Peter Lynch’s tips on unearthing value investing opportunities

buying opportunities value investing opportunities Peter Lynch market falls 10%

Finding the most attractive stocks around could be a relatively simple process

Peter Lynch’s track record as an investor is exceptional. Between 1977 and 1990 his Magellan fund recorded an annualized return of around 29%. This is almost double the S&P 500’s return in the same time period.

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However, some investors may be surprised to hear that his means of unearthing the best buying opportunities in the stock market are relatively simple. For example, he places a large amount of importance on the qualitative aspects of a business, and often stumbles across attractive companies outside of his day job.

A Simple Strategy For Buying Opportunities

In a world where complex technology is becoming an increasingly central part of our lives, some investors may feel that they need to use a complicated strategy when investing their capital.

However, a complex investment strategy does not guarantee better results than a simple strategy. It may mean more work is required to come to a conclusion about a company’s future prospects, but it does necessarily equate to investment success.

Peter Lynch prefers to use a simple strategy when deciding how to allocate capital:

“If you're prepared to invest in a company, then you ought to be able to explain why in simple language that a fifth grader could understand”.

By simplifying your investment process, you may be able to reduce the amount of time it takes to scour the market for buying opportunities. This may improve your efficiency and allow you to allocate your capital more productively.

Qualitative analysis

Some investors use quantitative analysis as a central part of their investment process. This can be highly beneficial when assessing the financial strength and returns of a business, for example.

However, Peter Lynch notes that there is much more to successful investing than focusing on facts and figures:

“Investing in stocks is an art, not a science, and people who’ve been trained to rigidly quantify everything have a big disadvantage”.

Considering the qualitative aspects of a business may provide you with a better guide as to its risk/reward opportunity. For instance, accurately gauging the size of a company’s economic moat is highly subjective, but could enhance your return prospects in the long run.

Inspiration in the real world

Unearthing the best investing opportunities can take place in a variety of scenarios. For instance, you may come across a business for the first time in your personal, rather than work, life. Therefore, being on the lookout for potential investments both inside and outside of your working day could be a rewarding move.

Peter Lynch has discussed where he initially finds companies, with it often being in day-to-day activities rather than when he is in the office:

“I talk to hundreds of companies a year and spend hour after hour in heady pow-wows with CEOs, financial analysts and my colleagues in the mutual-fund business, but I stumble onto the big winners in extracurricular situations, the same way you do”.

Inspiration for stock purchases can come at any time, and in any place. Remaining alert to possible buying opportunities could enable you to find the most attractive businesses that may not be on the radar of other investors.

A clear focus

When analyzing a business, it is easy to obsess over minor details that may not be of great importance to its financial performance in the long run. Instead, it may be more profitable to have a clear picture of the specific attributes you require from a company for it to be worthy of investment.

In Peter Lynch’s case, he places a great amount of importance on the profitability of a business:

“If you can follow only one bit of data, follow the earnings -- assuming the company in question has earnings. I subscribe to the crusty notion that sooner or later earnings make or break an investment in equities. What the stock price does today, tomorrow, or next week is only a distraction”.

By having a clear focus of which aspects of a business matter when it comes to its investment appeal, you may find it easier to decide how to apportion your capital. No stock is ever without risk. Concentrating on the aspects of a company that are likely to have the biggest impact on its stock price over the long run could make you a more efficient, and successful, investor.

This article was first posted on ValueWalkPremium

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About the Author

Robert Stephens
Robert Stephens, CFA, is an Equity Analyst who runs his own research company. He has been investing for over 15 years and owns a wide range of shares. Notable influences on his investment style include Warren Buffett, Ben Graham and Jim Slater. Robert has written for a variety of publications including The Daily Telegraph, What Investment and Citywire.

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