Fund Lessons From Peter Lynch

It's underfollowed. Lynch liked stocks that nobody else liked at the time. He was thrilled when he could find shares of a promising company ignored by Wall Street analysts and other mutual funds or investment firms. That sort of neglect meant there was still plenty of room for the stock price to increase -- assuming the underlying company could deliver rising earnings over time.

It's in a no-growth industry. Lynch was scared of high-growth industries. He believed that high-growth industries are hotbeds of competition -- and everyone knows that competition makes it hard for a company to sustain superior earnings growth.

It's got a niche. So what made Lynch a growth investor? For starters, he looked for companies that could deliver superior growth and he found them. He found many of his favorites among firms that occupied a particular market niche that was relatively easy to defend from competitors. For instance, he liked companies that owned rock pits.

Lynch also liked drug companies because their patents made them niche businesses. He also liked companies with brand names such as Coca-Cola(KO). The bottom line: it's very hard to compete with a business that has a good niche.

People keep buying the company's products. Lynch didn't want to own a company that made the latest toy. He wanted a company that made drugs or soft drinks or cigarettes or razor blades.

It benefits from technology. Lynch typically avoided technology companies that had to compete with each other by lowering prices -- but he liked companies that could benefit from those falling technology prices. If he heard about a new supermarket scanner, he might buy supermarkets rather than the company making the scanner.

Fortunately, you don't have to be an investing genius yourself to reach your own investment goals. Instead, you can rely on the stock-picking skills of first-rate fund managers -- many of whom have learned the lessons of Peter Lynch and other masters. That said, the more you know about investing, the more confidence you'll have when you're making judgments about your portfolio of funds or other investments.

-- written by Don Dion in Williamstown, Mass.

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