Mantras from gurus can’t replace hard work

Some successful fund managers would have you believe making money from the markets is easy. But as Tim Bennett explains, there's no substitute for doing your homework.

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One piece of investment advice that most of us have probably heard is US investor Peter Lynch's mantra that you should "invest in what you know". Lynch was one of the greatest investment managers of all time, as Carl Richards notes in The New York Times.

He made compound annual returns of 29.2% over the 13 years from 1977 to 1990, running Fidelity's Magellan Fund, while the S&P 500 returned 15.8% a year over the same time period. But, as Richards points out, you should take this particular piece of advice with a pinch of salt.

Lynch used to illustrate his point by recounting how his wife loved a particular brand of tights so much that he bought shares in Hanes, the company that made them. The share price went on to rise 30-fold. The trouble is, Lynch makes it sound so easy. But just knowing a product isn't enough there's a whole load of research that needs to follow if you are to decide whether or not you the shares are a good investment.

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For example, says Richards, "I've heard more than one person justify a decision to buy Apple shares because they really love their iPhone". That may explain how 17% of private investors in the US have ended up owning at least some Apple shares (according to investment firm SigFig) four times as many as own the average Dow Jones stock at a time when the firm's best days could be behind it.

The point is that while glib pieces of advice from gurus' like Lynch or Warren Buffett can make investing sound easy, in fact they're simply starting points for a great deal more research. The truth is that if you can't be bothered to do the legwork involved in uncovering a genuinely good investment, then the best advice you can get is to stick to low-cost index-tracking funds.

Tim Bennett

Tim graduated with a history degree from Cambridge University in 1989 and, after a year of travelling, joined the financial services firm Ernst and Young in 1990, qualifying as a chartered accountant in 1994.

He then moved into financial markets training, designing and running a variety of courses at graduate level and beyond for a range of organisations including the Securities and Investment Institute and UBS. He joined MoneyWeek in 2007.

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