"Your investor's edge is not something you get from Wall Street experts. It's something you already have. You can outperform the experts if you use your edge by investing in companies or industries you already understand." - Peter Lynch
Rule #1: Invest in what you know.
Since I never studied finance, I had to learn on the job. Everything I needed to know about making money in the market came from four key sources: 1. clients who had already gotten rich using stocks, 2. Warren Buffett's annual reports (of course), 3. the editorial page of the Wall Street Journal, and, most importantly, Peter Lynch.
Lynch ran Fidelity's Magellan Fund from 1977 to 1990. When he took it over it had $18 million in assets. By the time he resigned, the fund had grown to more than $14 billion and averaged a 29.2% return, which I'm pretty sure is still the best 20-year return of any mutual fund ever. Even though I never invested in the fund (because as you might remember, I hate, loathe and despise mutual funds) it is an amazing, amazing accomplishment.
One Up On Wall Street, published in 1989, was the first of Lynch's books about his investment philosophy. Slightly dated, it's still the one book I recommend whenever anybody asks me what they should read when they want to learn about common stocks. While the rest of the financial services industry has spent the last three decades concocting specialized terminology that confuses people and makes them feel dumb, weirdo derivatives nobody can understand, Lynch took the opposite approach. He empowered us. He told us we were smart enough and that our own common sense combined with a little research and some patience was all we needed.
Lynch found some of his best ideas when he was out with his family, traveling or talking with friends and associates. As one famous story goes, one day his wife told him how much she liked L'eggs pantyhose, a new product she'd found at the grocery store. After looking into the company's prospects and liking what he saw, Lynch bought the Hanes Company, maker of L'eggs, and his fund investors realized a 30-fold appreciation in Hanes stock.
Investing in what you know and understand is crucial when stocks go through the unavoidable bear markets and short-term disappointments that are part of investing, because of the fundamental truth of Rule #2.
Rule #2: The key to making money in stocks is not to get scared out of them.
I try not to talk stocks with people too much, because - well, it's kind of an elitist thing - and most people aren't really interested. Maybe they have automatic payroll deductions to put in a few mutual funds for retirement. But they don't want to hear about my stock war stories.
However there's one stock I can't help talking about: TJ Maxx. I'm obnoxious about it, holding up check-out lines to ask the employee in the store if they own any. When a woman tells me she bought her scarf at TJ Maxx, I always say, "Thanks. I'm an owner."
It's not quite as good a story as Lynch's 30-fold increase in Hanes, but I first bought the stock May 16, 2000 at $4.39. It closed on Friday at $63.52 - and that doesn't include the dividends I've gotten over the years. Great investment, but it hasn't always been easy. When the global economy almost collapsed in the fall of 2008, the stock plummeted from $18.76 down to $9.58, almost 50% in a couple of months. Rather than panic, I hopped in the car and drove to my nearest T.J.Maxx. After standing in line for ten minutes to check out, I asked the sales person how business was going in the middle of the recession. "It's great," she said. "We're busier than ever," and I went home and bought another 800 shares. No matter what the stock market does American ladies will never permanently quit shopping, especially if they can get a bargain, and nobody does bargains better than TJ Maxx.
When you really, really believe in the companies you own, that's when you make the big money.
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