Peter Lynch Beat the S&P 500 in 11 of His 13 Years Running Magellan. Here’s Why He Says “Turning Over the Most Rocks” Is the Key to Winning.

Before exchange-traded funds (ETFs) took over the investing world, mutual funds were the investment of choice for most retail investors and none was bigger than the Magellan Fund from Fidelity.

Magellan, managed by investing legend Peter Lynch, was the largest mutual fund in the world, peaking at about $102 billion in assets under management in 2000 during the dotcom boom. For perspective, its currently got roughly $27 billion in assets, so its down considerably from its peak as ETFs have boomed. There’s also an ETF now, the Fidelity Magellan ETF (NYSEMKT: FMAG).

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The fund made its name during the tenure of Lynch, who ran the fund from 1977 until 1990. During that time it went from about $20 million in assets to over $14 billion by 1990. Lynch’s legendary status is supported by his performance. Under his management, the fund averaged an annual return of 29.2%, which is among the best in the business. And he beat the S&P 500 in 11 of his 13 years there.

Lynch was also known for his folksy wisdom about investing that was easy for the average investor to understand if not execute on. His most famous quip is to “invest in what you know,” which, I admit, I tried when I first started investing to disastrous results. I really didn’t know what I thought I knew about the stock, I just liked the product. Lynch was saying to know the stock, know the company, know the industry. That’s a lot of knowing for someone new to investing.

What I should have done was listen to another bit of Lynch’s wisdom and turned over a few more rocks before making an investment.

Leave no stone unturned

“The person that turns over the most rocks wins the game. And that’s always been my philosophy,” Lynch once said. This piece of Lynchian advice is a bit more applicable and easy to grasp for the average retail investor. He’s basically saying: Do your research, look at more stocks to find the ones that have the most upside or best fit your portfolio. Don’t follow the crowds.

If everyone is buying AI stocks, don’t just reflexively pile into the most popular stocks with the highest returns. Those with the highest returns may also be the most overvalued and prone to a steeper decline if the market corrects. Or they may be overpriced based on hype and not actual real earnings and strong fundamentals.

The way to find the best AI stocks, or value stocks, or growth stocks, or income stocks, or whatever, is to go deep in your research of its valuation ratios, earnings history, earnings potential, debt, revenue growth, and other fundamentals, for that will tell the fuller story. The more stocks you explore, or the more rocks you turn over, the better chance you will have of finding the ones that are keepers in a long-term portfolio.

Like Magellan and Lynch, be an explorer.

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Dave Kovaleski has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Peter Lynch Beat the S&P 500 in 11 of His 13 Years Running Magellan. Here’s Why He Says “Turning Over the Most Rocks” Is the Key to Winning. was originally published by The Motley Fool