Peter Lynch: Why It’s Important To Do Your Own Research

Peter Lynch: Why It’s Important To Do Your Own Research

Here’s an excerpt from an article I recently stumbled across written by Peter Lynch in 1993.

In it, he talks about the importance of doing your own research and not relying on the opinions of others to make your investment decisions.

I’ve edited the text below for clarity and conciseness:

“The fact that the professionals now dominate the markets, which so often leads people to conclude that the amateur has no chance, has actually improved the amateur’s chance…What holds them back is the inferiority complex…

The inferiority complex causes investors to do one of three self- destructive things: (1) imitate the pros by buying “hot” stocks or trying to “catch the turn” in, say, IBM; (2) become “sophisticated” by investing in futures, options, options on futures, etc.; (3) buy what they’ve heard a pro has recommended, either in a magazine or on one of the popular financial news programs.

Information on what the pros think is so readily available that the celebrity tip has replaced the old- fashioned tip from Uncle Harry as the most compelling reason to invest in a company.

Let’s say that in the spirit of doing it yourself, you take money out of your savings account at the local S&L;, America First and Foremost, and decide to buy stock with it. You’re somewhat intrigued by the fact that the price of the common stock of America First and Foremost has fallen in half. You know this to be a solid institution with a strong balance sheet and no commercial lending because you checked into these things before you put your money there.

Just as you are about to pick up the phone and order the latest annual report from America F&F; to see if the story is as good on paper as it seems to be in real life, a little voice from the inferiority lobe whispers, “Who do you think you are, buying a stock in a company that has never been touted in Barron’s, Forbes, or Business Week?”

So instead of ordering the annual report, you go to the newsstand to pick up their latest copies to see what the experts are saying, and in one of them you discover that Mario Gabelli owns shares in Coca- Cola Enterprises, a bottling company for the world’s favorite soft drink. You buy the stock, on the theory that a famous fund manager like Gabelli knows a lot more than you and your Uncle Harry put together.

Since Gabelli doesn’t give out his home phone number, you can’t call him up to ask if he still likes CocaCola Enterprises and whether he views the price drop as an opportunity to buy more, or whether he has soured on the company and gotten out of the stock to cut his losses.

Most likely, the drop in the price will cause you to lose faith in the stock, and without Gabelli to reassure you, you sell your shares to cut your own losses – maybe you’ve even sold them to Gabelli!

Then you take your diminished capital and repeat the process with another celebrity tip, perhaps from an analyst at your brokerage firm. If you cut enough losses, sooner or later there’s nothing left to cut.”

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