When it comes to investing, there is always a lot that can be learned from the experience and wisdom of others—especially the great ones. In this article, we take a look at Peter Lynch and identify eight powerful tips that we can apply to dividend-growth investing.
Before we address the tips themselves, it’s important to take just a moment to delve into and reflect on Lynch’s remarkable investing accomplishments. Doing so will help reinforce the tremendous value we can mine from his wealth of knowledge and experience!
Peter Lynch is one of the most successful investors of all time. While he would not quite make it on my Mount Rushmore of the investing world, he absolutely places in my top ten—along side folks like Warren Buffett, John Templeton, Benjamin Graham, Philip Fisher, Jack Bogle, Thomas Rowe Price Jr., Carl Icahn, Joel Greenblatt, and Seth Klarman.
Lynch managed the legendary Magellan Fund at Fidelity from 1977 (at age 33) until his early retirement in 1990. This fund was an aggressive, capital appreciation fund targeting primarily domestic investments.
During this 13-year period at the helm, the fund earned an annualized return of 29.2%–more than doubling the S&P’s mark over that same period.
Additionally, he helped popularize the investing strategy known as GARP (growth at a reasonable price). As the acronym implies, Lynch advocated for a hybrid growth-value approach to investing. Furthermore, he is credited with developing the price-to-earnings-growth (PEG) ratio—an important tool for relative valuation under a GARP strategy.
He has written several books and his witty, no-nonsense approach to investing (similar to that of Warren Buffett and Charlie Munger) has made his name one of the most recognizable in today’s investing world.
It is worth noting that Lynch is not a pure value investor, nor is he a dividend-growth investor. He is and was a long-term growth investor, with a relative-value filter. However, as I always contend, the different approaches to long-term investing share a great deal in common and merely represent different areas of the investing spectrum (with a great deal of overlap) rather than distinct and mutually-exclusive points. As such, long-term investors of every shape and stripe can learn a great deal from his experience and wisdom—including dividend-growth investors!
Our first tip is probably the most well-known advice from Peter Lynch—namely, invest in what you know.
Lynch has recently argued that his advice has been misunderstood, misinterpreted and/or misapplied by many folks. He has clarified that what he has always been driving at is not that you necessarily have personal, first-hand knowledge of a company but, rather, that you (a) have a thorough knowledge of the company’s fundamentals and (b) understand its business model. If you can’t succinctly and lucidly explain to someone else why you’re buying a given stock, then you probably shouldn’t be!
This highlights an important corollary—long-term investing is about investing in companies, not stocks. We are buying partial ownership stakes in a physical company and we should always approach and manage our investment decisions from the point-of-view of a business owner. Fundamentals—not short-run price action—always drives long-run performance and value.
Heading the advice of Peter Lynch and knowing the companies one invests in could save a lot of dividend-growth investors from falling prey to yield and value traps!
The second dividend-growth investing tip we can learn from Peter Lynch is that research is critical.
As Lynch has aptly quipped, stocks are not lottery tickets. Tip number two is a natural progression from tip number one. Understanding a company requires research—you have to be willing to put the time and effort in.
As I love to point out: investing is an individual endeavor. There are no team awards. You and you alone will bear full responsibility for your decisions and the outcomes they produce. Do your own homework and form your own investing thesis.
The heart of dividend-growth investing is fundamental analysis. If you don’t enjoy performing the mental gymnastics required by this process, then investing may not be for you.
However, that doesn’t mean you have to be a rocket scientist. The investor with the highest IQ does not win by default. What is required is the willingness to engage in research and pursue knowledge and growth. The more research you do, the more effective and efficient you will become at the process.
The critical point is that you cannot skip this step. There are no shortcuts to investing success. Research is not only critical it is a prerequisite for investing in any company. Taking long-shots, speculating, and/or buying on somebody else’s advice is not a recipe for long-run investing success. Rather, it is the road to loss.
The next dividend-growth investing tip we can takeaway from Peter Lynch is to ignore the flash and noise.
Flash and noise typically come from three sources: companies, the media, and the financial industry.
Lynch warns that investors should be cautious of the flash when researching information from a company, such as annual reports. It is important to understand that, while such documents are intended to convey important data and performance indicators, they are also partly a marketing tool. Ignore the flashy, colorful, and glossy graphics and let the data and your own analysis do the talking.
