Don’t fall for the usual stock market platitudes. Here are 10 phrases that legendary investor Peter Lynch warns you against.
All roads lead to Rome. Or do they? No, they don’t.
There are so many sayings that we use to make snap decisions, but when you really think about them, they’re a load of crap.
This is true in life – and it applies to stock market investing.
While it might be fun to throw around a few comments at a family party, be careful what you say about investments. Sometimes these crazy little phrases become our truth. Sometimes we end up buying or selling because of some stupid words… and ruin our financial future.
Peter Lynch’s Points Are Evergreens
In 1997, legendary investor Peter Lynch – former portfolio manager of the Fidelity Magellan Fund – gave a speech on this very topic.
Okay, yes, granted, Peter Lynch stopped working as a money manager over 30 years ago (he was active from 1977 to 1990), and his speech is from 1997. It’s been a while.
Yawn? No. Please wait.
The takeaways from his talk are evergreen. They still hold true to this day. Don’t think so? Give it a read and see if you recognize these sayings.
By the way, did I mention that Peter Lynch got an average annual return of 29.2%? Now that is extraordinary.
Peter Lynch invested as a value investor (he carefully looked at companies and bought them when they had fallen below their intrinsic value), but he called his strategy “story investing.” Story investing means that he built a thorough thesis about the company and its future growth, and he called this thesis “a story.”
You Must Know What You Are Investing In
As an introduction to his speech, Peter Lynch explains that it’s important that you know what you are investing in.
You must really know the company, understand the product and read the annual report.
Too many private investors buy shares in something without knowing what they are making money on… or if they even make any money.
He also says to stop trying to predict recessions and stock market movements. You are better off focusing on understanding the businesses.
Okay, enough intro. What are some of the platitudes and phrases that he warns against?
1. “The stock has gone down so much, it can’t go any lower.”
Oh, yes it can drop more. It always can (unless it has reached 0).
This attitude is especially dangerous when you combine it with buying shares in something that you have not studied.
He uses the example of Polaroid (yes, it was a publicly traded company once and not just a peculiar retro camera), whose share price fell from 140 to 107 USD per share. According to Peter Lynch, people at the time said, “just load up the truck if it hits 100, because it couldn’t possibly fall any more.”
Yes, it sounds funny today, 30 years later, because we all know that new technology trampled the company to pieces.
Back then, the company’s stock fell to $18 in just nine months. In 2001 they went bankrupt.
2. The stock is this high already – it can’t possibly get any higher.”
But yes, it can rise more – and the market can be irrational longer than you can be solvent, as a wise man once said.
Peter Lynch uses tobacco company Philip Morris as an example. The stock increased fivefold in ten years, going from 12 cents in 1951 to 61 cents in 1961.
“It can’t rise any higher,” people said.
But it did, and it turned into a hundred bagger anyway, meaning it went up 100 times.
3. “Eventually, they always come back around.”
No, not everything will bounce back to its old peak.
The idea that “the stock market always goes up in the long term” and that you can therefore buy shares in anything and expect it to go up eventually is nonsense.
Peter Lynch uses RCA and Western Union as examples.
You could also take a lot of examples from the IT bubble, but it only burst two years after his speech.
Maybe in a few decades, we’ll be looking at some AI stocks as an example.
I am acutely aware that many of the stocks that we see flying so high today are at risk of falling drastically and never quite getting back to that high level. But of course, I don’t know.
4. “It’s just 3 dollars, how much can I lose?
You can theoretically lose everything that you invest. But people have this fixed idea that it is less risky to invest in companies where the nominal value of the individual share is low.
Listen. You can lose as much as anyone else.
Peter Lynch gives an example:
Let’s say your neighbor puts 10,000 USD in a share that costs 50 USD per share. Now it’s down to $3 and you’re thinking, “Good thing I waited, now it can’t drop any lower,” combined with, “how much can I lose, it’s only $3.”
You now buy $25,000 in stocks and feel like a king compared to that neighbor.
But wait. The stock now drops down to $0 per share. It’s game over.
Who has lost the most? Your neighbor or you?
“Most people can’t even answer that question,” says Peter Lynch, and the audience laughs.
Of course, you both lost everything, and the one who has invested the most lost the biggest amount.
Don’t be tempted to put money into a stock just because the nominal value seems cheap. Whether it’s cheap or not depends on so many other things.
For starters, how many shares did the company slice itself into? Do they even make any money? Did you check? You won’t know if something is cheap or expensive until you open the books and start looking at what’s really there – which I can teach you how to do in my e-book right here.
