Fidelity's Magellan Fund Manager Peter Lynch Was a Stock-Picking Rockstar in the 1980s, Averaging an Annual Return of 29%. Could His Top Rule Then Work for You Now?

You're probably aware that Warren Buffett led Berkshire Hathaway to a market-beating performance for the better part of the past few decades using simple -- not complicated -- investing rules.

If you were in the market in the 1980s, though, then you also know Buffett wasn't the only stock-picker with superior stellar results around that time. Fidelity's Magellan Fund (NASDAQMUTFUND: FMAGX) manager Peter Lynch was reliably hot during that era too, with an average annual gain of 29% that inflated the fund's assets from $18 million to $14 billion while he was at the helm between 1977 and 1990.

The secret to his success? It was also his favorite advice to investors: "Invest in what you know," mirroring Buffett's famous advice to "never invest in a business you cannot understand." The question is, given how different the market environment is now compared to then, does Lynch's top tip still work?

Not really. Here's why.

It's just different now

Don't misunderstand. Knowing something certainly can't hurt. Lynch's lesson was learned, however, at a time when it was possible to know more about a particular business than most other investors could. The advent of the internet in the meantime means every investor now has access to all the same information you do at any given time.

So simply investing in what you know doesn't translate into a strategic edge just because plenty of other investors know, see, and understand the exact same information.

Image source: Getty Images.

Perhaps the bigger reason simply investing in what you know doesn't necessarily result in market-beating returns, however, is that what the market -- the crowd -- rewards now is much more generous than what it rewarded then. Then, a company would likely need to have already become profitable before the bulls became bold enough to buy en masse. Now, investors are willing to pile into a name well before it has any chance of swinging to a profit, pricing in its distant future.

The thing is, it works. Think stocks like Amazon or Tesla, both of which soared well before either company turned profitable, and as such were unlikely brilliant performers for their earliest shareholders. Back in the 1980s, though, investors (including Peter Lynch) probably would have been happy to keep an eye on such companies, but most would have likely only become interested enough to buy their stocks once sustained profits materialized.

It would also be naïve to ignore the other thing that's since changed. Then, even aggressive, high-risk stocks were viewed as long-term holdings, sidestepping the risk of chickening out of a position at the exact wrong time. Today, cheap online trading arguably makes it too easy to get in and out of a position, adding to the very volatility that separates a stock from a reasonable valuation.

Ignore the modern-day disconnect at your own peril

By all means, invest in what you know. And learn more so you can invest in more.

Just understand that investing in companies and businesses you know alone won't necessarily translate into superior returns these days. Navigating the modern-day market environment means acknowledging that valuations can and do reach -- and remain at -- levels that may or may not reflect the underlying value of a business like they did when Peter Lynch was managing Fidelity's Magellan fund back in the 80s.

James Brumley has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon, Berkshire Hathaway, and Tesla. The Motley Fool has a disclosure policy.