Paul Andreassen showed many years ago, people who receive frequent news updates on their investments earn lower returns than those who get no news. It’s also no wonder that the media has ignored those findings. Not many people care to admit that they spend their careers being part of the problem instead of trying to be part of the solution.

My job, as I see it, is to learn from other people’s mistakes and from my own. Above all, it means trying to save people from themselves. As the founder of security analysis, Benjamin Graham, wrote in The Intelligent Investor in 1949: “The investor’s chief problem – and even his worst enemy – is likely to be himself.”

One of the main reasons we are all our worst enemies as investors is that the financial universe is set up to deceive us.

From financial history and from my own experience, I long ago concluded that regression to the mean is the most powerful law in financial physics: Periods of above-average performance are inevitably followed by below-average returns, and bad times inevitably set the stage for surprisingly good performance.

But humans perceive reality in short bursts and streaks, making a long-term perspective almost impossible to sustain – and making most people prone to believing that every blip is the beginning of a durable opportunity.

My role, therefore, is to bet on regression to the mean even as most investors, and financial journalists, are betting against it. I try to talk readers out of chasing whatever is hot and, instead, to think about investing in what is not hot. Instead of pandering to investors’ own worst tendencies, I try to push back. My role is also to remind them constantly that knowing what not to do is much more important than what to do. Approximately 99% of the time, the single most important thing investors should do is absolutely nothing.

There’s no smugness or self-satisfaction in this sort of role. The competitive and psychological pressure to give bad advice is so intense, the demand to produce noise is so unremitting, that I often feel like a performer onstage before a hostile audience that is forever hissing and throwing rotten fruit at him. It’s hard for your head to swell when you spend so much of your time ducking.

On the other hand, you can’t be a columnist for The Wall Street Journal without a thick skin. I have been called an ignoramus, an idiot and dozens of epithets unprintable in a family newspaper; accused of front-running or trading ahead of my own columns;assailed as being in the pockets of short-sellers betting against regular investors; described as being a close friend of a person I’ve never met in my entire life;decried as being biased in favor of high-frequency traders and as being biased against them;and told, almost every week, that I lack even the most basic understanding of how the financial markets work.

The perennial refrain from critics is: You just don’t get it. Internet stocks / housing / energy prices / financial stocks / gold / silver / bonds / high-yield stocks / you-name-it can’t go down. This time is different, and here’s why.

But this time is never different. History always rhymes. Human nature never changes. You should always become more skeptical of any investment that has recently soared in price, and you should always become more enthusiastic about any asset that has recently fallen in price. That’s what it means to be an investor.

When, in the fourth quarter of 2008 and 2009, I repeatedly urged investors to hold fast to their stocks, I was called a shill for Wall Street and helplessly naïve.

When I took a skeptical look at Congressman Ron Paul’s gold-heavy portfolio in December 2011, angry readers called me “weak minded,” “ignorant,” “pathetic” and a member of “the big bank lobby.” (Gold was around $1,613 per ounce then; it was last sighted this week sinking below $1,230.)

When, only a few weeks ago, I warned that any hints of a tighter policy from the Federal Reserve could crush recently trendy assets like real-estate investment trusts, high-dividend stocks and “low volatility” stocks, readers protested that I didn’t even know the difference between a rise in interest rates and “tapering,” or a decline in the rate at which the Fed buys back bonds. I know the difference – but, with many of these assets down by up to 10% since then, it isn’t clear that all investors knew the difference.

Every columnist knows that if you ever write something that didn’t make anybody angry, you blew it. People don’t like having their preconceived notions jolted, and doubt and ambiguity are alien to the way most investors think.

That’s why I’m realistic. I don’t ever expect to convert all my readers to my viewpoint. I would be a fool to think I could. But I’d be a worse fool if I ever stopped trying.

So you can understand exactly where I am coming from, I will tell you a story.

My senior year of college, my father was dying of lung cancer. Most weekends, I would take the train up from New York City to Fort Edward (then the nearest train station to where I grew up in rural upstate New York).

On one of my last visits, even as my father was in severe pain, he asked me the same question he always did: What are you reading?

I fluffed my feathers a bit and said: Kierkegaard. “What is he telling you?” asked my dad. I had just been reading a volume of Kierkegaard’s journals on the train, immersed in the poetic ruminations of the great Danish philosopher. So I immediately spouted, verbatim and with the appropriate pauses for world-weary effect, the words I still remember to this day: “No individual can assist or save the age. He can only express that it is lost.”

Without a moment’s hesitation, my dad retorted: “He’s right. But that’s exactly why you must try to assist and save the age.”

In that one moment, my dad put a callow youth gently in his place, out-existentialized the great existentialist and gave me words to conduct a career by.

Only years later did I understand fully what he meant: We can’t assist or save the age, but the attempt to do so is the only way we have of even coming close to realizing some dignity and meaning for our lives. The longer the odds, the greater the obligation to try to beat them. That’s why I keep at it, even though I have profound doubts that most people will ever learn how to be better investors. I never expect everyone to listen; all I ever hope for is to get someone to listen.

I felt this firsthand in a former job in 1999 and 2000, when I wrote column after column warning people not to fling money at technology stocks and, in return, got hundreds of hate emails a week (often hundreds per day). It was grim, contrarian work, constantly refusing to tell people what they desperately wanted to hear – it was like trying to stop a hurricane by pushing against it with your hands.

