During the 13 years that Peter Lynch managed the Fidelity Magellan Fund, until his retirement in 1990, Magellan was the best-performing general stock fund. An investment of $1,000 in Magellan in 1977 had become $28,000 by 1990.
While speaking at the recent Dain, Bosworth Financial Forum, Lynch pronounced himself unhappy that small investors believe they can't compete in the stock market. When individual investors feel like this, they "start acting funny," said Lynch. "They begin buying on tips they hear on the bus and wind up losing their shirts."Lynch said investors should draw on their own knowledge to invest in those companies whose businesses make sense to them.
"There's a direct relationship between research and results in the stock market. If individual investors research a handful of companies and purchase stock in the few that seem most promising, one or two may increase in value 30-fold or more over time. And you need to find only a few top-performers to make a lot of money in the stock market."
Drawing on his two best-selling books, "One Up On Wall Street" and "Beating the Street," Lynch recently offered to Bull & Bear newsletter this list of the "Eight Most Dangerous Things People Say About Stock Prices."
1. IF IT HAS GONE DOWN THIS MUCH, IT CAN'T GO MUCH LOWER.
Lynch notes that short sellers are most active when a stock drops to $3 to $5 (what he calls "baby-shoe sizes") because they know the stock probably will go to $0 in no time.
2. IF IT'S GONE THIS HIGH, IT CAN'T POSSIBLY GO HIGHER.
"Selling rising stocks - and buying falling stocks - is like cutting flowers and watering weeds," Lynch says.
3. YOU SHOULD BUY STOCKS REACHING NEW LOWS BECAUSE IT'S ALWAYS DARKEST BEFORE THE DAWN.
"In truth, it's always darkest before it's pitch black."
4. WHEN IT REBOUNDS, I'LL SELL.
"The stock doesn't know you own it," says Lynch. "Don't buy or sell based on what you paid. Look at the fundamentals."
5. CONSERVATIVE STOCKS DON'T FLUCTUATE MUCH.
"There's no such thing as `conservative stocks.' The range in which the average `conservative' stock trades varies 50 percent from low to high."
6. LOOK AT ALL THE MONEY I'VE LOST BECAUSE I DIDN'T BUY THAT STOCK.
"If you don't own a stock and it goes up, you haven't lost any money," says Lynch. "People torture themselves over this. It's as ridiculous as saying, `If I had bought the whole market, I would have made $1 billion."'
7. I MISSED THAT ONE. I'LL CATCH THE NEXT ONE.
"Beware companies that resemble a stock that performed really well. The best stocks are growth companies in non-growth industries."
8. THE STOCK HAS GONE UP, SO I MUST BE RIGHT - or - THE STOCK HAS GONE DOWN, SO I MUST BE WRONG.
"The important consideration is the value of the company, not fluctuations in the stock price. If the stock is falling but the company still makes sense and has no debt, stick by it," concludes Lynch.