Peter Lynch Turned Fidelity Magellan From $18 Million Into $14 Billion With a 29% Annual Return. Here's Whether His "Invest in What You Know" Strategy Still Works Today.

There haven't been many better fund managers throughout history than Peter Lynch. Through his illustrious career, Lynch proved to be one of the best stock pickers in the investing world. Between 1977 and 1990, Lynch managed Fidelity's Magellan mutual fund and put up incredible returns. His annual average returns of roughly 29% helped turn $18 million into $14 billion over that time frame, far outperforming the broader stock market and making him one of the best on Wall Street.

When asked for advice for common investors, Lynch always recommended that people simply "invest in what you know." By this, Lynch refers to a concept in which people draw on personal experiences and their understanding of the products and services they use in their own lives to generate investment ideas.

Does this strategy still work today?

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Lynch's advice is a great way to generate investment ideas

While I can't provide a definitive, data-driven answer on whether Lynch's strategy is foolproof, I definitely think it still works and is important to anyone's investing process.

Looking at products and services you use in the real world is a great way to identify investment opportunities. Even the greats like Warren Buffett do it.

For instance, Buffett got the idea to purchase Apple for Berkshire Hathaway's massive equity portfolio when he saw how upset one of his friends was after losing his iPhone, Apple's flagship product. Today, Apple is the largest position in Berkshire's portfolio.

If there's a product you are really passionate about, there is a high likelihood that others feel the same and that the company has developed a real moat, which can lead to strong pricing power and margins.

Additionally, the prominence of social media and review websites has enabled investors to get more feedback on just about anything. There are certainly investors today who invest based on sentiment alone.

Blend real-world sentiment with the financials

That said, I would caution investors against making a big investment decision based on a gut feeling. Rather, it's best to make this the beginning of your research process, because a product or service's popularity may not be as strong as you think. Perhaps the company has spent a lot on a short-term marketing push. Or maybe the product costs too much to make, and the economics are poor. It's also important to ask how easily a product or service can be replicated.

On the other hand, many investors buy a stock because of a company's strong financials and don't bother to try its products or services. This is a big mistake as well because the numbers rarely tell the whole story.

Ultimately, investors should take Lynch's advice and buy stocks of companies that make accessible products or services you can test on your own.

But I think the best investors are testing a company's products and services in the real world and analyzing its financials and other corporate aspects. A blended approach is best.

Bram Berkowitz has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple and Berkshire Hathaway. The Motley Fool has a disclosure policy.