1 Common Sense Tip from An Investing Master

Peter Lynch was the head of the US-based Fidelity Magellan fund in 1977, where he managed to deliver 29% annualized returns for his clients over 13 years. To put this into perspective, every $1,000 invested into his fund would have turned into $27,200 over his 13 year tenure.

In an interview after his stunning performance, the investing maestro had many thoughts to share that were useful for the individual investor. In particular, he quipped:

In this business if you’re good, you’re right six times out of ten. You’re never going to be right nine times out of ten. This is not like pure science where you go, “Aha” and you’ve got the answer.

But, is it really possible to outperform the share market by being only 60% right?

Being right some of the time

To illustrate this, we can look at two companies which had vastly different investing outcomes over the long term. For this case, I would refer to an article about the differing fortunes in the share prices of Dairy Farm Holdings International Ltd (SGX: D01) and Global Yellow Pages Limited (SGX: Y07). Dairy Farm is a pan-Asian retailer while Global Yellow Pages is a publisher of classified directories which is also venturing into different sectors. The share price performance for each two company is shared below:

Company Share Price (9 December 2004) Share Price (6 November 2014) Change in Share Price
Global Yellow Pages $1.66 $0.046 -97.2%
Dairy Farm $2.50 $9.35 274%

Source: Google Finance

Shares for Global Yellow Pages started trading on 9 December 2004. From its Initial Public Offering price of $1.66, shares of Global Yellow Pages has fallen a tremultous 97.5% up till 6 November 2014. In contrast, shares of Dairy Farm has steadily rose by 276% over the same timeframe.

Now, imagine if an individual investor had invested equal amounts of cash in both shares on 9 December 2004, and held both companies till 6 November 2014.

About ten years later, what we have is two conclusions. Number one, that individual investor would have turned out to be right only half of the time. Secondly, the combined returns for holding both companies would still be a respectable 88% of the initial outlay. In this context, that would be a fair return, as it comes despite the massive share price loss from Global Yellow Pages.

Foolish take away

The simple reasoning behind this overall result is shared from Lynch:

If you invest $1,000 in a stock, all you can lose is $1,000, but you stand to gain $10,000 or even $50,000 over time if you’re patient. It only takes a handful of big winners to make a lifetime of investing worthwhile.

From the example of Dairy Farm and Global Yellow Pages shown above, we can see how one big winning share can handily overwhelm a big loss. It stands to reason — as Lynch points out — that only a few big winners can make investing worthwhile. After all, investing is not about being perfectly right for every buy made, but about being right more times than being wrong.

Stay tuned for more tips from the investing master. Learn more tips and tricks from Peter Lynch through a FREE subscription to Take Stock SingaporeSign up here to The Motley Fool’s weekly investing newsletter that will teach you how to GROW your wealth in the years ahead. 

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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 Chin Hui Leong doesn’t own shares in any companies mentioned.