3 Peter Lynch Principles That Can Make You a Better Investor

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4:10premium investing guidance for beginners. Your path to financial freedom starts now. Starts now. All right, folks, welcome to Investing for Beginners podcast. Today, Andrew and I are going to take three of Peter Lynch's principles, and we're going to talk about how we have applied those to our investing journey. So these are associated with the book Beating the Street, which is easily one of the best beginner investing books out there. Super easy to read. Lots of great information. But before we dive in today, we'd love to hear from you. So we are running a listener survey and everyone who participates will get entered into a raffle for a$500 Amazon gift card.

4:52Plus the first 100 people to respond will receive a free Investing for Beginners coffee cup and coaster set. Head over to einvestingforbeginners.com slash pod survey. That's also in your show notes. Your feedback will help make the show better. and we'd appreciate you taking a few minutes to share your thoughts. Again, that's einvestingforbeginners.com slash partsurvey. You must be 18 or older to fill out the survey and terms and conditions will apply. So with that, let's go ahead and dive into Peter Lynch's principles and how we've applied them during our journey. Yeah, let's do it. Peter Lynch is such a great investor.

5:30He had incredible track record. You should go look him up. So the first Peter's principle we will dive deep into is you can't see the future through a rearview mirror. So what does it even mean with that? And where have you seen that in the markets? Basically, the way I interpret it is that the future results of the company, you can't see through the rearview mirror. So you hear all the time companies talk about past results don't guarantee future results. And while it can tell you a story, it doesn't always mean that what has happened in the past will continue on forever and that you should just take that for granted.

6:14And that's kind of how I've always thought of it. What about you? Yeah. I mean, you saw it with Nike, right? Yes. Pretty vividly and almost like a train wreck in slow motion. Yeah. Yeah. Very much so. So what do you think caused Nike to go through that train wreck? Yeah. I'm not like a sneakerhead, so I can't say for sure. But we did buy Dick's Sporting Goods. And they are, if you're not familiar with... I'm sure you've heard of the store, but what makes them different as a stock is they are the leader in their specific niche, which is sportswear. And so one of the things Nike did, which I believe management has since backtracked on, is they made a push to go direct.

7:06They have these Nike stores. Going direct can be great, especially for a brand like Nike. And I think Apple was always shown as the poster child. If you go direct with Apple stores, you're going to win. So I think that was some of the mentality behind Nike going direct. but it seems like they swung the pendulum so far that they weren't respecting some of their retail partners like Dick's Sporting Goods. And so I remember at the time when Nike was really getting into that direct thing, you would hear Nike's earnings calls and they would always be very positive about how they're going direct. And it was actually impacting retailers like Dick's Sporting Goods.

7:51And if you remember Foot Locker, I think that really hurt them because Nike was such a big partner for Foot Locker, Foot Locker being a much, much smaller concept. And so it kind of was a situation. I mean, this is my interpretation. I might be biased as a shareholder, but it was like a lose-lose proposition. Like Nike loses sales and the retailers lost sales. So that could have played some part into it. There could be a whole fashion thing going on too. I can't comment on that part. But that's kind of what I saw. And so Nike had great... It's always been like, if you want a quality growth stock, you buy Nike.

8:30It's not going to be like a tech company, but it's going to trounce the market. And it did for so long. And then for whatever reason, the last five years, they've really stumbled. And that's affected not just the stock price, but also their financials. Revenue growth has not been nearly where it was. and that can, when you pair that with a valuation compression, it can lead for a very painful shareholder experience, I'll say. Yeah. Yeah, for sure. Yeah, definitely. And this is very anecdotal, but my daughter and I were at the mall here in Wilmington last weekend and just walking around, we walked by a footlocker and A, I was surprised it was still open and it was in a mall, but there was literally two people in there, both employees, both standing there, what looking at their phones with literally nothing to do.

