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Three Tips from an Investing Master

I recently chanced upon an article that was floating around my social-media circles titled The Wit and Wisdom of Peter Lynch. The article was a summary of an investing-related speech that Lynch gave at a conference sometime back in 2005.

Lynch was the manager of the Fidelity Magellan Fund in the USA from 1977 to 1990 and his exploits became part of investing-lore as he racked up a truly outstanding record with 29% compounded annualised returns for 13 years. Every $1,000 entrusted to Lynch in 1977 would have become $27,000 by 1990!

Here at the Motley Fool Singapore, we’ve been touting that looking at what great investors are doing is akin to a top scoring classmate sharing with you his or her study tips.

Lynch’s track record would have put him in the ‘all-time greats’ category and the article had summarised some of Lynch’s treasured-principles on investing that I thought would make great tips. I’ve picked out three of the best. Here they are:

1) Know what you own

Lynch was an advocate of ‘knowing what you own’ and its corollary of ‘buying what you know’. At the core of his idea was that it is very important to treat a share as a business and to find out how exactly this business makes money – i.e. knowing what you own.

And then, he counsels investors that they can create an edge for themselves by noticing popular products and services they encounter regularly and then investigating the businesses that provide the products and services for investment ideas – i.e. buying what you know.

In fact, my Foolish colleague James Yeo has also wrote about how investors in Singapore can scour for investing opportunities by being more attentive in their daily life.

Like shopping and love outing out? Why not look behind the curtains of your favourite malls and restaurants to see who owns them? You might find out facts like how Paragon’s owned by SPH REIT (SGX: SK6U) while BreadTalk (SGX: 5DA) runs the BreadTalk bakery-outlets as well as award-winning Chinese-cuisine restaurant Din Tai Fung, for instance.

2) It is futile to predict the economy, interest rates and the stock market

In an interesting anecdote in Lynch’s book, One Up on Wall Street, he wrote that he would have appreciated it tremendously if any stock-market-prognosticator had called him up to warn him about the October 1987 US stock market crash before it happened. Turns out, no one did.

Lynch never could get predictions about the economy, interest rates or the stock market right. And he’s a bona-fide investing legend!

Thing is, it’s hard to make predictions about the financial world and even experts often get them wrong. As Niels Bohr, a Nobel Laureate in Physics, said, “Prediction is very difficult, especially if it’s about the future”.

And even if you can get macro-economic predictions right, it does not necessarily mean it can correlate to long-term investing success – studies have shown that important economic indicators like USA’s Growth Domestic Product Growth trends have a predictive-power of almost zero in deducing long-term domestic stock market returns in the States.

What Lynch suggests is to investigate individual companies instead. Find out what makes the business tick and determine its intrinsic value in relation to its share price. Then, invest accordingly.

3) You have plenty of time to invest in big winners

Lynch once said in an interview that investors had the chance to invest in American retailer Walmart for a 3000% gain even after the company had increased in price by 1000% 10 years after it became publicly-listed.

In Singapore, we’ve also seen shares like Jardine Strategic Holdings (SGX: J37), Raffles Medical Group (SGX: R01) and Super Group (SGX: S10) go on to at least double in price in the span of one to five years after they’ve experienced run-ups of 300-500%.

It’s not too late to invest in a company even after a massive run-up in price if its future still looks bright and its share price in relation to its intrinsic value still looks attractive.

So there you have it, three tips from an investing master himself!

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chong Ser Jing owns shares in Super Group and Raffles Medical Group.