A recent article in Barron’s offers highlights from a conversation with veteran stock picker and former Magellan Fund manager Peter Lynch.

Here are some key points:

• “After 50 years of doing this professionally, it reinforces that growth stocks are better than nongrowth stocks,” Lynch said, explaining that growth stocks are defined as those that exhibit sales growth—not just earnings growth: “A company can go from losing money to a 2% margin, to a 12% margin, and earnings are up six-fold—but that’s not a growth company.”
• Lynch explained that his “best” stocks have been “ones where I didn’t have to worry about the big picture,” describing them as companies with “a better mousetrap, a growth company in a non-growth industry.” He cited the examples of Stop & Shop and Dunkin’ Donuts, adding that Walmart was one of his bigger misses.
• Regarding time horizon, Lynch said, “you want to be in [the stock] in the second inning of the ballgame, and out in the seventh.” If you can’t find growth companies in innings three through five, he said, “look at turnarounds, special situations, back at the cyclicals.”
• “Cheap,” Lynch argued, “is different from a [good] story. There’s a great expression on the Street: It’s always darkest before pitch black. Wait until something’s gotten better.”
• “There’s a real shortage now of growth companies,” says Lynch, which he argues is a “red flag, because all the money is flowing into [a few companies]. There’s an end to that game. It will scare me if this trend continues for a couple more years.”
• As for opportunities in today’s market, Lynch said he is “looking at industries that are doing badly; that for some reason will get better.” He cites shipping and energy services as examples.
• “The one thing I want everybody who is buying individual stocks to get it that they have to understand the story, the five reasons something is going to go right for the company,” Lynch advises, adding, “If you can’t convince an 8-year-old why you own this thing, you probably shouldn’t own it. Don’t invest in a company before you look at the financials. If you made it through fifth grade, you can handle the math.”