9:23And then we walked a little bit further down the mall and there was a Dick's sporting goods entrance inside the mall and it was huge. And there were so many more people in the Dick's walking around shopping, buying things, walking through the shoe area and that kind of thing. It was such a night and day experience. It was a little bit shocking. So to your point, you can sometimes see that just on the ground, walking through the stores and seeing some of those things. So yeah, it's really eye-opening when you see that kind of stuff. I've seen that also. I mean, we're pretty close to each other, Raleigh, Wilmington.

10:05But yeah, exact same experience for me with the malls and Dick's Sporting Goods. It's pretty like, wow, eye-opening. Yeah. Yeah, for sure. Are there any other companies that maybe through the rearview mirror have done pretty well but have stumbled since? Yeah. HP comes to mind. I don't know if you do this too, but I vividly can remember when I've researched a company. so like back in like must have been like 2021 i remember having my printed out 10k of hp enterprise and i was like at the pool reading it i don't know like do you do you like have visual memories of where you've learned about a particular business or is that oh yeah yeah yeah yeah yeah yeah for sure.

10:55I remember reading about, it was S &P Global. I had downloaded a bunch of 10Ks on my iPad because I was flying to Brazil. And so I had 11 hours of uninterrupted time to do things. And so I decided I would be industrious and read some 10Ks. So I vividly remember sitting on the aisle row and reading the 10K as they're dimming the lights and feeling like I'm being so productive. Yeah, right. But I remember reading the 10K on my iPad on a flight to Brazil. So yeah, it definitely happens to me all the time. Okay, cool. I don't recommend printing out and bringing to the pool. That was just like an experiment.

11:49I guess I still have a printer, which actually HP, that is what they're more focused on now. Not an expert on the company, but I'll just go based on my memory. If you remember, HP back in the day was one of the PC leaders. They were up there. It's Dell, HP, maybe IBM. I don't remember about IBM, but definitely HP was a big, big one. And then in more recent years, they really struggled. As you see, I think, with a lot of these titans of business, as they get bigger and bigger, they start to run out of places to grow. And so you get companies that have a little bit of this business, a little bit of that business.

12:36One of the businesses that HP got into that really got hit by innovation was data centers, data center servers. And so what they ended up doing was they split the company off. There was just the HP Inc. And then there was HP Enterprise, which had the IT, which was basically garbage. If you look at that stock chart, I think it was terrible. I remember reading those reports and being like, ooh, lots of red. I don't think you want to see this much red in a spinoff company in their financials. So yeah, that's kind of what happened with HP. and I don't again I wasn't around when they kind of had that fall but I wonder so I speculate if the whole Lenovo thing really succeeding kind of helped unseat HP and then not to mention like I actually do have an HP printer not going to say whether I like punted my last one or not you can just use your imagination but I don't know why I bought the same one that pissed me off I still stuck with this HP printer.

13:46And I'm probably one of the few people left on the planet who actually have a printer. But that was a big part of their business as well, printers. And as we all know, we hardly ever print things, especially with the advent of QR codes and NFC and all of those things. So maybe that's a bigger kind of longer-term example of how the innovator's dilemma can hit a company. and you see it more often than you think in technology. Yeah, absolutely. And I haven't had a printer in a long time. And so I haven't had to experience that frustration that you've experienced. But yeah, I don't even remember the last time I needed to print something.

14:31If I did, I most likely went to the library. So just because that's just an easier way to do it. And yeah, it's interesting how something that was so dominant during a period of time just eventually fades. I distinctly remember my father using, he worked from home for a while, and I remember him using a fax machine, for example, and how that was just so cutting edge at the time. and then it became obsolete and he had a printer as well and how that has now become obsolete. So it's really interesting how some of these things that were once so dominant can just kind of fade into the history books.

15:15Yeah, 100%. All right, well, what about the flip side? Maybe a company where the rear view mirror wasn't as rosy, but they were able to turn things around. Do any companies come to mind for you? probably probably one that has certainly gone through a peak and a valley and then a peak again would be Microsoft you know the company during the the unmentionable period you know the Steve Ballmer years for anybody that invested during in Microsoft during that period between the dot com and Sati Nadella taking over probably gives them goosebumps or the willies thinking about how poorly the company did during that period.

