“With small companies, you’re better off to wait until they turn a profit before you invest.” Peter Lynch – 20 Golden Rules

Excellent advice that.

I’m breaking it with Catch the Wind,  breaking it in a big way. CTW doesn’t even have sales! Let alone profits. Even if sales eventuate, profits are an entirely different matter. The list of tech companies with hundreds of millions in sales who still can’t crack a consistent profit is long. Heck software companies can have 70% gross margins and still struggle to turn a consistent profit. Investing without profits is playing with fire.

For the time challenged here’s a summary of Lynch’s 20 Golden Rules. Though I encourage everyone to read the rules in full and if you haven’t read Lynch in the last five years then it is probably time to do so.

I enjoy and profit from distilled wisdom like these rules, but profiting from them requires more than simply reading the list. It is important to fold the rules into your investment strategy or clearly articulate why you’re not. Can you add some of these rules to your investing checklist? Think about each rule and whether you regularly apply it and if not why not. Like all rules they are made to be broken, but before you break a rule it is essential to understand it.

• Invest in companies or industries you already understand
• Ignore the herd
• The disparity between price and value is the key to success, be patient and own successful companies.
• Know the company and why you own it.
• long shots almost always miss the mark.
• The part time stock picker probably has time to follow 8-12 companies and five is sufficient.
• If you can’t find any companies that you think are attractive, put your money in the bank.
• Never invest in a company without understanding its finances.
• Avoid hot stocks in hot companies.
• If you invest $1000 in a stock, all you can lose is $1000, but you stand to gain $10000 or even $50000 over the time you’re patient. You need to find few good stocks to make a lifetime of investing worthwhile.
• In every industry and every region, the observant amateur can find great growth companies long before the professionals have discovered them.
• Stock-market declines are routine. If you’re prepared , it can’t hurt you . A decline is a great opportunity to pick up the bargains left behind by investors who are feeling the storm in panic.
• Investing is more about your stomach than your brain. If you are susceptible of selling everything in a panic, you ought to avoid stocks and stock mutual fund altogether.
• There is always something to worry about. Avoid weekend thinking and ignore the latest dire predictions of newscasters. Sell a stock because the company’s fundamentals deteriorate, not because the sky is falling.
• Dismiss all predictions and forecasts and concentrate on what‘s actually happening to the companies in which you’ve invested.
• If you study 10 companies, you will find 1 for which the story is better than expected. If you study 50, you’ll find 5 . There are always pleasant surprises to be found in the stock market companies whose achievements are being overlooked on Wall Street.
• If you don’t study any companies you have the same chance of success buying stocks as you do in a poker game if you bet without looking at your cards.
• Time is on your side when you own shares of superior companies. You can afford to be patient –even if you are missed Wal- Mart in the first 5 years, it was a great stock to own in the next 5 years.
• In the long run, a portfolio of well chosen stocks will always outperform a portfolio of bonds or a money market account. In the long run, a portfolio of poorly chosen stocks won’t outperform the money left under the mattress.

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