How to Invest like Peter Lynch – Pioneer of the Price Earnings Growth ratio (PEG) 2


Peter Lynch is arguably the greatest mutual fund manager of all time. He has a track record that is unmatched in the world of investing. Peter Lynch is most famous for running Fidelity’s Magellan Fund from 1997 till retirement in 1990 averaging returns of an astonishing 29.2% a year. To put this into perspective, the S&P 500 only averaged 15.8% annual returns in that same period. In essence, he beat the market by almost 100% every year. During his tenure at the Magellan Fund, he grew assets from $20million to $14billion.

Lynch’s common sense approach and quick wit have made him one of the most quoted investors on Wall Street. Lynch’s bestseller One Up on Wall Street is book every investor should read as it breaks his approach down into easy-to-understand concepts.

Peter Lynch Investment Strategy: Lynch’s approach centers on a variable that he is famous for developing: The price-earnings-growth ratio, or “PEG”.

The PEG divides a stock’s PE ratio by its historic growth rate to find growth stocks selling on the cheap.

Lynch’s rationale: The faster a firm is growing, the higher the P/E multiple you should be willing to pay for its stock. Lynch is known for saying that investors can get a leg up on Wall Street by “buying what they know”, but that’s really just a starting point for him; his strategy goes far beyond investing in a sat food company you like or a beverage company whose drinks you buy.

Along with the PEG, he focused on fundamental variables like the debt/equity ratio, earnings per share growth rate, inventory/sales ratio, and free cash flow. It’s important to note that Lynch used different criteria for different categories of stocks, with the three main categories being:

  • Fast-growers –  stocks with EPS growth rates of at least 20 percent per year.
  • Stalwarts – stocks with growth rates between 10 and 20 percent and multi-billion-dollar sales.
  • Slow-growers – those with single-digit growth rates and high dividend payouts.

He also used special criteria for financial stocks.

During the stock selection process, Lynch consistently applied a set of eight fundamental principles. They are.

  1. Know what you own.
  2. It’s futile to predict the economy and interest rates.
  3. You have plenty of time to identify and recognize exceptional companies.
  4. Avoid long shots.
  5. Good management is very important – buy good businesses.
  6. Be flexible and humble, and learn from mistakes.
  7. Before you make a purchase, you should be able to explain why you’re buying.
  8. There’s always something to worry about.

3 websites that use Peter Lynchs method to pick stocks are:

  1. http://www.gurufocus.com/
  2. http://www.fastgraphs.com/
  3. http://ycharts.com/

Famous Quotes

“Go for a business that any idiot can run – because sooner or later, any idiot is probably going to run it.”

“Investing without research is like playing stud poker and never looking at the cards.”

“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.”

“If you stay half-alert, you can pick the spectacular performers right from your place of business or out of the neighborhood shopping mall, and long before Wall Street discovers them.”

“If you spend more than 13 minutes analyzing economic and market forecasts, you’ve wasted 10 minutes.”

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