Sunday, January 6, 2013

How to Invest Like Peter Lynch: Part One

What advice would Peter Lynch give an investor learning how to invest? He would tell you to make your own investment decisions.

Peter Lynch is well known for saying, "You should be able to explain your investment decisions and provide good reasoning."

This means don't buy a stock because you see someone on CNBC or your local news network recommending the stock. This also means don't buy a stock because you have a friend who keeps talking about what a good stock he thinks it is.

Too often investors get burned by taking investment advice from other people. When you make an investment decision, write down the good reasons why you're making that decision.

For example, you read a company's annual report and there has been consistent growth in earning and profits for the last 5 years.

Or you notice a real popular product that everyone wants to buy. You check the company's financial statements and they happened to be making a good profit as well.

For example, in 2008 I kept hearing my friends and family talking about the I-pod. I didn't care much for it and I still don't. I look at it as an overpriced Mp3 player. But when the new I-pods kept coming out I noticed that people thought they had to have it. People would wait in lines for hours to get one. There was such a strong demand for the products. I finally thought to myself that the manufacture Apple had to be a good stock even though I've never liked technology companies. I bought the stock for around $100 and at its high the stock was at $700 a share.

Or you might notice a real popular restaurant growing in your area. I remember noticing the real popular Chipotle Mexican Grill chain of restaurants back in 2007. The stock was selling for around $60 and it's now worth around $300 a share.

So make sure you come up with your own investment decisions. I've seen over and over again CEO's going on CNBC and making a sale pitch trying to convince investors to go buy their stock. They can be very manipulative.

Financial adviser's love to recommend mutual funds to investors just because there making a commission off it, not because it's the best investment for the person.

Investors like Peter Lynch and Warren Buffett wouldn't take investment advice from someone else, even if it was insider's information, and you shouldn't take anyone's advice either. Learn how to invest on your own and make your own decisions.

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