Golden Rules of Investing by Peter Lynch

Peter Lynch is an American investor and a mutual fund manager. He managed the Fidelity Magellan Fund from 1977 to 1990 from $20 million to $14 billion. He reportedly beat the S&P 500 index benchmark in 11 of those 13 years. http://www.investopedia.com/university/greatest/peterlynch.asp
 
At the end of his book, "Beating the Street", he wrote his golden rules of investing:
  1. Investing is fun, exciting and dangerous if you don't do any work.
  2. Your investors edge is not something you get from experts. It's something you already have. You can outperform the experts if you use your edge by investing in companies or industries you understand.
  3. Over the past three decades, the stock has come to be dominated by a herd of professional investors. Contrary to popular belief, this makes it easier for the amateur investor. You can beat the market by ignoring the herd.
  4. Behind every stock is a company, find out what it's doing.
  5. Often, there is no correlation between the success of a company's operations and the success of its stock over a few months or even a few years. In the long term, there is a 100 percent correlation between the success of the company and the success of its stock. This disparity is the key to making money; it pays to be patient and to own successful companies.
  6. You have to know what you own and why you own it.
  7. Long shots always miss the mark.
  8. 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 and to buy and sell shares as conditions warrant. There don't have to be more than 5 companies in the portfolio at any time.
  9. If you can't find any companies that you think are attractive, put your money in the bank until you discover some.
  10. Never invest in a company without understanding its finances. The biggest losses in stocks come from companies with poor balance sheets. Always look at the balance sheet to see if a company is solvent before you risk your money on it.
  11. Avoid hot stocks in hot industries. Great companies in cold, non-growth industries are consistent big winners.
  12. With small companies, you're better off to wait until they turn a profit before you invest.
  13. If you're thinking about investing in a troubled industry, buy the companies with staying power. Also, wait for the industry to show signs of revival.
  14. If you invest $1000 in a stock, all you can lose is $1000, but you stand to gain $10000 or even $50000 if you are patient. The average person can concentrate on a few good companies while the fund manager is forced to diversify. By owning too many stocks, you lose this advantage of concentration. It only takes a handful of big winners to make a lifetime of investing worthwhile.
  15. In every industry and every region of the country, the observant amateur can find growth companies long before the professionals have discovered them.
  16. A stock market decline is as routine as January blizzard in Colorado. If you're prepared, it can hurt you. A decline is a great opportunity to pick up the bargains left behind by investors who are fleeing the storm in panic.
  17. Everyone has the brainpower to make money in stocks. Not everyone has the stomach. If you are susceptible to selling everything in a panic, you ought to avoid stocks and stock mutual funds altogether.
  18. There is always something to worry about. Avoid weekend thinking and ignore the latest dire predictions of the newscaster's. Sell a stock because the company's fundamentals deteriorate not because the sky is falling.
  19. 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.
  20. If you study 10 companies, you'll find 1 for which the story is better than expected. If you study 50, you'll find 5. There are always pleasant surprises to be found in the stock market - companies whose achievements are being overlooked on Wall Street.
  21. If you don't study any companies, you'll have the same success buying stocks as you do in a poker game if you bet without looking at your cards.
  22. Time is on your side when you own shares of superior companies. You can afford to be patient - even if you missed Wal-Mart in the first five years, it was a great stock to own in the next five years. Time is against you when you own options.
  23. If you have stomach for stocks, but neither the time nor the inclination to do the homework, invest in equity mutual funds. Its a good idea to diversify. You should own a few different kinds of funds. Investing in six of the same kind is not diversification.
  24. The capital gains tax penalizes the investors who do too much switching from one mutual fund to another. If you've invested in one fund or several funds that have done well, don't abandon them capriciously. Stick with them.
  25. You can take advantage of the faster growing economies by investing some of your assets in an overseas fund with a good record.
  26. In the long-run, a portfolio of well-chosen stocks and/or equity mutual funds will always outperform a portfolio of bonds or a money-market account. In the long-run, a portfolio of poorly chosen stocks won't outperform the money left under the mattress.
 
 

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