He is also wary of the ‘middleman’, which describes a company that sells most of its products or services to a single customer. However, this can be difficult to foresee. He may however look at an overpaid target or restructure that expects a successful turnaround. Such corporations tend to alternate between ‘diworseification’ and restructuring. These are companies that consistently pursue acquisitions that are overpriced and beyond the acquirer’s realm of understanding. Beware bad acquisitions and the middleman The underlying earnings and cashflows of these companies are often something left to be desired. High growth businesses in popular industries with low barrier to entry attracts a lot of competition and imitation. Stocks that receive significant positive attention have greater risk of being over-bought and over-priced. He also dislikes whisper stocks that attract imaginative, complicated and emotionally appealing stories. Peter Lynch prefers to avoid the hottest stock in the hottest industry stocks that are heralded as the next big something longshot companies at the cusp of solving the latest national problem and stocks with the most exciting name. He may take notice however if most managers are selling most of their shares. This is because rewarding shareholders becomes a priority when management owns a large amount of its company’s stock.Ĭonversely, Lynch is careful not to overreact to insider selling as this can occur for a variety of reasons. He views company share buybacks and high employee and executive stock ownership as a positive signal. All this even if it is a no-growth industry.
He likes companies that have a niche, where people must keep buying its product and service, and is a user of technology.
He likes companies that institutions do not own, and analysts do not follow. Peter Lynch likes companies that sound dull, ridiculous, boring, depressing or unappealing. Review key financial ratios and numbers.Categorise your investments to ask better questions.This is a practical approach that many investors can learn from. His investment principles and methods are outlined in his book, One Up on Wall Street: How To Use What You Already Know to Make Money in the Market, which we review briefly below. Lynch looks to buy great companies that he believes the market has undervalued and underappreciated. Peter Lynch, Magellan’s former fund manager, suggests that average investors who become experts in their own field can pick winning stocks effectively with a little research.
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