Although not as famous as Warren Buffett, Peter Lynch has established himself as one of the most successful investors in the world. From 1977 to 1990, his fund made a compounded annual return of 29.2%, making it the world’s best-performing fund during this time. Lynch has also provided a lot of investment advice, including recommendations to “buy what you know” and “invest for the long term”.  But one of my personal favourites is his insider trading quote. This stated that “insiders might sell their shares for any number of reasons, but they buy them for only one: they think the price will rise”. I would use this advice to buy Spotify (NYSE: SPOT), which has seen significant amounts of insider buying recently. This is despite the downturn in growth stocks over the past few months. 

Who has been buying? 

At the start of the May, it was announced that Daniel Ek was pouring $50m into Spotify shares. There are two reasons why this is a big deal. Firstly, investing $50m is a big sign of confidence into a company and cannot be considered merely tokenistic. Secondly, Daniel Ek is the co-founder of Spotify and the CEO. This means that he has significant amounts of inside knowledge around the company. In a period where growth stocks are getting considerably beaten down, this shows that he genuinely expects the Spotify share price to rise. It is also a fundamental reason why I am tempted to buy some shares in the company. 

Other factors 

Despite this insider buying, the Spotify share price has continued to slip. In fact, it is currently priced at $99. This is lower than when Ek recently bought shares and a 60% decline from last year. Such a fall has mainly been caused by the general sell-off of growth stocks, alongside worries about the firm’s profitability. 

For example, in Q1, despite revenues reaching €2.6bn, gross profit only totalled €671m. This means that gross margins only equal 25%. Other streaming services, such as Netflix, operate with gross margins of over 40%. This highlights that Spotify has extremely low margins for the streaming industry. As these large expenditures are not likely to decrease, this raises concerns about the ability for Spotify to ramp up its profitability. 

Why would I still buy this growth stock? 

Despite these concerns, I am still confident about the future of Spotify. In the recent investor day, Ek reiterated plans for the company to “get a billion users”, while also generating $100bn in annual revenue and 40% gross margins. These targets are very ambitious. Yet if they can be achieved, it is likely that the Spotify share price would soar in the long term. 

Further, the group currently trades at a price-to-sales ratio of under 2. Yet in Q1, revenues grew at a rate of 24% year-on-year. This indicates that the Spotify share price may have now dipped too low. Therefore, although I worry about the current poor gross margins, I still believe this growth stock has been overly beaten down. Daniel Ek’s recent purchase equally provides me with optimism. Therefore, I am tempted to add some Spotify shares to my portfolio.

The post I’d follow Peter Lynch’s advice and buy this bargain growth stock appeared first on The Twelfth Magpie.

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Stuart Blair has no position in any of the shares mentioned. The Motley Fool UK has recommended Spotify Technology. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

During his 13 years at the helm of the Fidelity Magellan mutual fund, the now-retired Lynch achieved a staggeringly good average annual return of 29%, growing the fund’s assets from $20m to $14bn.  

But Lynch has been more than just a master investor. Like Warren Buffett, he has been keen to pass on his wisdom to others. 

Don’t time the market, beat it

Lynch isn’t a fan of timing. He insisted that investors should forget about trying to predict where markets would be in the next week, month or year. Since economic wobbles come and go, he believes it is far better to exercise patience and focus on finding great companies to buy and hold for the long term — just the sort of talk we like at the Fool.  

Despite his aversion to timing, Lynch nevertheless believes that private investors are more than capable of beating the market thanks to being less constrained than professional money managers. Perhaps the best known of his suggestions is to buy what you know and understand. 

According to Lynch, some of the most successful investing ideas come from being a consumer. One famous (and highly profitable) example of this was when he invested in Hanes Corporation after his wife was complimentary about the L’eggs brand of tights that the former was test-marketing in its stores. While undertaking research, Lynch discovered that Hanes was the only major company to stock the growingly popular brand in supermarkets, making them more accessible to shoppers who didn’t visit department stores very often. He bought the stock which proceeded to six-bag before the company was taken over.

That’s not to say you can become a millionaire purely by investing in things you like. This, for Lynch, has been just the start of the process. Only after conducting a thorough analysis of a business, its financials and growth prospects should you consider buying a slice of it.

Lynch is also a big fan of diversification and during his investing career, frequently held more than a thousand stocks in the Magellan fund. While few private investors have the time or energy to research and assemble such a sizeable portfolio (Lynch was known as a workaholic), a lot of success in investing comes from recognising that not all of your picks will be successful. Holding 20 or so quality stocks, as opposed to just a couple, is a far more sensible approach when it comes to growing your wealth.

