Peter Lynch's eight simple principles for success in investing

1. Know what you own

Seems elementary, right? But as someone who talks to lots of investors, I can report that you'd be shocked at how few investors actually do their research. Scroll down to No. 7 for a good first step in getting ahead of the game.

2. It's futile to predict the economy and interest rates (so don't waste time trying)

After 2008's crash, I noticed a distinct increase in armchair economists. We financial types do enjoy water cooler talk about interest rates, trade deficits, debt levels, etc. But there's a danger in converting thought into action.

The U.S. economy is an extraordinarily complex system, with 300 million people acting in their own self-interest and responding to each others' actions, government incentives, and external shocks. And that's before we factor in our increasingly frequent interactions with the rest of the world. Trying to time the market is futile. Set up a financial plan that allocates your assets based on your risk tolerance, so that you can sleep at night.

3. You have plenty of time to identify and recognize exceptional companies

Lynch mentions that Wal-Mart (NYSE: WMT) was a 10-bagger -- i.e. its stock rose to 10 times its initial price -- 10 years after it went public. Even if you had gotten in after waiting a decade, though, you'd be sitting on a 100-bagger.

Some would argue that it's still not too late to get in on Wal-Mart, decades after going public. While the company's no longer a monster growth story, it continues to crank out 20% returns on equity year after year. That type of consistent ROE is a huge positive indicator of management's ability to effectively allocate capital. I could tell a similar tale about Microsoft's early growth years, right on down to its still-impressive current return on equity (42%).

Amazon.com (Nasdaq: AMZN), though only 13 years old as a public company, has seen its stock double since its 10th birthday. Of these three, it's the only company still trading at growth-stock valuations. Bulls are hitching their wagon to Amazon.com's ability to expand its role as the premier online retailer, and its upside in the cloud-computing space.

The lesson of Wal-Mart, Microsoft, and Amazon.com? You don't need to immediately jump into the hot stock you just heard about. There's plenty of time to do your research first. See No. 1.

4. Avoid long shots

Lynch claims he was 0-for-25 in investing in companies that had no revenue but a great story. Remember, the guy who averaged 29% returns went oh-fer on long shots. You and I are unlikely to do much better.

I've said it before, and I'll say it again. Use companies with proven track records as your baseline. ExxonMobil (NYSE: XOM), IBM (NYSE: IBM), and Procter & Gamble (NYSE: PG)are selling for 9, 11, and 16 times forward earnings, respectively. This is what the market is charging for solid, low-to-moderate-growth companies that dominate (or at least co-dominate) their spaces. Expect to pay more for higher-growth prospects, but make sure the risk-reward trade-off on an unproven company is worth it.

5. Good management is very important; good businesses matter more

The pithier Lynchism is: "Go for a business that any idiot can run – because sooner or later, any idiot is probably going to run it." For a prototypical example of a so-easy-a-caveman-could-run-it company, think the aforementioned Procter & Gamble.

6. Be flexible and humble, and learn from mistakes

Lynch has said: "In this business, if you're good, you're right six times out of 10. You're never going to be right nine times out of 10.". You're going to be wrong. Diversification and the ability to honestly analyze your mistakes are your best tools to minimize the damage.

7. Before you make a purchase, you should be able to explain why you're buying

Specifically, you should be able to explain your thesis in three sentences or less. And in terms an 11-year-old could understand. Once this simply stated thesis starts breaking down, it's time to sell.

8. There's always something to worry about.

Lynch noted that investors made a killing in the 1950s despite the very new threat of nuclear war. There are plenty of fears to choose from right now, but we've survived a Great Depression, two world wars, an oil crisis, and double-digit inflation.

Always remember, if our worst fears come true, there'll be a heck of a lot more to worry about than some stock market losses. Lynch's parting shot is that investing is more about stomach than brains.

ref: http://www.fool.com/investing/general/2010/05/21/how-peter-lynch-destroyed-the-market.aspx

Which stocks to sell in difficult times !

It sound so easy to say ‘sell poor stocks’ . Here is a small note on what is a poor stock – and what are the characteristics:

1. Has a negative cash flow – and not because of growth investing. If the company is still ‘buying’ markets, establishing itself etc. in a difficult market conditions, the capital market will punish such companies real hard during hard times, so be careful.

2. Too much of debt: In an easy debt market in the world many companies take on too much debt to grow. When interest rates go up such companies will be hurt real bad. So high debt equity ratio, and low interest coverage ratio, expensive roll overs and inability to convert debt into equity will all bring the earnings and the price expectations to new lows. Infrastructure companies with many SPVs fall in this category, be selective avoid over-leveraged companies.

3. If the price has gone up more on p/e increase rather than earnings increase: a sure-fire sign of a share being over-priced. In real estate terms if the rents are stagnating and the ‘price’ of the house is going up, it is time to think of it as a bubble. May burst later, or much later but be prepared for the burst that is all.

4. Warnings before quarterly results: When a company revises its quarterly, and half yearly EARNINGS, the capital market ALSO reduces the expectation (price-earning ratio) thus dramatically hurting the price. See the high standard deviation in the price of Icici Bank.

5. After issuing the warning if the company actually follows it up with poor results and does not know how to cope with it, the market will kill it further. Of course the market may do it on the sell side too (Bharti fell to 245, remember?).

6. Company talking big – expansion, merger, foreign acquisition, etc. but has accumulated losses! If you had bought this share at Rs. 30 and is now quoting at Rs. 150, RUN with your clothes intact. If the share price falls, there will be NOBODY to buy it! So I am repeating point no. 1 – see whether the CASH is coming in or going OUT.

7. See the origins of bulk sales of the companies shares. This is a little tricky, but not impossible. Keep your eyes and ears open.

8. Keep reading message boards – Moneycontrol.com, Myiris.com, etc. they all have shareholders, employers, suppliers, etc. willing to tell you things which the media does not know. Keep track.

9. See whether there is a spate of resignations, large scale flight from one company or from the industry? Look at the mutual fund and life insurance industries! There is a massive reduction of people – and it is not the low end employee’s fault. It also reveals the culture of the company – and that is useful.

10. See the SEBI website / IRDA website to see whether the company has been warned, punished or warned your mutual fund, life insurance company or your broker – tell tale signs to change your broker.

these steps will keep your life, wealth and happiness – ALL intact immaterial of whether the market is at 18700, 13800, or 9800…or 76,000!

ref: http://www.subramoney.com/2010/09/index-will-double/