The Peter Lynch Crayon Test Could Save Your Investment Portfolio

Peter Lynch, the gentleman that achieved 29% annual returns while running Fidelity’s Magellan Fund from 1977 through 1990, is famous for saying that you should never invest in any idea that you can’t illustrate with a crayon. A variation of this advice is that you should never own a business where it takes more than a few sentences to explain how the company turns a profit.

The highest-quality businesses can usually be explained quite simply.

Coca-Cola makes its profits by making syrup concentrates that allow them to make about $0.30 or so on every dollar once it is said and done.

Hershey sells chocolate in varying serving sizes in such a way that the company can achieve 16% total returns on assets.

Philip Morris International manufactures cigarettes for pennies per pack, and sells them for $5-$10 per pack.

Procter & Gamble sells household products like Tide Laundry Detergent, Gillette razors, … Read the rest of this article!