The Harvard Investment Club hosted Peter Lynch today to offer some basic advice on investing in public equities. Mr. Lynch is one of the most well known and likely one of the most successful investors in history judging from the track record of his Magellen Fund at Fidelity, which returned 29% compounded over the 23 years he managed the fund while growing it from $18 million to the $14 billion in assets when he retired from the fund in 1990.

He gave very commonsensical sounding yet insightful advice to future investors. The notes from the talk follow below:
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A. Know what you own.

When a stock goes down and you don’t understand what the company does, you don’t know whether to sell or buy more. Don’t buy things that are complicated. He bought stocks like Dunkin Donuts.

Keep in mind, the average stock has had a range of 100% from high to low. If you don’t know what you own, you are likely to “turf it” (sell it right before it goes up). People should employ their advantages, and buy stuff they know a lot about.

B. It is futile to predict the economy, interest rates and the stock market. (*ignore this point* ;-))

You just don’t know what is going to happen. Predicting the future is a waste of time. If you spend 13 minutes on economics you have wasted 10 minutes. Small economics…asking questions like: how much does aluminum cost? and does a recession impact used cars or new car sales? are a good idea.

C. You have plenty of time.

When WMT went public they were a 15 year old company. 10 years later they were up 10x and after 15 more years 30x more (300x total). There are good companies, but not a lot of them. Fortunately, you don’t need to find a lot of them just a few over a career.

D. 10 most dangerous things people say about stock prices:

1. If its gone down this much already it can’t go any lower.

One of his favorite stocks went from 15 to 12.5 to 9 all the way to 3. He was still confident thinking that he was “a little early”. With a level head, he bought more and ultimately did well on the investment.

2. If it has gone this high, it can’t go higher.

This is simply not true. MCD, MSFT, GOOG are all examples.

3. Eventually they always come back.

Sometimes they don’t.

4. It is trading at $3. How much can I lose?

All of it.

5. Its always darkest before dawn.

It is darkest before complete blackout.

6. When it rebounds to $10, I’ll sell.

Numbers don’t matter. They are arbitrary.

7. What me worry? Conservative stocks don’t fluctuate much.

Things change. See the electric utility industry.

8. Look at all the money I’ve lost, I didn’t buy it.

Don’t look at the ones you miss.

9. I missed that one. I’ll catch the next one.

Maybe not.

10. The stock has gone up/down I must be right/wrong.

Don’t start buying because stocks go up. There is a 100 percent correlation between earnings and stock performance over time.

E. Avoid Long Shots.

The company says “If this works and that works it goes up 20 fold!” But now…no sales. Mr. Lynch was for 30 on these.

F. Importance of Management.

Management is important, but if you have a bad industry and terrific management, you can’t win. But simple businesses don’t need much management. Mr. Lynch wants to buy a company that any fool can run, because eventually one will.

G. Be Flexible.

Even when industries are successful, you can still lose. MCD, Outback, etc. made money in the restaurant industry even when it was growing at 2%. Even shrinking industries are OK. An industry not going anywhere but where you have a monopoly makes money. Bankruptcy is OK.

H. When to Sell.

When to sell is exactly when to buy. Always write down the reason why you made the investment decision. What is the story?
Stick by the reasons. If the story changes or you are wrong, sell…unless you can come up with a new story.

I. There is always something to worry about!

The organ in the stock market is not the brain. It is the stomach. There is way too much news now.

Key example was in 1991: Recession was imminent, 1st War in Iraq was starting (big concerns about major losses), Banking system was on the brink, etc. But…it all turned around. You can’t get too distracted by background noise.

After Caesar died, the market in Rome probably crashed. In the year 1 BC, people worried about Y0k. In 1999 it was Y2k. People overreact. There is always something to be nervous about.

The news today is the depressing channel and the super depressing channel. But look at Brazil, Philippines, Chile, Eastern Europe…there is good news out there.

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This last piece is music to my ears as I seek to ignore the horrible news coming out of the banking sector today. At least for another day or two we will stay on the bright side…but watch out for that other shoe.