Peter Lynch's top six investing tips everyone must follow ::ET

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When it comes to investing in stock markets, investors usually get trapped between logic and sentiment. They tend to take decisions based on herd mentality and sometime they become clueless about the future course of the stock market. This situation leads to bad investment decisions.

"Sometimes having good knowledge may not be sufficient to earn good rewards from the market if the basics are forgotten. These basics, if followed, can help an investor hold his ground even in a difficult market situation and hence create wealth in future. Even world-renowned investors would not have earned that respect in the market, had they not followed the basic fundamentals of investing. One of those investors was Peter Lynch," says Nitin Vyakaranam, founder & CEO of ArthaYantra, an online financial planning firm.

Peter Lynch in fact was known for the consistent returns he generated for his investors at Fidelity's Magellan Mutual Fund. "When he started overseeing the portfolio of Magellan in 1977, the fund was less known and had only $18 million in assets. Magellan's assets were managed by Lynch from 1977 to 1990. During these thirteen years, the compounded average annual investment return generated by him was close to thirty percent," says Vyakaranam.

Lynch's success depended on his ability to adapt to different investment styles and go with whatever worked at that time. Even if his styles of investment differed with the changing times, his fundamental checklist remained constant. At an investment conference in New York in 2005, Lynch shared his checklist.

It may a good idea to revisit these checks to help our own perspective about investments:

1. Don't buy anything you don't know

Lynch desired to know everything about the company and carried out his ground checks before investing in it. He also advocated investing in companies which one is familiar with or whose business is relatively easy to understand. In the words of the legend himself, "investing without research is like playing stud poker and never looking at the cards."

2. Before you purchase, explain why you are buying it

The reasons for our purchase should never be based only on someone else's suggestions. In order to explain why you are buying something, you need to know what you are buying.

3. It is futile to predict the economy and the interest rates

One needs to cut market noise and concentrate on core fundamentals when selecting investment options. Lynch said that "if you spend more than 13 minutes analyzing economic and market forecasts, you've wasted 10 minutes."

4. Good management is important- buy good businesses

Lynch invested in the 'story' a company has to offer. What a company is going to do to deliver the desired results formed the crux of his investment decisions. If a company has a business that anyone can relate to and the management has a clear plan to deliver expectations, then this check is cleared.

5. Be flexible and humble and learn from mistakes

No one is perfect. Not living in a self-denial that our bad investment choices will someday turn good is a humble start.

6. There is always something to worry about

Investments are subjected to various risks and market conditions. No investment plan can curtail all the risks. One can only mitigate risk to achieve higher degree of success with one's investments. While picking securities, Peter Lynch stuck to what he knew or could easily understand. He mostly invested for the long run and was unfazed by short-term market volatility. Buying good business at reasonable price was his mantra. In order to pick good business, he turned as many stones as possible to spot the hidden gems.

"Attempt to understand the Peter Lynch approach to investing. You will realize that a share is not a lottery ticket, but a part-ownership to a business," observes Vyakaranam.