Peter Lynch – How the Heck Did He Do It?


Peter Lynch was the investment manager of the Magellan Fund at Fidelity Investments from 1977 to 1990 where he averaged a 29.2% yearly return. $1,000 invested became $28,000 after just 13 years.

He is also famous for his investment books One Up on Wall Street, Learn to Earn and Beating the Street, and for coining new mantras like “invest in what you know” and “ten bagger.” A ten bagger is when you make ten times your initial investment on a stock. This article is going to compare what Peter Lynch did, how it’s different than current investing trends and if the current market situation enables such returns.

Investment Rules

Some of his rules are:

  • “You only need a few good stocks in your life time”: The message here is not to water the weeds by holding on to the dogs in your portfolio but sticking to the winners. Most investors usually sell their winners when they go up by 20% or 30% and keep the losing stocks. There shouldn’t be a problem to find ten baggers now. Peter Lynch kept a book where he wrote over 100 stocks that went up 10-fold while he ran the Magellan Fund that he didn’t own. The stock market always gives great investing opportunities and probably always will, the trick is to find them. The easiest way of finding current ten baggers is to take March 2009 as a starting point, but there are also companies that became ten baggers even for investors that bought them before the great recession. An example is Apple (NASDAQ: AAPL) with a price of around $9 in June 2006 that grew to the current $100. As AAPL is one of the most traded stocks on the market, we can only imagine how many investors traded AAPL back in 2006 for a single or double digit percentage gain while they could have enjoyed ten bagger returns just by holding on to a winner.
  • “The person that turns over the most rocks wins the game”: This rule is the opposite of what the current ETF craze suggests where you buy a little bit of everything on the market. By doing what the market does you can never beat the market, and the market is everyone that blindly invests through ETFs or other funds. Just a little bit of market panic could create an avalanche of forced sales and give stock pickers great new ten bagger opportunities.
  • Ask yourself this question when the market declines: “Will this infect the basic consumer? Will this drop make people stop buying cars, stop buying houses, stop buying appliances, stop going to restaurants?” No one likes market declines and recessions but those are inevitable when investing so be prepared to weather those and buy more when stocks are cheap.
  • “Buy what you know”: is what Peter Lynch is famous for, but this does not mean that if you like Starbucks you should just buy it. His advice looks for more specialized knowledge like if you are in the steel industry, you will probably be among the first to know when it starts rebounding. But, that inside knowledge should be combined with serious fundamental stock research.
  • Absent a lot of surprises, stocks are relatively predictable over twenty years, as to whether they’re going to be higher or lower in two to three years, you might as well flip a coin to decide”: A long term approach to investing in stocks similar to many other successful investors like Warren Buffett is the general rule. Investing for shorter periods of time in stocks is just betting and not investing.  
  • “All else equal invest in the company with the fewest color photographs in the annual report”:A simple message; the focus lies on the business and on making profits, and not extravagant investments.
  • “When even the analysts are bored, it’s time to start buying”: Sometimes after one-off events like scandals or sector declines, analysts will look for more hype sectors and bash the untrendy ones. This will leave complete sectors in the shadow and that is the best opportunity to buy in. After a while, analysts will flock back, earnings will rise again and the returns on investment should be made by then.
  • “Owning stocks is like having children – don’t get involved with more than you can handle”: As already mentioned, stock picking takes a lot of time, but you do not need to know every stock in the market. According to Lynch there is no need for an amateur investor to follow more than 8 to 12 companies and have more than 5 companies is a portfolio at any time.


Lynch’s general investing rules are still applicable today as they involve meticulous research in order to understand the financials and the business of a company. What separates Lynch from the rest is that he buys when companies or a sector is in some short term trouble and then sticks to the investment until it is fully valued by the market. Also, as the prices of his investments increase and things go better, Lynch is known to increase his stake at higher prices. A general conclusion should be: buy cheap, stick to your winners and do lots of research.

A funny anecdote from his last interview is that in a bubble market people always ask for stock tips, while on the last two trips no one asked, so this might mean that the bubble is ending. A bubble bursting would provide much more ten bagger opportunities.

To conclude in Lynch’s wisdom, if you invest $100 in stock you can lose only $100 while the returns are unlimited. Pretty simple.