Yes, you really can become a better investor in just 2 minutes!
In his iconic 1989 book ‘One Up On Wall Street’, legendary investor Peter Lynch describes a 2-minute drill that he thinks any investor should follow before parting with their money:
Before buying a stock, I like to be able to give a two-minute monologue that covers the reasons I’m interested in it, what has to happen for the company to succeed, and the pitfalls that stand in its path.
The drill acts a lot like a safety barrier. It forces you to cement your arguments and think about potential risks that lie ahead. It also lets you identify when an investment is failing to perform and should be sold.
Lynch goes on to say “[o]nce you’re able to tell the story of a stock to your family, your friends, or the dog so that even a child could understand it, then you have a proper grasp of the situation.”
In fact, Warren Buffett is also an advocate for writing down the exact reason you’re thinking of buying shares in a company, commenting on the importance of knowing your motives:
One thing that could help would be to write down the reason you are buying a stock before your purchase. Write down “I am buying Microsoft at $300 billion because…” Force yourself to write this down. It clarifies your mind and discipline.
Let me show you what this practice might look like:
Should I buy CSL shares?
One company high on my watch list right now is CSL Limited (ASX: CSL).
My main reason for wanting to buy shares today is that I think CSL has a powerful flywheel and strong pricing power reminiscent of the best companies in the world. I think there will be strong, long-term demand for its patent-protected products which will drive continued revenue growth.
For this to happen, and justify the current share price, CSL will need to continue to invest in and develop innovative products. It will need to make some careful acquisitions. It will need to maintain its unyielding focus on customer safety. And it will need to relentlessly protect its supply of plasma, which is a key component of its products.
Foolish takeaway
The 2-minute drill does not guarantee investment success, however, taking the time to think honestly about the company you’re about to invest in (and writing it down!) can give you clarity on your investment expectations.
Perhaps you could try out Peter Lynch and Warren Buffett’s practice on the following well-priced stocks?
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More reading
- 4 top ASX shares to invest $4,000 into immediately
- The smartest ASX shares to buy if you have $2,000
- Why the coronavirus is still affecting share markets
- Is this ASX healthcare share about to soar?
- Where to invest $10,000 in ASX 200 shares immediately
Regan Pearson has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of CSL Ltd. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.
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