Priceless Advice From Legendary Investor

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If you’ve been around the investing block a few times you know the old jokes about stocks falling the second you buy them. Peter Lynch, the legendary investor who averaged a 29.2% return from 1977 to 1990 doesn’t shy from plunging stocks like most others, though. Instead he embraces it and calls corrections for what they truly are.

He encourages investors to face the reality that stocks go down, a lot, and often. At the time he made his remarks, he looked back 93 years and identified 50 declines of 10% or more. That averages to a 10% fall once every two years. In stock market parlance that’s called a correction, or as Lynch jokes, a euphemism for losing money rapidly.

Of those 50 declines, 15 of them resulted in declines of 25% or more, creating bear markets. On average that means every six years or so the market will fall by about 25% or more.

Lynch succinctly states that this information is all you need to know. You need to realize the market will go down very often by double-digit percentage levels and quite often will fall into bear market territory. He goes on to say that, if you are not ready for those plunges, you should not own stocks.

Key Points

  • Peter Lynch views market downturns as natural and inevitable, suggesting that investors should see these moments as opportunities to buy quality stocks at a discount rather than fear them.
  • Lynch advocates for a patient approach to investing, highlighting that substantial gains can still be made by entering the market later, as long as one invests in fundamentally strong companies.
  • He emphasizes the importance of understanding a company’s financial health and market conditions to capitalize on lower stock prices during corrections, rather than attempting to predict market movements.

Why Are Plunging Stocks So Good?

There are two ways to think about plunging stocks In Lynch’s view. One is to view them as a catastrophe and the other is to see the bargain. He explains that if you like a stock at $14 and it goes to $6 and the balance sheet looks fine and you think it’s going to $22 then the move from $14 to $22 is good but the return from $6 to $22 is way better.

And none of what he preaches demands an understanding of timing. He candidly states that these declines will happen but nobody knows when they will happen.

He skewers the market prognosticators too by stating that people will tell you that they predicted the market will fall but they will have done so 53 other times too and been wrong.

So, you can take advantage of the volatility in the market if you understand what you own. That means knowing the company isn’t laden with debt and brittle fundamentally. If you find a company with growing earnings per share, and a cash rich balance sheet that has thrived in bull and bear markets, as well as boom and bust economic cycles, you know you’ve got a great company and a share price pullback is an opportunity.

The Time Equation

One market analyst famously stated that he made a lot more money when he stopped trying to make money fast. That line of thinking is espoused by Peter Lynch too. He claims that you have a lot of time. People are in an awful rush to buy a stock but the opportunity to make huge money persists long after the opportunity may seem to be in the rearview mirror.

Take Warren Buffett buying Apple in 2016 before it rose by 5x yet after it launched the iphone almost a decade earlier. He spotted the opportunity almost ten years too late and still made a fortune.

Lynch cites Walmart which came public in 1970. It already had a great record for 15 years and had a strong balance sheet. He states that you could have also waited ten more years from that IPO. For example, maybe they were in 7 or 8 states and you wanted to see them expand nationally, so you kept waiting.

Well, it turns out even if you did wait a full 10 years after they came public, you could have made 35x your money over the next few decades. The bottom line is opportunity surrounds you if you take the time to do the homework, find the great companies, and wait to pounce when the time is right and the market is fearful.