Next, ignore the media noise. Chasing the news is a recipe for investing failure. Always remember that the media (including those on social media) are motivated by one thing: advertising revenue. They are focused on their own financial best interest—not yours! As such, they are driven by metrics such as views, subscribers, and watch time. They will pump out noise (sensationalism) just to get you to tune in. Ignore the noise.
Finally, beware of the flash from the financial industry. The industry is driven to a large degree by fees generated from assets under management. They want your money—that’s how they make their money! Your financial performance is secondary. Do your own homework and ignore the flash of titillating marketing efforts.
Dividend-growth investing is a strategic chess game. Ignore the flash and noise. Do your own homework, develop your own investing thesis, and stick to it—ignore the flash and noise that will bombard and surround you.
The fourth lesson dividend-growth investors can learn from Peter Lynch is that long-term investing is far more predictable.
Lynch argues that you can have a greater degree of confidence in where a company will be in 10, 15, or 20 years than in one to two years… the short-term is a coin flip.
Short-run price action and market volatility is driven by emotions (investor behavior), while long-term results are driven by fundamentals. As such, we have a much better chance of understanding and forecasting fundamentals than the often irrational and nearly always shifting emotions of the market.
As Benjamin Graham famously asserted, “In the short run, the market is a voting machine… but in the long run, it is a weighing machine.” Or, as Buffett puts it (echoing his mentor), the market is a “popularity contest” in the short run.
Successful dividend-growth investing involves capitalizing on time arbitrage—an advantage for the retail investor. The goal is to take advantage of short-term, emotionally-driven overreactions by the market and allow the fundamentals and intrinsic value to provide a strong margin of safety and guide our long-term investing decisions.
In other words, dividend-growth investing requires a contrarian, long-term mindset. Not only can we learn this lesson from the great value investors… but from Peter Lynch as well.
If you’re interested in learning more about this, I recommend reading our article Value Consistently Trumps Growth for Long-Term Investing.
The next takeaway we can glean from Peter Lynch is not to over-diversify our dividend-growth portfolios.
To be clear, we consistently stress the need to be properly diversified on our site. You will hear us say this again and again. However, Lynch’s advice is that there is a point where enough is enough… and that line of demarcation has nothing to do with risk and everything to do with effectiveness.
Time is a limited resource. As investors, we only have so much of it. As such, there is only so much of it that we can invest into our investing. Research, analysis, and portfolio management comes with a cost—and that cost is time. Lynch’s advice is to have as much diversification as possible—but not so much that your ability to research, analyze, and manage (effectiveness) is compromised. In classic Lynch style, he likens stocks to children—warning investors not to get involved with more of them than you can handle!
Now, I personally manage several portfolios—including our public dividend-growth portfolio on our site that maintains, on average, around 80 holdings. However, I’ve been investing for decades, am a corporate finance professional, and enjoy spending 25+ hours a week (on top of work) managing that investment load!
I would NOT recommend that kind of load/diversification for beginners!
I typically recommend starting with a portfolio of 10 to 15 (diversified) stocks. That will provide you with adequate diversification when starting out, while not overwhelming you. As (1) your knowledge, skills, and abilities grow as an investor and/or (2) you are able and willing to invest more time, you can further expand your portfolio.
Again, diversification is good… but too much of a good thing can be bad!
To learn more about portfolio diversification, I encourage you to read our articles Idiosyncratic Risk: Is Your Portfolio Really Protected? and Sector Rotation: The Case for Dividend-Growth Portfolio Diversification.
The next tip dividend-growth investors can learn from Peter Lynch is that market risk is irrelevant to long-term investing.
Short-run market volatility (systemic risk) is simply noise when it comes to long-term investing. It is specific (aka idiosyncratic) risk that is the true concern—and that can be effectively mitigated with proper diversification.
Fundamentals will overcome short-run volatility in the long run. Furthermore, market volatility is actually beneficial—providing dividend-growth investors with the opportunity to capture greater value and larger margins of safety.
An important corollary to this lesson from Lynch (and one he has repeatedly emphasized) is that market timing is futile and to be avoided. As we saw in tip #4, short-run volatility is highly unpredictable. He has argued, “Far more money has been lost by investors preparing for corrections or trying to anticipate corrections than has been lost in the corrections themselves,” adding, “I’ve found that when market’s are going down and you buy [stocks] wisely, at some point in the future you will be happy. You won’t get there by reading ‘Now is the time to buy.’”
