Investing money in 2020? These tips from Peter Lynch can help you avoid great losses

Peter Lynch, one of the greatest US investors, has his own unique approach. Investing money in 2020 might seem risky but these tips can surely help you avoid big losses.

Investing money in 2020

Nowadays seems like a really hard time to avoid losing money. And where to invest money profitably is quite a big question. Indeed, the US-China tensions, the coronavirus crisis that is far from over, the US elections, and Brexit uncertainty might spook many investors.

Many indexes have almost recovered from their March losses. It particularly seems to be the case with S&P 500, though not so much with the Footsie. I think it’s not just the Brexit uncertainty discount. It’s also due to the fact that the FTSE 100 doesn’t have many overvalued high tech names. Although I expect another stock market crash, Footsie shares are better bargains than S&P 500 stocks, in my opinion.

But before picking a few I’d read some good tips from Peter Lynch, a financial guru.

Peter Lynch and his principles

Lynch is known for being a successful value investor. He owned an investment fund that generated about 30% return per year. I compiled some of the great investor’s quotes here.

“A lot of money can be made when a troubled company turns around.” That’s an important rule, indeed. Many investors panic when everything goes on sale. At the same time, they get greedy when the stock market is in a bubble. Good days come after bad days. This is true of individual companies too. They can recover after recessions and make their shareholders rich. 

“When purchasing depressed stocks in troubled companies, seek out the ones with the superior financial positions and avoid the ones with loads of bank debt.” Well, it’s self-explanatory because “companies that have no debt can’t go bankrupt.” 

Another point is rather controversial. “Managerial ability may be important, but it’s quite difficult to assess. Base your purchases on the company’s prospects, not on the president’s resume or speaking ability.” Many brilliant financiers, including Warren Buffett, consider adeqaute management to be essential for a business to prosper. In fact, it’s one of Buffett’s key criteria. But agree with Peter Lynch, that the management’s ability is often hard to judge. 

How do you judge if a company is overvalued? Well, “carefully consider the price-earnings ratio. If the stock is grossly overpriced, even if everything else goes right, you won’t make any money.” That’s absolutely true. In the best case scenario the stock will only rise slightly. But if many things don’t go right, the investor will probably end up with huge book losses.

“If the P/E of Coca-Cola is 15, you’d expect the company to be growing at about 15 percent a year, etc. But if the P/E ratio is less than the growth rate, you may have found yourself a bargain. A company, say, with a growth rate of 12 percent a year (also known as a “12-percent grower”) and a P/E ratio of 6 is a very attractive prospect.” That’s a great way of spotting bargains. I assume Lynch means net earnings growth. Not only should a company trade at a low P/E ratio, it should also grow at a steady rate, which should be higher than the company’s P/E ratio.

What next?

There are other criteria when choosing great companies and the Footsie has a lot on offer.