Peter Lynch on stock picking: 'You shouldn't own a stock if you can't…'

Lynch’s investing philosophy puts business understanding ahead of market hype and popular stock picks.

“If you cannot explain to an 11-year-old in two minutes or less why you own the stock, you should not own it,” he once famously said while delivering a speech in 1997. Lynch explained that understanding the business behind the stock is the most important principle of investing in the stock market.

Lynch noted that this is why legendary investor Warren Buffett only invests in what he understands and what falls within his circle of competence. “I buy stuff like Dunkin Doughnuts, Stop and Shop and made money on them," he added.

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Having a proper understanding of what companies do before investing in them is, in fact, one of the core principles of his popular book 'One Up on Wall Street'. "I have this expression: 'Know what you own'. If you don't understand what you own, you are toast," he said.

The market veteran quipped that people spend hours researching flights to ensure they get the best price. But when it comes to investing, "they will put $10,000 in some crazy stock they heard on the bus".

But one should not just buy shares of her neighbourhood restaurant or her favourite clothing brand because she sees a long list of customers there every day. This should only mean that the company should be added to her research list, and she should invest only after properly knowing about its financials, growth prospects and more, according to Lynch.

When Peter Lynch took over the Fidelity Magellan Fund in 1977, it was an obscure fund holding $18 million in assets. By the time he stepped down in 1990, Magellan managed over $14 billion. Over those 13 years, Lynch generated an average annualised return of more than 29%, nearly double the S&P 500 performance over the same period, cementing his status as one of Wall Street's most legendary stock pickers.

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