15:59And I know you looked it up and the company was doing around five or 10 % revenue growth during that period, which isn't horrible, but it's certainly not awesome. And it struggled for a long, long time. And I don't remember the exact numbers, but from the dot-com peak to Satya Nadella taking over, it was flat or down during that entire period, which was a 13 or 14 year desert, if you will, for investors. And once Satya Nadella took over, then the company has certainly seen much rosier times. That was around 2013 or 14, somewhere in that timeframe. And the company has been much, much better. 2015, maybe I don't, the dates are eluding me, but the company is certainly, fortunes have certainly been much, much better consistently.

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19:49Yeah. I mean, when you think about an almost$4 trillion business doing revenue growth 15%, 16%, 18 % annually, it's like, boy. Yeah, that doesn't suck. No, it does not. It does not. And Nadella's done a lot. He's done a lot of great things. Yes, he has. They acquired GitHub, which is huge in software. Everybody talks about the cloud. That was a big one. The way he basically took three... Ben Thompson talks about this. He took three divisions. The company was basically separated into three pieces and they all bickered with each other and none of them collaborated. They were all territorial and bureaucratic and everything.

20:35and he went in there and fixed it up. Yeah. That's cool. Yeah. Yeah. I mean, I think it would be an understatement to say that that was a good hire. Yeah. Yeah. Whoever made that decision, you know, made a really good choice. Yeah. You know, for sure. And, you know, he, he doesn't get the, he certainly doesn't get the same accolades or maybe recognition that Steve Jobs or Bill Gates would get because he wasn't the founder. of the business and he wasn't instrumental in starting the business, but he certainly has had a lot of success since he's taken over. And he certainly put the company in a much, much better place going forward than they were previously.

21:21The same could be said for Tim Cook as well. Tim Cook has certainly done a masterful job of managing the business since the jobs passed away. So, and I don't think they get enough credit for the job that they've done. And, you know, it just, it gets swept under the rug because they weren't founders. Yeah. Plus like, what have you done for me lately? You're right. Yeah.

21:49Yeah. Yeah. It reminds me of that Russell Crowe scene in Gladiator. Are you not entertained? You know? Right. Yeah. Are you not entertained? Yeah. That'd be a great meme. Put their faces on there. Right. Yeah, right. You're not entertained. No. Are there any other companies that you could think of that maybe in hindsight didn't do so great but are now doing better today?

22:18I mean, I'm sure there's a bunch. Nothing immediately springs to mind. And we do have two more Peter's principles to get to. Okay. All right. Let's move on. Put a pin on it. Yeah. Yeah. Let's put a pin in that. If it comes into our heads, we'll come back to it. But yeah. All right. Sounds good. Moving along. So the next Peter's principle, number 11, the best stock to buy may be the one you already own. So I know you've... Another way to say this is dollar costs averaging up. So I know you've done this. Why does this work and why did you do it and how did you do when you did it? I've done pretty well with it.

23:00It is a mind shift that is harder for value investors because our natural inclination is to buy things when they're on sale, i.e. when the stock price goes down. So if you're looking at Microsoft, for example, and you see that the stock price drops, your natural inclination is, hey, okay, it's on sale. Let's go buy it. As Buffett would always say through the years, I like to buy everything on a discount, my stocks and my socks. So that's our natural inclination. Something I kind of learned from Brian Feraldi and Brian Stoffel and tangentially David Gardner is this idea of averaging up. and what it revolves around is as the business gets better, you buy more of it because it still will create more value as it goes forward.

23:53One of the biggest hurdles with that is anchoring on the stock price. So if you bought a company at$100 and it goes up to$150, now you air quote think this is more expensive because it's$50 more than when you bought it. But it also could mean that the company has grown revenues at 20 % and the ROIC has improved and the margins have gotten better. So now it's a more valuable business. So why wouldn't you buy it at 150 and air quote average up? Because then you can partake in the gains that it continues to gather as it improves. This is something I've done with a few companies in my portfolio. Visa is one that I won't bore everybody with.

