You have to tell money how you want them to go into your pocket - II

Peter Lynch's Secret

You don't need a lot in your lifetime. You only need a few good stocks in your lifetime. I mean how many times do you need a stock to go up ten-fold to make a lot of money? Not a lot.

Was that your (Peter Lynch's) secret?

Well, I think the secret is if you have a lot of stocks, some will do mediocre, some will do okay, and if one of two of 'em go up big time, you produce a fabulous result. And I think that's the promise to some people. Some stocks go up 20-30 percent and they get rid of it and they hold onto the dogs. And it's sort of like watering the weeds and cutting out the flowers. You want to let the winners run. When the fun ones get better, add to 'em, and that one winner, you basically see a few stocks in your lifetime, that's all you need. I mean stocks are out there. When I ran Magellan, I wrote a book. I think I listed over a hundred stocks that went up over ten-fold when I ran Magellan and I owned thousands of stocks. I owned none of these stocks. I missed every one of these stocks that went up over ten-fold. I didn't own a share of them. And I still managed to do well with Magellan. So there's lots of stocks out there and all you need is a few of 'em. So that's been my philosophy. You have to let the big ones make up for your mistakes.

In this business if you're good, you're right six times out of ten. You're never going to be right nine times out of ten. This is not like pure science where you go, "Aha" and you've got the answer. By the time you've got "Aha," Chrysler's already quadrupled or Boeing's quadrupled. You have to take a little bit of risk.

Extracted from:
Interview with Peter Lynch | PBS
(http://www.pbs.org/wgbh/pages/frontline/shows/betting/pros/lynch.html)

I read from 曹仁超's article on Hong Kong Economic Journal (信報) today and he mentioned Peter Lynch's secret which I have put in this article. Its true that we could not expect every stock we chose would rise and will not fall. Most people earn much because they chose the right stock, then buy and hold. Just like Walmart and Microsoft 20 years ago. Yet 20 years ago they're not the 1st tier stocks.

That's why an analysis on the company's balance sheet is important if you are to take this strategy.

I also read another paragraph lately which is quite related to this blog's topic from the reading, The Intelligent Investor by Benjamin Graham: (Your Money and Your Brain: p.220)

... It turns out that our brains are hardwired to get us into investing trouble; humans are pattern-seeking animals. Psychologists have shown that if you present people with a random sequence-and tell them that it's unpredictable-they will neverthelesss insist on trying to guess what's coming next.

Why it is related to picking the right stock is because you have to do the analsyis and be confident with it. Here analysis means to do financial analysis on the company's business situation, but not the analysis on the trend of the stock price.... (to be continued)