Anyone Can Pick Good Stocks

I am a Money Magnet! We are Money Magnets!

If Chef Gusteau's motto in the movie Ratatouille was "Anyone can cook" then Peter Lynch would have to be the stock investing guru with the motto "Anyone can pick good stocks!"  In his book One Up On Wall Street, Peter Lynch wrote that it is actually very easy to pick good stocks and that anyone can do this.  Peter Lynch suggested that one only has to be observant to be able to pick good stocks.  By this he meant watching out for promising companies with great products that consumers rave about.  Basically, his strategy is a fundamental approach to stock market investing.  He said that while prices move up and down in a volatile market, a stock's price will eventually follow its fundamentals.  That's why it is important to pick stocks with solid fundamentals.  He suggested that before one buys a company's stocks, it would be good to write the company's "story."  This story is a brief description of what the company is, where it is headed, and why it is a good buy.  He then added that as long as the company's "story" is intact, then there should be no reason to sell the stock even if the price dips in the short-term.

What I really liked was the part when he presented the 12 silliest and most dangerous things people say about stock prices.  Read on the learn what these are.

 12 Silliest Things People Say About Stock Prices
  • "If it has gone down this much already, it can't go much lower."  There is no rule as to how much a stock can go up or down.
  • "You can always tell when a stock has hit bottom."  Trying to catch the bottom of a falling stock is like trying to catch a falling knife.  It is always a better idea to wait for the knife to hit the ground, sticks, and vibrates a little before you try to grab it.
  • "If it has gone this high already, how can it possibly go higher."  
  • "It's only 3 dollars a share, what can I lose?"  Buying a lower-priced stock per share is not less risky than a higher-priced stock.  A lousy cheap stock is just as risky as a lousy expensive stock.
  • "Eventually they always come back."  Some companies never regain their prosperity.
  • "It's always darkest before the dawn."  
  • "When it rebounds, i'll sell."  Very often, downtrodden stocks never return to the level which you decided to sell.  It can sometimes take years before they rebound to the same level!
  • "What me worry? Conservative stocks don't fluctuate much."  Even conservative stocks like utility stocks can be very volatile.  Simply, there isn't a stock that you can afford to ignore.
  • "It's taking too long for anything to ever happen."  If you give up on a stock because you're tired of waiting for something wonderful to happen, then something wonderful will begin to happen the day after you get rid of it.  Patience will be rewarded.
  • "Look at all the money I've lost because I didn't buy it."  Warning: Don't try to catch up with already rising prices!
  • "I miss that one, I'll catch the next one."  The next one rarely works.
  • "Stocks gone up, so I must be right." or "Stocks gone down, so I must be wrong."  This is the one of the greatest fallacy in stock investing.  All this means is that there was somebody who was willing to pay more or less than you.  It doesn't mean that you've instinctively made a good or bad investment.  It's what happens to FUNDAMENTALS that really counts in the LONG-TERM.
I guess that last line really sums up what Peter Lynch has to say about picking the right stocks.  A company's stock price will likely follow its fundamentals in the long run.  Emphasis must be put on the time frame.  In one of his statements, Peter Lynch actually mentioned that on the average, it took him 3 to 4 years to earn multi-baggers* in certain stocks.  

*A multi-bagger is a stock that multiplies your capital/investment by the number stated.  Ex: A double-bagger is one that doubles your investment.     

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  1. Hello,

    My name is Marc Brown. I am a financial writer as well as a skilled coupon clipper, a Dad, and the frugal gatekeeper of my household. I am trying to build up my portfolio and would love to post as a guest on your site. Frugality, debt, budgeting, personal finance, and managing the household have always come naturally to me and it’s something I really enjoy writing about. I would be glad to come up with something unique and interesting to contribute to your blog or write about any ideas you may have for a guest post.

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    Marc Brown

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    on February 16, 2011 at 8:30 PM