Peter Lynch firmly believed that individual investors had advantages over professionals when it came to research, because unlike the latter, individuals had more freedom to act independently and explore the market without being tied down by committees and superiors.
According to him this flexibility to act gives small investors an edge as they have a better ability and potential of discovering profitable investments. He encourages the adoption of the bottom-up approach to discover good investment opportunities. He suggests digging up possible investment options one-by-one, then getting familiar with the company and lastly conducting the fundamental analysis to verify growth and profitability potential.
‘Local knowledge’ is what Lynch preached and claimed as the key element to successful investment. His well-known investment principle of ‘Invest in what you know’ is still deemed as being one of the most essential lessons for any serious investor. What he adopted was a ‘story’ approach to investment. He believed the more one knew about the company, its business, its products, and its competitors, the more chances there were of finding a good ‘story’ which had high possibilities of coming true.
Additionally, he also considered small or emerging companies as good investments as they have higher growth prospects than more mature companies. However, Lynch stressed strongly that having a good company is not enough, you have to research the fundamentals, and look at the valuation.
Never invest in any idea you can’t illustrate with a crayon, and remember, you can’t see the future through a rear-view mirror.