I’m always trying to find new sources of inspiration when building my investment portfolio. From legendary figures like Warren Buffett to recent arrivals like Cathie Wood, I believe there are lessons to be learnt from these individuals. Of course, following these investors will never instantly allow me to find great opportunities and continually outperform the market. However, the guidance within their approach can help develop my investment technique and build my portfolio.
For this reason, I decided to look at the advice of billionaire investor Peter Lynch. He has an enviable track record, achieving an average return of nearly 30% between 1977 and 1990. This all took place while running his Magellan fund at Fidelity. Not only was this performance consistent, but it also doubled the return of the S&P 500 during this time, making it the best-performing mutual fund in the world.
The Lynch approach
There are two key pieces of Peter Lynch’s approach that I aim to include as part of my strategy. The first is the concept of investing in what I know. Lynch encouraged retail investors, like me, to make the most of their own edge. This involves investing in companies whose products or services I use as this will help to inform the research process. I’m very fond of this concept. Trying to analyse a highly complex company that I’ve never heard of is much more likely to fail. Whereas studying a company I’m a regular customer of, is far more likely to work.
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Another aspect of Lynch’s strategy is finding investments known as ten-baggers. This term was coined in his wildly successful book One Up On Wall Street. It referred to finding a stock that increases in value 10 times. To find potential ten-baggers, Lynch suggests looking for stocks with solid earnings growth but still trading at a reasonable valuation.
A Lynch-inspired holding
A prime example of a Lynch-type investment is Games Workshop Group (LSE: GAW), a hobby shop known primarily for board games and mini-figures. The company is a familiar site in many shopping centres, with almost 140 physical outlets in the UK. Its name recognition certainly fulfils Lynch’s idea of investing in what you know, as this is a business I’m aware of and have also used.
It also fulfils the ten-bagger element of Lynch’s approach, with significant historical growth levels, while trading at a reasonable price level. The company’s bottom line profits have grown by over 23% every year for the last 10 years, and turnover has grown by over 12% during the same period. This impressive growth could result in continued share price increases if it can continue. Furthermore, the current price-to-earnings (P/E) ratio of 16.9 is reasonably low given this growth rate.
However, it’s essential to note that the share price has recently suffered, falling 11% in 2021 and 34% this year. Additionally, growth is forecast to slow considerably next year, with turnover expected to increase by 2.1% and bottom-line profit by 3%. This forecast lower growth isn’t hugely encouraging, although it’s important to remember that this is on top of the impressive growth in 2022.
Nonetheless, I believe Games Workshop is a good example of how I can replicate Peter Lynch’s investment style. I’ll add it to my portfolio in 2023, when I get some cash.
