Background
Peter Lynch managed the Fidelity Magellan Fund from 1977 to 1990, achieving an average annual return of 29.2% — making it the best-performing mutual fund in the world during his tenure. He grew the fund from $18 million to $14 billion. His approach — Growth at a Reasonable Price (GARP) — combines growth stock selection with valuation discipline.
Core Methodology
Lynch's approach involves finding companies with strong earnings growth trading at reasonable valuations. His key metric is the PEG ratio (P/E ratio divided by earnings growth rate): a PEG below 1 means the stock is cheap relative to its growth. He categorised stocks into 6 types: slow growers, stalwarts, fast growers, cyclicals, turnarounds, and asset plays.
Key Trading Rules
- Use the PEG ratio: P/E divided by earnings growth rate. Below 1.0 = undervalued relative to growth
- Buy what you know: use your personal knowledge and consumer experience to find opportunities early
- Classify every stock: slow grower, stalwart, fast grower, cyclical, turnaround, or asset play
- Fast growers (20-50% earnings growth) trading at PEG below 1 are the sweet spot
- Tenbaggers (10× returns) come from small/mid-cap companies in the early stages of a long growth story
- Don't diversify excessively — 'Diworsification' — own your best ideas in meaningful size
Key Concepts
Books & Resources
One Up on Wall Street by Peter Lynch. Beating the Street by Peter Lynch. Learn to Earn by Peter Lynch.