The vindication came for me not when the Nasdaq bubble burst, but years later, when a hand-addressed envelope came in the mail. One of my columns was enclosed, folded again and again and frayed almost to tatters.

Across it, a reader from Minnesota had written by hand: “Dear Mr. Zweig: For a long time I have wanted to say thank you for writing this. The second I read this it made so much sense to me that I tore it out and folded it up and carried it around in my wallet. Whenever my friends started bragging about their trading profits I would excuse myself, go to the bathroom, pull this article out and read it again and it kept me out of trouble. I am returning it to you now because I don’t think I need it anymore, but I wanted you to know that I have carried it with me every day for years.”

No one writes letters anymore, of course. But I still get emails every week from readers telling me that something I wrote kept them out of trouble or helped them make sense of the market’s latest mad outburst.

I’ve had many honors in my career – being chosen as the editor of the revised edition of Graham’s The Intelligent Investor; spending two years helping the Nobel laureate Daniel Kahneman write his book Thinking, Fast and Slow; and, this month, winning the Loeb Award. But the greatest honor I have had is the abiding privilege of trying my best to serve our readers well. It isn’t always easy, and I don’t always succeed, but that effort is its highest reward an investing journalist can ever have.

Japanese way of cost efficiency

A fantastic sentence written on every Japanese bus stop.

Only buses will stop here – Not your time .
So Keep walking towards your goal .

Japanese way of cost efficiency

The Taj hotel group had invited Mr. Masai Imai from Japan to hold a workshop for its staff.

The staff were very skeptical - the hotel is doing excellent business, this person from Japan has no exposure to hotel industry - what exactly is he going to teach?

But everybody gathered as planned for the workshop in the conference hall sharp at 9 am.

Mr. Masai was introduced to them - a not so impressive personality, nor the English all that good; spoke as if he was first formulating each sentence in Japanese and then translating it into rather clumsy English.

"Good morning! Let's start work. I am told this is a workshop; but I see neither work nor shop. So let's proceed where work is happening. Let's start with the first room on the first floor."

Mr. Masai, followed by the senior management, the participants, the video camera crew trouped out of the conference room and proceeded to the destination.

That happened to be the laundry room of the hotel.

Mr. Masai entered the room and stood at the window, "beautiful view!" he said.

The staff knew it; they need not invite a Japanese consultant to tell them this!

"A room with such a beautiful view is being wasted as a laundry room. Shift the laundry to the basement and convert this into a guest room."

Aa Haa! Now nobody had ever thought about that!

The manager said, "Yes, it can be done."

"Then let's do it," Mr. Masai said.

"Yes sir, I will make a note of this and we will include it in the report on the workshop that will be prepared." Manager

"Excuse me, but there is nothing to note down in this. Let's just do it, just now." Mr. Masai.

"Just now?" Manager

"Yes, decide on a room on the ground floor/basement and shift the stuff out of this room right away. It should take a couple of hours, right?" asked Mr. Masai.

"Yes." Manager.

"Let's come back here just before lunch. By then all this stuff will have got shifted out and the room must be ready with the carpets, furniture etc. and from today you can start earning the few thousand that you charge your customers for a night."

"Ok, Sir." The manager had no option.

The next destination was the pantry. The group entered. At the entrance were two huge sinks full of plates to be washed.

Mr. Masai removed his jacket and started washing the plates.

"Sir, Please, what are you doing?" the manager didn't know what to say and what to do.

"Why, I am washing the plates", Mr. Masai.

"But sir, there is staff here to do that." Manager Mr. Masai continued washing, "I think sink is for washing plates, there are stands here to keep the plates and the plates should go into the stands."

All the officials wondered - did they require a consultant to tell them this?

After finishing the job, Mr. Masai asked, "How many plates do you have?'

"Plenty, so that there should never be any shortage." answered the Manager.

Mr. Masai said, "We have a word in Japanese -'Muda'. Muda means delay, Muda means unnecessary spending. One lesson to be learned in this workshop is to avoid both. If you have plenty of plates, there will be delay in cleaning them up. The first step to correct this situation is to remove all the excess plates."

"Yes, we will say this in the report." Manager.

"No, wasting our time in writing the report is again an instance of 'Muda'. We must pack the extra plates in a box right away and send these to whichever other section of Taj requires these. Throughout the workshop now we will find out where all we find this 'Muda' hidden."

And then at every spot and session, the staff eagerly awaited to find out Muda and learn how to avoid it.

On the last day, Mr. Masai told a story.

"A Japanese and an American, both fond of hunting, met in a jungle. They entered deep jungle and suddenly realized that they had run out of bullets. Just then they heard a lion roaring. Both started running. But the Japanese took a short break to put on his sports shoes.

The American said, "What are you doing? We must first get to the car."

The Japanese responded, "No. I only have to ensure that I remain ahead of you."

All the participants engrossed in listening to the story, realized suddenly that the lion would stop after getting his victim!

"The lesson is: competition in today's world is so fierce, that it is important to stay ahead of other, even by just a couple of steps. And you have such a huge and naturally well endowed country. If you remember to curtail your production expenditure and give the best quality always, you will be miles ahead as compared to so many other countries in the world.", concluded Mr. Masai.