Renowned fund manager and author Peter Lynch once said ‘Behind every stock, there is a company. Find out what it’s doing’.
In this article, we will try to understand the famous quote in greater detail.
Most individual investors, especially those who are new to the stock market, are too affected by the stock price movement.
If the price of a stock is rising, it becomes a good company to buy. When the price is falling, the same stock becomes a bad investment.
Very few put in the effort to find out what the company is really doing.
What is its business? Who runs the business?
Even fewer people dig in deeper to read annual reports and study the company in greater detail.
As an investor, unless you understand the underlying business of a company, you will not be able to hold its stock when the price is falling.
You could end up selling a great company out of fear – even though its price will recover in the future and give you great returns in the years to come.
The ability to hold a good company even when its stock price is falling or undergoing a time correction – will play a crucial role in you becoming a successful investor.
In the long run, the stock price will go up only if the business of the company does well.
In Peter Lynch’s own words “I think you have to learn that there’s a company behind every stock, and that there’s only one real reason why stocks go up. Companies go from doing poorly to doing well or small companies grow to large companies”
Our advice: If you like a stock, buy small quantity of shares. Study the company in more detail. Buy more shares if you like its business. As your understanding of the business increases, your conviction (confidence) will also increase, this will allow you to give higher allocation in your portfolio.