Peter Lynch
An Overview of Peter Lynch
Period of Reign: 1966-1990
Associated With: Fidelity Investments
Highlights: Grew the Magellan fund from $18 million to $14 billion from 1977-1990, returning an average of 29% annually
Quotes: Go for a business that any idiot can run - because sooner or later, any idiot probably is going to run it. More Lynch quotes at Woopidoo
Terms-Coined: Ten Bagger, an investment which is worth ten times what was paid
Post-Success: Founder of the Lynch Foundation which supports education, religious organizations, cultural and historic organizations, and hospitals and medical research
Peter Lynch investing style summarized
- Invest in what you know
- Do your homework, look for fundamental value
- Look for an opportunity in growing companies, avoid stagnant growth
- Invest long term, don’t worry about the short term
Peter Lynch Books
To be added.
Additional Peter Lynch resources
- A great explanation of the Peter Lynch investment philosophy and specific rules that Lynch looked for when selecting companies
- Biographical and background information on Peter Lynch
- A PBS interview with Peter Lynch about his entry into finance and his overall views on investing and the market
- A statement issued by Peter Lynch in the aftermath of 9/11 where he reiterates his beliefs about long term investments in the market
Stock Screen Parameters to Mimic Peter Lynch’s Investment Style
The below bullet points attempt to recreate Peter Lynch’s investment style using technical parameters that can automatically be screened. These parameters are from an interpretation by Harry Domash, and were run using the MSN stock screener. The text in italics explains how the parameter was defined in the screener.
1) Growth: Find companies with a high annual growth rate, but not so high that they can’t keep up
Parameter: Annual EPS Growth Rate >= 20
Parameter: Annual EPS Growth Rate <= 30
2) Debt: Find companies with that aren’t in too much debt. Lynch says a debt to equity ratio (D/E) of 1/3 is normal, and a DE ratio of 4/1 is definitely too high
Parameter: Debt to Equity Ration <= 1
3) Price: Find stocks that are reasonably priced, based on the stocks price to earnings ratio (P/E), and compared to the historic growth of the company. Be careful not to confuse this with the Price to Earnings to Growth (PEG) ratio which compares the PE with forecasted future growth. Lynch says a P/E to growth of 2 is too high.
Parameter: Current P/E Ratio <= 1.75 * Annual EPS Growth
4) Returns: Find companies that have consistent returns. We will do so by comparing the average pretax profit margin to a portion of the current pretax profit margin, which should indicate consistency.
Parameter: Pre-tax Margin 5-Year Average >= .5 * Pre-tax Margin
5) Overlooked: Find companies that are overlooked. Lynch says if institutional investment is low, you may have found an overlooked gem.
Parameter: Institutional Ownership <= 35
6) Red Flags: Find companies without red flags. Lynch mentions one red flags as the accumulation of inventory.
Parameter: Inventory Turnover Decreased Not Since Last Year
7) Limitations: Finally, Lynch mentions these rules do not apply to financial institutions, so those should not be included
Parameter: Eliminate finance companies from the results