24:33but other companies like Agen, Brookfield Asset Management, now Brookfield Corporation, Topicus, all these companies I have averaged up over the years. And Google, I did the same thing. I averaged up on Google as well. So these are companies that I've continued to buy as they've improved their financials. And I've done well with those companies and it's all part of the dollar cost averaging system because you find a really good company. And if you can find a good value and buy it for more, you're still going to achieve that improvement in the value. But it is counterintuitive to what we think of as value investors.

25:15So that's what makes it hard. Yeah, totally does. That anchoring thing is so hard too. Like you're saying, you bought at$100 and you look at$125, it just looks way more expensive. and there's some I think psychology behind that it's just kind of how we're wired and we just have to remember that the market and the stock don't know that you've bought it so we have to separate our own egos and our own life stories with the practical reality that businesses are not stagnant just because you bought it could be a different business six months from now and could be to your point a better business So to kind of double click on the anchoring idea, out of the companies you listed, was there one where it was like you bought it pretty cheap and then it got a little bit more expensive, but like from a unbiased perspective, it's like, okay, it's still like a good deal, but maybe it was harder for you because it's like, man, I remember buying this cheaper and now I have to buy it a little bit more expensive.

26:24But then you are ultimately glad that you did. yeah uh besides visa the other one would be google um i i i didn't you know i i hindsight i timed it but i didn't um so when the when the stock got down to i don't know 80 some bucks a share kind of thing i bought some and then uh i as i did more research on the company i just i I decided that it was still really good value at 110. And so it was really hard though to buy it because I was still anchoring on the$86. So it took me a lot of thinking about it to move past the, okay, stop being so cheap. Is this company going to be better? Am I going to be happy that I bought it at 110 five years from now?

27:21And I kept coming back to the answer of yes. So then, okay, why am I anchoring on 86? I should anchor on 110. And I'm just, I'm usually aware of the numbers. I don't remember the exact number. But my point being is that once I, once I moved past the, okay, I got to stop being so cheap and try to pull the trigger. Then I was happy that I did that. And I did it a few more times after that as well. So it was harder to do. I've been doing that all along with Visa, but to me, that's a different story. And so it just feels different. But Google recently was definitely one that I struggled with to move past that.

28:04It was hard. Yeah. And I also don't remember the exact numbers or the exact dates, but I'm pretty sure you bought before I did. And I think I kind of missed the really nice dip, but I got in on a less nice dip. and that stock has up to now i mean it could change tomorrow but it's doubled up to now so you've done really well on that and probably have done better than i have and uh so you know it can be worth going through that suck because yeah there'll be great rewards on the other side for sure you know the other thing that can make that hard too is uh the the narrative around that So the contrarian part of it is that you're being positive about what you see and what you think the future of that business is.

28:50But then everyone around you is negative, negative Nelly. You know, AI is coming for Google. Open AI is coming for search. Bing is coming for search. All of these things, you're inundated with it and you just see it everywhere you go. And so if you're on social media, if you're reading blog posts, if you're listening to podcasts, everybody is casting negative about what's happening with Google. Any negative news that comes out gets amplified. And so when you're trying to average up into a company that's going through that and you think it's hard because you feel like you're on an island alone.

29:29And yeah, there's maybe some voices of reason like Andrew or Ben Thompson from Stratechery that are a lot more logical about it. But there's an ocean of people that are not being logical about it and are just reacting. reacting. One of the downsides to social media for sure is that particularly on X, everybody's an expert of the day, whether it's the Google AI trade or whether it's a Lululemon or tariffs or whatever. Everybody's an expert and they're not afraid to voice their opinions, even when they really don't know anything more than you do. So that can make it hard. it is a lonely place i mean um i wouldn't recommend doing it but you could go up to like your spouse and be like are you not entertained i was on an island and i made all this money i know like with my spouse my wife it didn't work um she's just like right same what money i'm like well we reinvested it she's like so what money i'm like long term you know long Long term.