Peter Lynch is a legendary investor. His philosophy is, “Look for what’s simple, boring, and consistent.” The best businesses are easy to understand by anybody. You should know what they sell, how they sell, and their financials. If you know these, you avoid freaking out when the market occasionally crashes.
There are many ways to categorize stocks: by size, sector, stage, etc. However, Lynch categorizes stocks into six types based on growth patterns, risk profiles, and business characteristics.
Cyclicals: These are stocks tied to economic cycles, thriving during booms and struggling during recessions. Industries like automotive, steel, or airlines often fall here. Their performance hinges on macroeconomic trends, making timing critical for investors. Misjudging the cycle can lead to significant losses or missed opportunities. Examples: Ford, Boeing, United Airlines, Caterpillar
Stalwarts: Stalwarts are large, stable companies with consistent earnings growth, typically 10-12% annually. Think Coca-Cola or Procter & Gamble. They’re less volatile than fast-growers, offering safety and modest gains. Lynch saw them as reliable holdings for steady returns, especially during market uncertainty. Examples: Visa, Coca-Cola, Apple, Microsoft
Asset Plays: These stocks are undervalued based on their assets, like real estate, cash, or intellectual property, which the market overlooks. For example, a company might own valuable land that is not reflected in its stock price. Investors can profit when the market recognizes, or the company monetizes these hidden assets. Examples: Macy’s, Berkshire Hathaway, Paramount Global
Turnarounds: Turnarounds are companies recovering from distress, like bankruptcy or operational missteps. They’re high-risk but offer big rewards if management executes a successful revival. Lynch liked their potential but warned of the uncertainty involved. Examples: Intel Corporation, Meta
Fast-Growers: These are companies with explosive earnings growth, often 20-25% or more annually, like tech startups or emerging retailers. They carry high risk due to competition and valuation concerns but can deliver massive returns if they sustain momentum. Lynch loved finding these early. Examples: Palantir Technologies, Tesla, Shopify
Slow-Growers: Slow-growers are mature companies with minimal growth, often 2-5% annually, like utilities or established food brands. They’re stable, usually pay dividends, and suit conservative investors. Lynch viewed them as safe but uninspiring, with limited upside compared to other categories. Examples: Verizon, Johnson & Johnson
When building your stock portfolio, you can diversify over these aspects so that the volatility of a stock like Tesla or Palantir, or the potential bounce-back of Intel or Meta, is balanced by the reliability of Coca-Cola or P&G. A more accessible way of diversifying is investing in a market tracking index fund, something recommended for most investors.
Another key recommendation is “Don’t overpay.” When markets continuously go up, and valuations don’t make sense, there may be a bubble. Peter Lynch believes a fairly valued company has a PE ratio equal to its annual earnings growth rate. Although that might feel too strict today, the principle stands: if you think a stock is overvalued, avoid buying it; you might miss a winning bet, but more likely, you’ll prevent a losing one.
A final piece of advice we’ll include in this article is not to try to time the market. Lynch recommends “Avoid bottom fishing.” Don’t wait for the absolute bottom to buy into quality companies. Nobody can know when stocks hit the absolute bottom, so you should start buying when they become undervalued enough to be attractive.
Regardless of your investment strategy, we recommend saving as much as possible each month and investing it according to your plan.