Lynch’s point is simple: Ignore the noise of short-run market volatility (it’s irrelevant) and, instead, stay focused on your long-run investing plan. Time in the market always trumps timing the market!
This lesson is even more important for dividend-growth investors. Contrary to growth and pure-value investing, which are focused on capital appreciation, dividend-growth investing is an income strategy. The primary focus is on passive income—not capital appreciation (i.e., market price). With DGI, as long as the fundamental story remains intact, income is not impacted by volatility at all! In fact, downward volatility simply allows us to increase the pace of our income growth!
I cannot stress that enough. As long as the fundamental story has not changed, downward volatility simply allows you to deploy your investment capital even more efficiently!
To learn more about systemic and specific risk, I encourage you to read 9 Sure-Fire Signs You’re NOT a Long-Term Investor—we address this in detail in one of the signs!
The next takeaway we can learn from Peter Lynch is that dividend-growth investing requires patience and conviction.
Lynch argues that wealth creation is accomplished over decades—not months or years. Big winners typically take 5-10 years to play out. It’s a marathon—not a sprint. To maximize your gains, investors must be willing to exercise patience and hold positions long term.
Furthermore, Lynch asserts that you’re not going to be perfect… but you don’t have to be! Echoing Buffett, he posits that a few big winners are all you will ever need—they will more than overcome your losers. However, you have to have the patience to hold them—rather than cutting those potential big winners into run-of-the-mill small winners. In fact, forfeiting big wins by being impatient just increases how much you will need to be right!
Finally, we need to have conviction—conviction in our plan and process. As Lynch so aptly notes, fear is the enemy of the retail investor. While market volatility is noise, it is—none the less—very real. As a contrarian, value investor, we need to have the conviction to buy when others are selling and stick to our process and investing thesis when there’s blood flowing in the streets.
As Lynch puts it, we need to have the intestinal fortitude to “stand by [our] stocks as long as the fundamental story hasn’t changed.”
However, in order to have that kind of conviction, we must (a) know the company intimately and (b) understand why we own it (see Tip #1 and Tip #2). Furthermore, as dividend-growth investors, we must have a well-defined process and understand it. It must be our own process and we must do our own research and analysis. It’s hard to have conviction in someone else’s plan and process when things go south in a hurry!
To learn more about the importance of process in dividend-growth investing, I recommend reading my article Dividend-Growth Investing Success Is All about the Process.
The final tip Peter Lynch provides for dividend-growth investors is to keep it simple stupid (KISS)!
The KISS principle has been the mantra of Warren Buffett as well. Both investors emphasize the importance of only investing in companies you understand. If you can’t understand their balance sheet, income statement, statement of cash flows, or their business model… then you probably shouldn’t be investing in them!
In fact, Buffett takes it one step further, arguing that should invest in businesses an idiot could run… because sooner or later one probably will!
However, this lesson extends beyond just the businesses you consider. It is also important to keep your investing plan and process as simple as possible. This holds true for two reasons: (1) It will enable you to research and analyze more efficiently and (2) you are more likely to understand and stick with a simple process when things get ugly. Complexity does not typically foster conviction when you are tested by the market!
While Peter Lynch made his mark as a growth investor, his long-term approach to investing makes his experience and wisdom a fertile field from which dividend-growth investors can and should harvest valuable insights, lessons, and tips from.
In this article, we have identified eight valuable tips that we can be glean from Lynch and apply to our dividend-growth investing:
If you’re looking for more insights into dividend-growth investing, then you’re in the right place!
At Wicked Capital, we focus exclusively on helping others become as successful as possible with dividend-growth investing and we hope you’ll continue to return to our site to learn, grow, sharpen your skills, and find effective and positive ideas and motivation!
Soak it all in, take and use what you want, modify it to fit your unique situation, and keep building that DGI portfolio with a solid process and winning long-term investing mindset!
Finally, if you’re interested in starting a dividend-growth portfolio, we highly recommend using M1 Finance (we listed the numerous reasons for this in many of our other articles!).
If you decide to pull the trigger, please consider using our M1 referral link https://mbsy.co/sZVS3 and we’ll both get some free cash!
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