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There is a military saying: “Orders that can be misunderstood will be misunderstood.”
At first glance, this may seem funny, but given the real consequences of ambiguous interpretations, people are not in the mood for jokes.
This also happened on the stock market. Peter Lynch, the legendary manager of the Fidelity Magellan mutual fund, achieved a staggering average annual return of 29.2% during his 13 years managing the fund.
In the 1980s, journalists approached successful investors and asked how they managed to regularly find "X" in the market. A company is a business that, after buying its shares, grows ten or a hundred times and generates multiple profits. For example, Lynch loved to buy inexpensive and durable stockings for his wife at some stores, and he bought shares of these stores, which subsequently brought him huge profits. Or you go to a local restaurant, praise its food and service, and invest in the restaurant's stock, which soon increases by 500 to 1,000 percent.
What could be simpler than that? A great product or service and lots of satisfied customers are all an investor needs to make a decision. This is how the most popular myth, named after Peter Lynch, was born: "As a consumer, you can't go wrong if you buy what you like!"
This myth proved so persistent that more than 40 years later, its influence has increased many times over as unprecedented wealth growth and technological advances have made investing accessible to billions of people on the planet. This is because this myth exploits a gaping hole in human thinking known in science as the availability heuristic or availability bias. The core of the heuristic is that people always want to find simple answers to complex questions.
This explains the popularity of companies such as Detsky Mir, Yandex, Tinkoff, MTS, Facebook (banned in the Russian Federation), Apple, Tesla, Google, McDonalds, etc. among Russian investors. Why these? They simply have a lot of customers, and investors ask simple but wrong questions when thinking about buying their shares. "Do I like these products and services?" It's difficult, but true. "Is it in my interest to be a co-owner of this company now?"
Meanwhile, the “author” of the myth wrote in his 1989 book “The Peter Lynch Method”:
"...one of my ideas has been misunderstood. Peter Lynch never recommended buying products from your favorite store just because you like shopping there. Also, you shouldn't buy stock in a manufacturing company because it makes your favorite product, or stock in a restaurant because you like its food. If you like a store, product, or restaurant, that's a good reason to take an interest in the company and put it on your list for research and analysis, but just buying stock isn't enough! "Don't invest in a company before you've gathered information about its prospects, financial condition, competitive position, expansion plans, etc."
Unfortunately, this explanation does not correspond to the simplistic and therefore false interpretations that the financial industry, including all journalists, analysts, bloggers and other writers, like to pick up and use for their own selfish interests. And everyone is happy with everything. Investors think they are making a good investment. The industry takes money from them. And the wolves are fed and the sheep are still safe. Why change anything?
But there is a way out. Don't be like the majority and avoid simplifications. Knowing the biases of investor thinking and studying the business thoroughly can lead to lasting investment success.
My website: asdorzhiev.ru.
My new analysis project "The Practice of Investing in Stocks and Bonds"