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‘If You Can’t Explain To An 11-Year-Old In 2 Minutes Or Less Why You Own The Stock, You Shouldn’t Own It’

Investment Guru Peter Lynch: ‘If You Can’t Explain To An 11-Year-Old In 2 Minutes Or Less Why You Own The Stock, You Shouldn’t Own It’

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Highly esteemed investor Peter Lynch, known for his extraordinary track record as a fund manager at Fidelity Investments, once revealed his “10 Commandments” for prosperous investing.

What Happened: Lynch, who drove Fidelity’s Magellan Fund to an average annual yield of 29.2% from 1977 to 1990, imparted his investment insights in a 1997 speech.

First and foremost, Lynch stressed the significance of comprehending the business behind the stock. He counseled, “If you can’t explain to an 11-year-old in 2 minutes or less, why you own the stock, you shouldn’t own it.”

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This principle resonates with the investment approach of Warren Buffett, who only invests in what he understands and falls within his area of expertise.

“If you can’t explain to an 11-year-old in 2 minutes or less, why you own the stock, you shouldn’t own it. Understanding the business behind the stock is the most important principle of investing in the stock market. This is why Buffett only invests into what he understands and what falls in his circle of competence. I buy stuff like Dunkin Donuts, Stop and Shop and made money on them,” Lynch said during the speech.

In addition, Lynch rejected the concept of forecasting the economy. He identifies as a “bottom-up” investor, concentrating on individual stocks through company and industry analysis. He holds the belief that attempting to predict interest rates or the economy is pointless.

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“it’s futile to try and predict interest rates or the economy. If you spend 13 minutes per year on economics, you’ve wasted 10 minutes,” he added.

Lynch underscored the importance of patience in investing. He noted that one could have purchased Walmart a decade after its initial public offering and still reaped substantial returns. He emphasized that investing is a marathon, not a sprint, and there’s no need to hastily jump into buying stocks.

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