Where does one find a stock to buy? It’s not available at the supermarket, exactly – though you might get ideas there. You don’t just pick it out of a hat or from a list – though there are lists available everywhere. You shouldn’t just pick something you like – though again, it can be a place to start. And if you are just scanning an old school table of stocks from the newspaper, or digging through your brokerage account, it can feel intimidating.

There’s no perfect way to find a stock, but there are a few common methods. I’m going to spell out a few in a series of videos, for you to get an idea of ways to approach stocks. You’re going to find that it’s not such an exotic process. Stocks represent companies that are all around us. It’s just a matter of figuring out how to translate that into something that makes sense for you as an investor.

This video is going to hew closest to that concept, of stocks all around us. For that, we’re going to find stocks Peter Lynch Style.

Who is Peter Lynch?

Lynch is a famous investor who is best known for two things – running Fidelity Magellan, a mutual fund that was among the best performing in the world during his time, and for publishing some of the most well-read books about investing, One up on Wall Street and Beating the Street.

We will learn a lot about investing from Lynch. Here, I’m going to focus on his perhaps best-known lesson, what I’m calling “Peter Lynch Style.”

What is Peter Lynch Style?

“Buy what you know.” Peter Lynch’s big idea is Invest in companies you understand. In his first book, One Up on Wall Street, he wrote, “The best place to begin looking for the tenbagger* is close to home – if not in the backyard then down at the shopping mall, and especially wherever you happen to work.”

*A Lynch coined phrase to mean a stock that goes up 1000%, or 10 times your original value. Two home runs and a double, he’s called it.

What he means: we see business activity every day. Trends, hot new stores, quality products that we use in our work or personal lives. All of these are leads to potentially interesting stock ideas. And yet, we often ignore these to go after whatever has a lot of buzz on social media, or whatever is moving a lot.

It’s the summer of 2023, so let’s take AI – how many people are chasing stocks of companies supposedly related to artificial intelligence, without really understanding why the company would benefit from it, what advantage they have, or how long that advantage will endure? How many of us even really understand what AI is? But it doesn’t matter. If a stock is going up because AI is popular, that is enough for a lot of people to buy it.

Instead, imagine a college professor who sees their students all using a new app. Or a parent who finds they buy all their kids’ clothes is at the same new chain store. Or a worker who hears there’s a 15-month backlog on a key part for their construction project. Each of them has an interesting insight, and that could lead to a company with good prospects that isn’t widely known in the market yet.

What are the problems with buying what you know?

There are always caveats.

The biggest one is that having this initial insight is not enough. You have to research the company, both to confirm that your insight is reflecting reality and that the company is turning that insight into a profitable business*.

*Lynch had to clarify this himself, in an updated intro to his book. “Peter Lynch doesn’t advise you to buy stock in your favorite store just because you like shopping in the store…Liking a store is a good reason to get interested in a company and put it on your research list, but it’s not enough of a reason to own the stock!”

You then have to research the stock, to see whether your insight is already ‘priced in the stock’, meaning you’re not getting a bargain, exactly. “All my friends message me using iPhones and Apple products are great” isn’t an innovative insight at this point.

I also try to be careful in assuming my taste matches anybody else’s. If my insight is ‘I really love this product or store,’ I try to avoid a leap to ‘everybody must love this product or store.’

An insight based on observed behavior in other people is a safer bet, whether that’s a group of specialists whose opinion you trust, or it’s a wider sampling of friends or acquaintances or people you see in the world.

How I’ve used Peter Lynch style stock picking

I’ve picked stocks at least in part using a Peter Lynch style several times in my investing, both successfully and unsuccessfully.

I consider my wife’s hometown grocery store in Michigan a good stockpicking ground. If a product hits there, it’s probably available nationally. I found Smart Balance made a ‘healthy’ peanut butter that I actually liked. If there’s somewhere I have an edge, it’s in peanut butter. If Smart Balance could make peanut butter that rivaled Skippy or Jif, they were worth checking out. I bought a few shares of Smart Balance, and sold them a few months later when they had doubled. The company got bought out for about the price I sold shares at, but three years later. So that was probably better lucky than good on my part.

Stitch Fix is a company that fascinates me, the combo of data and human selection. I also hate shopping for clothes and like their service. I opened a small position before the pandemic. The stock soared during the pandemic*, but eventually, not enough people wanted their service, and their growth strategies were a mess, and I lost a good chunk of money.

*My biggest errors with Stitch Fix were around not selling. We’ll cover that later.

Last example: I love traveling. I’ve used Booking.com to book hotels or even ‘alternative accommodations’ – AirBnB style apartment bookings – more than any other platform. I also knew from work how respected Booking is for sales conversion and for how they market on Google and other sites. So I had both personal and professional insight. And because Booking isn’t quite as well known in the U.S. – this is the same company as Priceline, from the old William Shatner ads, but Priceline’s legacy business has been overtaken by Booking – there was an opportunity to get a reasonable price. I’ve owned the shares for five years. It’s a good example of the Lynchian style.

A last note of caution and upside

All of these examples illustrate one more double-edged sword about Lynch style stockpicking. It’s fun, because you’re connecting your life to your stocks, and because you might find something new. And it’s dangerous, because you may get more attached to a pick that you come across this way. A rule that will apply to all stock picking is that you can’t turn off your brain or your analysis once you buy the stock. It’s especially applicable to “buying what you know.”

I have a soft spot for Lynch because he’s a fellow Massachusetts native. He even talks about his hours of research in the Burlington Mall, my hometown mall. He probably spent more time there than I ever have.

Lynch is a legendary investor for a lot of reasons. We’ll study more of him. He was and is a believer that more people can not only invest, but can do as well as the professionals. And at the core of that belief was this Lynch Style Investing concept, that buying what you know and applying the everyday insights you have to your investing can be your best path to success. I wouldn’t say it’s the only path, but it’s certainly a good tool to keep in mind.

For our next post in how to buy stocks, we’re going to talk about how to use stock screeners to find stocks.