So, what doesn’t Lynch like? While all investing involves risk, Lynch has never been attracted to “long shot” companies — many of which clutter the junior market. As far as Lynch is concerned, it’s always better for investors to wait until a business has established itself before risking their capital.

Lynch also dislikes selling winners — something most of us do only too quickly. As far as he is concerned, investors shouldn’t attempt to improve their results by “pulling out the flowers and watering the weeds“. So long as we don’t become so attached to a great performing share that complacency sets in, the former Fidelity man believes in sitting tight, even if the company appears slightly overpriced.

The post Making a million could be easier if you invest like Peter Lynch appeared first on The Twelfth Magpie.

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• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Here are five of my favourite quotes, from five of my favourite investors…

Although it’s easy to forget sometimes, a share is not a lottery ticket… it’s part-ownership of a business — Peter Lynch

I often come across people who won’t invest in the stock market because they “don’t gamble“. And if you’re trying to get in and out of get-rich-quick shares as quickly as possible, then you’re gambling — and you’ll almost certainly lose.

But is owning and running a corner shop the same as gambling? How about owning and running a large successful multinational? Or owning just a small portion of a large successful multinational that’s being run by competent managers?

It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price — Warren Buffett

Of all of Warren Buffett’s great one-liners, this is the one that I think most investors forget most often, and I often see people chasing rock-bottom bargains rather than companies that will steadily grow their wealth over decades.

A share that has fallen dramatically and can be picked up for only a few pennies might actually be a bargain. But a one-off recovery is only going to get you so far, and you’ll need lots of repetitions over your lifetime — and you’ll be burned by plenty that crash. Far better, then, to put the bulk of your cash into top class, cash-generative, dividend-paying shares at fair prices, and reinvest the dividends.

The stock investor is neither right or wrong because others agreed or disagreed with him; he is right because his facts and analysis are right — Benjamin Graham

You must have heard of the South-Sea Bubble, Dutch tulip mania, and the dot com bubble? They were textbook examples of investors piling in just because everybody else was, but it happens all the time, though perhaps with a bit less drama.

We see investing fads and fashions coming and going all the time, with shares being talked about by everyone and then forgotten when the next big thing comes around. And only too often, investors are looking for reinforcement of their own opinions rather than fact-based critique.

I am […] absolutely convinced that, in the long-term, valuation and fundamentals of a company are the only things that matter and, like gravity, those things will reassert themselves — Neil Woodford

The efficient market hypothesis suggests that, as all known information about a company at any one time is analyzed, the market will produce a rational price for a share and you just can’t beat it. That’s obvious nonsense in the short term, as there are all sorts of stupid emotional reasons for people pushing shares up to ridiculous prices or running scared and forcing them down.

But over the long term, one of the few things that we can be confident of is that a company’s fundamentals will win out, and that’s all that really matters.

Invest at the point of maximum pessimism — Sir John Templeton

This is one of my favourite investing maxims of all time, and it’s been at the forefront of my mind through all of the economic turmoil of the past few years. Having a banking crisis, are we? Well, when everyone is selling their banking shares as if it’s the end of the world, that’s the time to buy. Oil is how cheap, and how much is it hurting big oil company shares? Time to get in, then, and buy when everyone else is selling.

And that reminds me of another quote from Benjamin Graham — “The intelligent investor is a realist who sells to optimists and buys from pessimists.”

The post 5 top tips from 5 great investors appeared first on The Twelfth Magpie.

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• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Alan Oscroft has no position in any shares mentioned. The Motley Fool UK has no position in any shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Warren

Warren Buffett is the son of a stockbroker from Omaha, Nebraska. From age six he sold bottle tops in his hometown. Then delivered newspapers. By his teens and early 20s he was playing the stock market, learning about stock picking from value investing great Benjamin Graham.

He bought into a near-bankrupt textile mill called Berkshire Hathaway. Through clever and insightful investing and dealmaking, buying assets in unloved businesses at knockdown prices, he turned it into one of the biggest companies globally.

He spotted trends early, noting that a consumer boom was getting underway in America, and bought into giants such as Coca-Cola and Procter & Gamble. Other successes included the Washington Post, insurer Geico and lesser known companies most investors had shunned, but which had inherent strengths he spotted.

Value investing was his forte, and his greatest saying is now almost a cliché: Be greedy when others are fearful, and fearful when others are greedy. This means buying when companies are out of favour and available on the cheap, and selling when everyone is piling-in.

And this approach worked rather well. From 1965 to 2015, through bull markets and bear markets, Berkshire Hathaway delivered a compound annual return of 19.2%. Buffett’s net worth is now $66.7bn. Not bad for a middle-class boy from Nebraska.