5. “It’s always darkest before the dawn.”
It’s a bit of an old superstition to think that when things are bad, they can’t get any worse. Some people look at the stock or the business and almost rejoice that things are going really badly, because they think that now things must turn around.
But who says so?
Peter Lynch gives examples of a lot of age-old companies that lost revenue and money. People back then said something like, “it’s absolutely horrible, let’s buy it.”
But really… it can always get worse. A company can go bankrupt. Instead of saying “it’s always darkest before dawn,” say “it’s always darkest before it’s pitch black.”
Yes, of course, that’s also nonsense, but Lynch uses humor to get his point across.
6. “When it rebounds, I’ll sell.”
People passively hold on to a stock that has fallen, promising only to sell when the loss has been recouped. They tell themselves that they will sell when it’s back at the starting point.
This is the wrong approach.
Peter Lynch offers an example: let’s say you bought a stock at 10 USD, but then it drops to 6 USD. You want to hold onto the stock until it rebounds to 10.
If you are really sure it will go from 6 to 10, you should load up the truck with the shares. But people don’t. They just hold it.
What happens then? Let’s say the stock goes up, but it never reaches $10 again. It hits $7. And $8, and $9.50.
And then it falls again.
Then what? How great was your strategy then?
The idea of passively holding onto a stock until goes up to your buying point is foolish.
The stock has no idea you bought it, Peter Lynch explains. People treat stocks as if there is a relationship and as if the stock owes them something.
But the stock market doesn’t care what price you bought a share at.
7. “Me? Worry? I own ‘conservative’ stocks.”
This is the idea that some companies have been around so long that they will always be around. But that is nonsense.
There is no such thing as a “conservative” stock.
Companies are dynamic and the market is constantly changing.
Peter Lynch lists a number of old, venerable companies with more than 100 years of history… that went bankrupt.
8. “Look at all the money I lost by not buying the stock.”
People worry too much about companies that they’ve missed. It’s usually the latest high-flying and shiny stock that they sigh and drool and beat themselves up over.
Don’t worry.
“You can’t lose money on stocks you don’t own,” Peter Lynch says, adding, “the only way to lose money is to buy a stock, have it go down, and then sell it.”
9. “The stock has gone up, I must be right.” (Conversely, “The stock has gone down, I must be wrong.”)
Let’s say you buy shares in a company and it goes up 30% right away. You will probably feel like the king of the hill and run around, look at cars, and book an expensive holiday. Inside, you see a bright future for yourself. You feel you are right. You are a moneymaking machine. Yeehaw!
But wait a minute. Did you open the annual report before investing? Have you researched it? What is it that you are right about?
Your research and knowledge will not improve just because the stock has gone up.
The reverse happens when the stock falls. Then you feel like selling the kids’ used toys because the future looks bleak.
But stocks go up and down a lot over the course of a year. A share moves, on average, 50% between the lowest and the highest point during a year, Peter Lynch explains. Perhaps the latest rise or fall means approximately… nothing?
10. “This is the next (insert hot stock here)”
When a stock you own goes up, you may think you’ve found the next big thing, but take a moment to pause and make sure you haven’t got a “whisper stock” or a “long shot” on your hands.
What are whisper stocks and long shots?
Whisper stocks are the kind of stocks that people whisper about, saying it’s the latest new miracle (in the old days, stockbrokers would call you on the phone with these tips).
Peter Lynch also calls them long shots, because what you think they can accomplish is simply too far-fetched.
They typically make no money – sometimes they even generate no income at all (think biotech for example), but there’s talk that they are “the next” something (insert whatever hot company you can think of here).
This kind of “miracle” shares should be avoided, says Peter Lynch.
Everyone Has the Brains but Not the Stomach
Peter Lynch explains that it is not particularly difficult to be an investor. You can get by with math skills of a 5th grader.
But it will challenge you in a different way.
“Everybody has the brain power for the stock market, but do you have the stomach?”
He explains how there has always been something to worry about up through the decades.
In the 1950s, people were concerned that there would be a recession or a nuclear war, but neither of those materialized and the 50s became one of the best decades in the stock market. However, many people shied away from investing because of that fear.
So What Should You Do?
There is no way around it. You have to know what you are investing in. You have to open the 1o-K, calculate a little. You have to look at the product and evaluate it (alternatively, you have to invest in cheap index funds).
Luckily, you can learn a lot more about how to do so in my little e-book Free Yourself here.
