Key Insights
1. Focus on the details of the companies and ignore the general market
People love to speculate, but economists have spent decades predicting recessions, yet they still can’t seem to get it right. Even the experts on Wall Street, in their lofty ivory towers filled with stock charts, put-call ratios, and foreign investments, can’t predict markets with any useful consistency that everyday investors can rely upon.
As an investor, your job is to pick financially sustainable stocks with the highest earnings potential. If the market is currently overvalued, Lynch’s advice is to wait because none of the stocks will be reasonably priced, so there won’t be a company worth investing in at this stage.
2. Don’t waste your time trading options or futures
You will most likely lose your shirt. Warren Buffett has repeatedly stated that futures and options should be outlawed, and Lynch firmly agrees with the Oracle of Omaha.
The issue with options is that they are a derivative (so there’s no actual ownership) and thus very complex and high-risk.
Futures are even riskier. Created for the institutional investor rather than the individual investor, this financial product is more suited to investments in the commodity market. Parties have to establish prices in advance, and either side may later on need to deposit more funds into their accounts to meet daily obligations. When trading futures, you are facing maximum liability on both sides.
3. In ideal conditions, even if you fully understand the stocks you own, you will still only have a 20% chance of investing in a company that turns out to have phenomenal profitability
So, out of five companies you invest in, one will take you to the moon, while three may deliver expected results, and the last is likely to disappoint completely. Therefore, research is critical before you invest in any stocks to give you the best possible chance of building a successful portfolio.
4. The easiest way to decide whether to invest in a company is to see if you can explain its core business simply and quickly, like in an elevator pitch
Think simple enough that a fifth-grader would understand it and fast enough that they won’t get bored listening. If you succeed with this task, don’t miss what could be an extraordinary investment opportunity.
5. In the stock market, as in marriage, the ease of divorce is not a reason to marry
Just because you have an out doesn’t mean you should make rash decisions when you go into it. Keep in mind that this is all part of a long-term strategy, ideally with a decades-long investment horizon.
Twenty years is enough time for a well-chosen stock to bounce back from nasty market corrections and accumulate handsome profits. If you choose your stocks wisely, you won’t want to sell them. Of course, complications will arise, but since no amount of liquidity will keep you from suffering (even financially) in your daily life, it makes sense to invest for the long haul.
6. No one can make any money when the industry becomes too popular
Nobody wins in an overrated industry. Lynch writes: “If it’s a choice between investing in a good company in a great industry or a great company in a lousy industry, I’ll take the great company in the lousy industry any day.”
7. It’s a huge mistake to buy shares simply because their price has rapidly increased
The “here and now” is the best approach in the market. However, when looking at historical data, remember that it doesn’t show where the cliff drop-off is, and it doesn’t mean that the investment will do well in the years to come.
