How to Become Rich Part 2: Peter Lynch's Universally Proven rules of investing

On October 25, 2016 By thesuccessmanual Topic: Personal Finance, Remarkable, Book summary

Peter Lynch (born January 19, 1944) is a successful Wall Street stock investor whose record ranks him as one of the best stock-pickers in the world.

1. Know What You Own - Most people don't really know the reasons why they own a stock - you should.

2. It is Futile to Predict the Economy, Interest Rates and the Stock Market(So Don't Waste Time Trying) - "If You Spend 13 minutes per year trying to predict the economy, you have wasted 10 minutes" Focus on the "facts" now at hand rather than predictions about the future

3. You Have Plenty of Time - to identify and recognize exceptional companies.

4. Avoid Long Shots - if you run across a company that falls into this category but still excites you - do nothing and write down the name. Look at it again in 6 to 12 months and see if you still think it is good. If it is one of the good ones and went from 5 to 15 while you waited, per point #3 above, you probably still have plenty of time.

5. Good Management is Very Important and Buy Great Businesses.

6. Be Flexible - lots of unexpected things happen, some good and some bad.

7. Knowing When to Sell is Hard - before you make a purchase, you should be able to explain why you are buying/own it in terms that an 11 year old could understand - three sentences at most. Remember this reason and sell the holding when the reason no longer continues to hold.

8. There is Always Something to Worry About - and this makes things interesting. Forget about all the global bad stuff because the key to good investing is not the brain/intellect, its having the stomach.

1. "If it's gone down this much already, how much lower can it go?" (answer: Zero)

2. "If it's gone this high already, how can it possibly go higher?" (some of the best companies grow for decades)

3. "Eventually they always come back." (no they don't - there are lots of counterexamples)

4. "It's only $3 a share, what can I lose?" ($3 for every share you buy)

5. "It's always darkest before the dawn." (Its also always darkest before it goes absolutely pitch black. Don't buy a business just because price dropped and it is cheaper now)

6. "When it rebounds to my cost, I'll sell." (The stock does not know you own it! Don't take it so personally Note: this comment is explained by the well documented psychological tendencies called loss aversion and anchoring bias which are talked about in Behavioral Finance. If you liked it at ten, you should love it at 6 so either buy more or sell)

7. "What me worry? Conservative stocks don't fluctuate much." (There is no such thing as a conservative stock - the average stock fluctuates between 50% to 70% from its high to its low price every year. There is a graveyard where all the "conservative" stocks get buried. Companies and businesses change!)

8. "Look at all the money I lost - I didn't buy it!" (Don't beat yourself up about the missed opportunities because it is not productive - when he managed the Magellan Fund, he almost never owned one of the 10 best performing stocks in a given year, but he did fine anyway).

9. "I missed that one. I'll catch the next one." (Doesn't work that way)

10.) "The stock has gone up - so I must be right" or "The stock has done down - so I must be wrong." (Technical analysis is not worth much. So many people like something at 20 and hate it at 12 - never made much sense to him).

Related Money Guide: Warren Buffet's Wealth Rules.

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