Millions of people started investing for the first time in 2020, and for many of them, it was excellent timing. The market saw tremendous gains as companies bounced back from the pandemic-induced crash in March 2020. To illustrate this, the S&P 500 index, which is widely used as a benchmark for the market, has almost doubled since the pandemic hit.
However, the stock market's performance over the last few months has sent many investors crashing back to reality. This is most evident in the technology sector. The technology-heavy Nasdaq Composite Index, which comprises heavyweight stocks such as Microsoft and Amazon is down 13% from its peak in November 2021. The immediate outlook doesn't look too rosy either with inflation fears and geopolitical tensions flaring between Russia and the West. Now more than ever, it is essential for investors to get smart and expand their investing knowledge. One of the best ways to do so is to tap into the mind of successful investors who have been there and achieved it all.
Enter Wall Street legend Peter Lynch, who wrote the bestselling investing guide ‘One up on Wall Street’. Peter took the Magellan Fund from $18 million assets under management to a whopping $14 billion, averaging an astonishing 29.2% annual return between 1977 and 1990. His performance has earned him a place in history as one of the most successful investors of his age. This article will highlight three key lessons from his book to help guide you on your investing journey.
1. Your edge as an everyday investor
This is perhaps the book's main point and the inspiration behind the title. Peter Lynch believes an individual investor can outperform the investors on Wall Street in two ways:
- Utilizing their expertise in their own field.
- Paying attention to the interesting companies around them.
For example, let’s look at Azraf, who works as an optometrist. Every day in his job, he gets a first-hand view of eye health trends, which products are doing well, and is up to date on the latest developments in the optical industry. This experience will give him a more comprehensive understanding of the industry and enable him to spot the trends earlier than any analyst Wall Street could offer. All he needs to do now is take his first-hand expertise and combine it with research about the companies in the optical field.
Paying attention to the companies around you can also give you an edge. Most of us probably noticed the growing popularity of Apple in the mid-2000s and how the demand for their products kept rising. How many of us considered whether we should investigate if the company would be a good investment? (If you want to see if Apple is permissible to invest in, check out Zoya’s stock screener below.)
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Leveraging your expertise, paying attention to the companies around you, and combining this with research about the company is a powerful way for the everyday investor to beat the professionals.
2. When to buy
This is often a question many first-time investors struggle with. Concerns about whether the market conditions are right or if you can buy the company for cheaper later can leave investors waiting on the sidelines and potentially missing out on significant returns.
Peter Lynch’s advice is simple.
"The best time to buy stocks will always be the day you've convinced yourself you've found solid merchandise at a good price."
He says there is always something to worry about when investing, and the best thing to do is to buy when the right opportunities present themselves.
3. When to sell
Once you have used your personal edge in the market and bought a great company, the final step is knowing when to sell. It’s very easy even for experienced investors to be spooked into selling. Perhaps the stock has already risen a lot, or so called experts are advising you to sell.
The author relates the story of when he bought Toys R Us for $1 a share in 1978 and sold it for $5, influenced by a fellow investor who had sold. While a five-fold return is an amazing result, Toys R Us continued to climb and reached $25 in 1985, which is a truly exceptional return.
There are two reasons to sell an investment:
- You need the money.
- Your investment thesis is no longer valid.
Selling because you need the money is self-explanatory. Identifying whether the reason you bought a stock is still valid is more complicated. You first need to have a good understanding of why you bought a stock in the first place. This is your investment thesis. If this changes for the worse, it is a good sign that perhaps it is time to sell. However, if your thesis remains intact and you don’t need the money, then why sell?
Sometimes the urge to sell can be intolerable for some investors. In this case, instead of selling the entire investment, you could sell a part of it. This way, you can lock in some profits but crucially remain invested for the long run.
In summary, make use of your personal edge, buy when you have found the right company, and sell when you need the money or your thesis is no longer intact.
As Muslims, one of the personal edges we have as a community is the power of dua. Dua is a powerful tool that Muslims can use to ask for barakah in their investments and to guide their investing decisions. In the Quran, Allah SWT says:
“When My servants ask you ˹O Prophet˺ about Me: I am truly near. I respond to one’s prayer when they call upon Me.” (Al-Baqara 2:186).
So don’t hesitate to make dua when investing. More specifically, consider incorporating Istikhara (prayer of guidance) into your investment decision-making process as you would for other areas in your life.
These were just three key lessons, but the book contains many more, and I would highly recommend that investors read it in full. Also, do let me know in the comments if you would like to see more of this type of content.