3 Major Tips From Charlie Munger on Investing

How many companies should you invest in? How long should you hold on to stocks? Is it possible to over-diversify?

Famed mutual fund manager Peter Lynch spent decades successfully managing the Magellan Fund at Fidelity. He learned that anyone can be a successful investor if they put in the hard work and choose and manage stocks in the right way.

Read more to get four tips from Lynch on how to manage a stock portfolio successfully.

How to Manage a Stock Portfolio

Once you’ve figured out which companies’ stock to purchase for your portfolio, Lynch writes that it’s time to turn to how to manage that portfolio. According to Lynch, proper management of your portfolio is key to your success as an investor. His advice on how to manage a stock portfolio highlights several core principles:

  • Don’t invest in too many companies.
  • Pay attention to the companies you invest in.
  • Diversify your portfolio.
  • Play the long game.

Tip #1: Don’t Invest in Too Many Companies

Crucially, you should never hold more stocks in your portfolio than you can personally manage or keep track of. A manager of a large fund with a staff of analysts can afford to own stock in hundreds or even thousands of companies; however, as a retail investor, you’ll never have the bandwidth to do the research you need to do to make informed investment decisions in a portfolio that large.

Tip #2: Pay Attention to Your Stocks

Lynch advises you to pay consistent attention to the stocks in your portfolio. Playing the stock market is not a “set it and forget it” business. Analyzing the key metrics of the companies whose shares you own—quarterly earnings statements, profit and loss statements, balance sheets, and cash flow statements—will help you determine which stocks are poised for sustainable long-term growth and which are overvalued and likely to suffer a decline. Don’t just hold onto a stock by inertia: If the fundamentals of the company are truly headed in the wrong direction, it may be time to sell them.

Lynch writes that it’s best to take copious notes on the activities of the companies in your portfolio. He recommends a review of your full portfolio every six months to evaluate which stocks to drop, which new ones to add, and which current ones to buy more of.

(Shortform note: Although Lynch recommends constant vigilance with your portfolio, other investment experts write that this level of oversight may not be sustainable for most individual investors. To have a truly well-diversified portfolio, you’d likely need to own between 20 and 100 stocks. You’d also need to constantly review the financial statements of dozens of companies. This takes more time than most non-professional investors have, not to mention a level of knowledge and expertise to properly interpret that data that many such investors likely won’t have.)

Tip #3: Keep Your Portfolio Diversified

Lynch writes that it’s crucial to maintain a balanced portfolio. This means having a mix of stocks from many sectors of the economy. Indeed, warns Lynch, it’s a risky strategy to overload in stocks from companies in any one industry, no matter how stable and secure that sector may seem. Ideally, you want a portfolio whose composition closely reflects the total market—this protects you against a collapse in one industry because your losses there may be offset by gains (or at least smaller losses) in other industries. 

Recent history shows why it would be a gamble to bet too heavily in one industry: Putting all your money into tech stocks would have wiped you out during the dot-com crash of the early 2000s; going all-in on cryptocurrency would have been calamitous in 2022 when cryptocurrencies plummeted amid fraud scandals.

The Risks of Over-Diversification

Although many experts agree with Lynch that it’s wise to maintain a diversified portfolio, there’s also a risk in having a portfolio that’s too diversified. Some evidence suggests that the risk-mitigation benefits of a diversified portfolio diminish greatly once you own more than 20 stocks. In other words, there’s only a marginal difference from a diversification standpoint between owning 20 stocks and 10,000.

If you own too many different stocks and become too diversified, you can reduce your potential for high returns. In a portfolio consisting of dozens or even hundreds of stocks, a few stocks performing exceptionally well will have only a middling impact on your returns because they would only represent a small share of your total portfolio. But if you had a diversified portfolio of only around 20 stocks, those high performers would have an outsized positive impact on your returns.

Tip #4: Play the Long Game

Lynch writes that successfully managing your portfolio is largely about staying the course in the market. Don’t worry about the short-term ups and downs—the historical performance of the market over decades shows that consistently owning stocks is a winning strategy.

When you start buying stocks, you’ll inevitably experience market downturns. They can last for a month, a quarter, or even a couple of years. These downturns are often unpredictable and are usually caused by large-scale macroeconomic events and conditions that individual investors have zero control over—from interest rate changes to geopolitical events to natural forces like weather and pandemics.

And, when these bear markets strike, you’re likely to lose money. But, warns Lynch, this isn’t the time to flee the market in a panic. Indeed, he doesn’t think of them as market collapses at all, but rather as market corrections—times when previously overvalued stocks come back to Earth and settle at prices that more accurately reflect their worth. And it’s during these market corrections that savvy investors can seize the opportunity to find bargains and buy stocks at discount prices. By contrast, writes Lynch, bull markets (when stock prices experience a prolonged rise) are often a sign of overpriced stocks, where you’ll be hard-pressed to find good bargains.

Time in the Market, Not Timing the Market

The history of stock prices, as measured by well-regarded indexes like the S&P 500, bears out Lynch’s argument. Many investment experts argue that success is more about time in the market than about timing the market. In other words, continually investing in the stock market is a better strategy for high returns than trying to buy stocks at a low price and sell them at a high price. This is because it’s difficult to predict when the market will go up and down, and as Lynch points out, you as an individual investor have almost no control over it.

But, evidence suggests that playing the long game does work. Over the past 94 years, the S&P 500 has swung back and forth, with 27% of those years having negative returns. So if you’re buying and selling stock in a one-year timeframe, you have a significant risk of taking a loss. But the longer the time window of your investment, your chances of positive returns become overwhelmingly likely. Over those same 94 years, through December 31, 2022, 94% of 10-year periods have had positive returns. 

Exercise: Build Your Ideal Portfolio

Lynch writes that anyone can succeed in the stock market through research, persistence, smart investments, and vigilance. Think about how you can apply Lynch’s insights to build your ideal portfolio.

  1. Do you think ordinary investors can put together and actively manage stock portfolios of individual stocks that can consistently outperform the market? Explain why or why not.
  2. Do you think most investors would be better served by trying to beat the market with their own hand-picked stock portfolios, or do you think it’s better to put your money in an index fund that simply aims to track the market? Explain your reasoning.
  3. Do you think it’s more effective to continually invest in the stock market regardless of the state of the economy? Or do you think it makes more sense to try to time the market to buy stocks when they’re cheap and sell them when they’re expensive? Explain your answer.
How to Manage a Stock Portfolio: 4 Tips From Peter Lynch

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Like what you just read? Read the rest of the world's best book summary and analysis of Peter Lynch's "Beating the Street" at Shortform.

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  • How ordinary investors can outperform the stock market
  • Why it's crucial to do your homework before you invest in a company
  • Why you must be willing to endure inevitable short-term losses

Elizabeth Whitworth

Elizabeth has a lifelong love of books. She devours nonfiction, especially in the areas of history, theology, and philosophy. A switch to audiobooks has kindled her enjoyment of well-narrated fiction, particularly Victorian and early 20th-century works. She appreciates idea-driven books—and a classic murder mystery now and then. Elizabeth has a blog and is writing a book about the beginning and the end of suffering.

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