Collection: Peter Lynch - #17 'First Rule of Investing'

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In this episode, Peter Lynch talks about the single most important principle in investing.

In this episode, you’ll learn:

  • The single most important principle in investing.

  • Why investors need to know what they own?

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The single most important thing to me in the stock market for anyone is to know what you own. I’m amazed how many people who own stocks, they would not be able to tell you why they own them. They couldn't say in a minute or less, why they own it.

Actually if you press them, they’ll say, “The reason I own this is because the sucker’s going up.” That’s the only reason – (Laughter) – they own it. And if you can’t explain – I'm serious – if you can’t explain to a 10-year-old in two minutes or less why you own a stock, you shouldn’t own it. And that’s true I think about 80% of people who own stocks.

And this is the kind of stock people like to own. This is the kind of company people adore owning. These are relatively simple companies, and they make a very narrow, easy-to-understand product.

They make a one-megabit, SRAM, CMOS, bi-polar risk, floating point data IO array processor, with an optimized compiler, a 16-bit dual-port memory, a double-defused metal oxide semiconductor monolithic logic chip with a plasma matrix vacuum fluorescent display, it has a 16-bit dual memory with a UNIX operating system, four whetstone megaflop poly-silicone emitter, a high bandwidth – that’s very important – six-gigahertz double metallization communication protocol, an asynchronous backward compatibility, peripheral bus architecture, four-way interleaf memory, a token ring interchanging backplane, and it does it in 15 nanoseconds of capability.

Now if you own a piece of crap like that. (Laughter) You will never make money, never.

Somebody will come along with more whetstones or less whetstones, a bigger megaflop or a smaller megaflop. You won’t have the foggiest idea what’s happening, and people buy this junk all the time.

I made money in Dunkin’ Donuts. (Laughter) I can understand it. (Laughter) When there were recessions, I didn’t have to worry about what was happening. I could go there, and people were still there, I didn’t have to worry about low-priced Korean imports.

I mean I just – (Laughter) You know, I can understand it and you laugh. I made 10 or 15 times my money in Dunkin’ Donuts. Those are the kind of stocks I can understand. If you don’t understand it, it doesn’t work. This is the single biggest principle.

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