Here’s a good Peter Lynch anecdote from a recent Bloomberg article on banking stocks:

“David Ellison learned a simple lesson from legendary mutual-fund manager Peter Lynch as a young bank analyst at Fidelity Investments in the 1980s: If things at a company are getting better, you want to own its stock. “

This lesson is, of course, is the basis of the simple investment philosophy I espouse on this website: Buy a diversified portfolio of distressed stocks that show evidence of a turnaround and have legitimate growth prospects. (see this post for a bit of philosophical justification for this approach).

Even though many of the types of stocks you will buy under this approach, will fall in price (especially right after I buy them) or provide little gains, a few are bound to rebound enormously over time as the “company gets better”, and you are guaranteed to make money “in the long run”. Simply witness the performance of NAVI, VG, PWER and a few other stocks I’ve mentioned here over the years. The massive gains in these stocks have more than compensated for major losses in Britesmile, Corgi, and a few of my other truly bad investments. Of course, one never knows in advance which stocks will gain and which will fall.

The problem with any investment strategy, it seems, is not so much the theory, but in fighting the negative emotions, such as fear, that surround the prospects of loss, both temporary and permanent. They key is to use analysis to locate potential investment winners, and then practice diversification to quell the fear of loss, and provide you with the financial staying power to allow random fate to eventually dole out it occasional reward.