Improving Your Understanding Of What You Invest In

Peter Lynch wrote Beat The Street and is a monster of an investor. Not only was his performance amazing over his career, 29.2% annualized over 13 years, but the way he distills his thought processes and talks about them are very simple to understand and easy to implement.

Near the beginning of "Beat The Street" he mentions the St. Agnes portfolio to get his point across that the average person can indeed beat the street. The portfolio from some of these kids destroyed the S&P 500. Here are some of the maxims of 7th graders that they used in their investing, here are some of the best ones:

- You can lose money in a very short time but it takes a long time to make money

- The stock market really isn't a game, as long as you pick good companies that you think will do well, and not just because of the stock price

- You can make a lot of money from the stock market, but then again you can also lose money, as we proved

- You have to research the company before you put your money into it

- Never fall in love with a stock; always have an open mind

- You shouldn't just pick a stock - you should do your homework

- Just because a stock goes down doesn't mean it can't go lower

- Over the long term, it's better to buy stocks in small companies

- You should not buy a stock because it's cheap, but because you know a lot about it

Brilliance from children on stocks and yet most of these lessons aren't currently being followed in the market, especially right now. Speculation on tech stocks is running rampant, you're seeing SPAC's going nuclear and IPO evaluations being laughable.

If investors actually took time to try and understand what it is they are buying, a large percentage of them would have to admit to themselves that they have no clue what they're buying or why they're buying, but they "think" that they can sell it to someone else at a higher price down the road. This is literal speculation.

Speculation loses you money. Don't do it.

Now we turn back to Peter Lynch and some of the ways he goes about finding multi-baggers that helped him with his success. The biggest take away I get from watching him talk and reading his books is to invest in what you know. This means if you know about eating burritos, maybe a Chipotle is up your alley, if you shop at Aritzia, check out their stock.

But if you are allergic to using computers and don't understand how to open your e-mail, do you think you should be investing in a video card maker like NVIDIA? Simply experiencing a product using it can give you an edge, you can talk to your friends and see what they think about it, you can ask your significant other what their thoughts on a product are.

Lynch talks about how much he learned simply from going to his local mall with his children. He even admits to multiple mistakes of omission when his children told him about a so-and-so store that blew up that he wished he had bought. I like how Phil Town explains understanding a company, you should understand a company so well that you can understand it better than the short sellers of said equity. This means you should be able to rationally explain why someone thinks this stock will go down, and hopefully why they're wrong.

Another way of looking at understanding is to invert your story. This is something Charlie Munger has made popular. Charlie said “All I want to know is where I’m going to die, so I’ll never go there.” Basically, looks at problems from a different direction. You can't also solve problems by looking forward, sometimes you must look backwards. I think this is a very helpful tool I'm trying to implement to help me build a case against my investment ideas. If you can't build a strong case against your idea, then you know you are getting close to having a winning idea.

Hopefully, you now have some extra tools to help you understand your stocks a little better and understand the importance of truly understanding what you're buying when you're in the battlegrounds of the stock market.

By the way, f you got some time to spend listening to Peter Lynch talk, watch this in its entirety.