Peter

Peter Lynch was brought up in a poor single-parent family and joined Fidelity as an intern after caddying for its president D George Sullivan. In 1977 he became head of the Magellan Fund, an unknown investment fund with just $18m in assets. He was just one of dozens of the company’s fund managers but when he left his role in 1990, Magellan had more than $14bn in assets.

Peter rode the 1980s wave of rising share prices but what amazes me about this success is that he resigned as fund manager before the even bigger bull market of the 1990s. Despite this, he achieved an annual return of 29.2%. So he basically increased the value of his portfolio by nearly a third every year for 14 years – an astonishing achievement.

How did Peter Lynch invest? Well, the interesting thing was that he invested in a diametrically opposite way to Buffett. While Buffett was a value investor who chose blue chip giants that happened to be out of favour at the time, Lynch was a growth investor who specialised in buying into small, fast-growing companies.

While Buffett would have major holdings in perhaps a few dozen firms, Lynch would have literally hundreds of positions in small companies at any one time. And he had to. Think how many $10m holdings in growth companies you need to make $14bn. Over a thousand. Which makes his achievement even more impressive.

Foolish bottom line

So, who wins? Well, investing is about making money. The thing is, Peter Lynch was just an employee of Fidelity; he tended not to have a large investment portfolio of his own. That’s why the Lynch Foundation is valued at only $125m, while Buffett’s wealth is in the tens of billions of dollars, and he’s one of the world’s richest men.

Peter’s return is higher, but it’s over a shorter space of time. Buffett just kept on going. And the result is a legacy that’s one of the largest bequests to charity in history. Warren takes it.

The post Head to Head: Warren Buffett vs Peter Lynch appeared first on The Twelfth Magpie.

More reading

• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Prabhat Sakya has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

His answer unnerved me a little. He said, “Ninety-five percent boredom and five percent fear!”

Keeping a cool head

That could be a standard answer to such a question, and a standard joke in the trade, but I’ll never feel completely at ease on a flight to Corfu again!

The fearful parts of flying must surely be taking off, landing, and when the plane hits a spot of turbulence. My pilot friend went on to tell me that passenger jets pretty much fly themselves these days, once they are up.

So, with the clouds passing beneath like a cotton-wool carpet for most of the journey, and the plane steering itself a steady course, presumably pilots turn to crosswords, sudoku or a good book to pass the hours.

Hopefully, that’s an exaggeration. I don’t really believe for one second that my well-trained and qualified professional friend and his aviation peers spend the short amount of time they are actually flying their planes themselves seized in the grip of abject terror. However, we can’t deny that the stakes are high and the potential for a catastrophic outcome is ever present.

5% fear

It strikes me that being an investor is similar to being an airline pilot — ninety-five percent boredom and five percent fear. It’s a good analogy for being a shareholder and throws up a few cautionary lessons.

Legendary US fund manager Peter Lynch once said, “The key to making money in stocks is not to get scared out of them.” So what are the dangerous times, the 5% fear times, when I might get scared out of my shares?

Buying in the first place seems like a danger zone. Imagine my buying a share after doing all my due diligence and research, only to see the share price move immediately in the wrong direction. There’s a lot of potential for fear to drive me to panic-sell straight away.

Then, after a long period of holding and perhaps steady gains or even status quo, some market wobble or a profit warning could come along. Once again, I’m at the controls and gripped with fear. Again, it would be easy to sell up in a fearful panic.

How about if things go right and the share price rises a fair bit after I’ve bought. The profits build in my share account and the position gets big in my portfolio. Fear seizes me again. This time it’s the fear of losing my gains, so I sell out to take my profits, perhaps missing large further gains still to come.

95% boredom

There’s danger in the 95% boredom time that I’m holding the shares when nothing much seems to be happening, too. When I’ve done all the research and I’m all caught-up with monitoring events with my holdings, there’s not much to do as a shareholder. There’s danger in that. For a long time, shares that eventually go on to pay me handsomely for my ownership of them can do nothing at all but sit there. Or share-price progress can seem paint-dryingly slow.

Sheer boredom could motivate me to seize the joystick and loop the metaphorical loop with my holdings, perhaps doing daft things such as selling them and reallocating funds to more ‘exciting’ shares elsewhere.

If I want to make money from my shareholdings, and if my reason for holding each one remains valid, I must follow Peter Lynch’s advice and make sure I’m not scared (or bored) out of them. And to help with that, I’m going to remember what my airline pilot friend told me.

The post Don’t Let This Mistake Crush Your Returns From Shares appeared first on The Twelfth Magpie.

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Kevin Godbold has no position in any shares mentioned. The Motley Fool UK has no position in any shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.