Louis Rukeyser was a sounding board for reason in irrational markets. For three decades, he hosted Wall Street Week. He pushed against the ever-shrinking attention span of Wall Street by promoting a longer-term mindset.
Anytime markets got wild, Rukeyser filled his panel with a few legends to help cut through the noise. Few guests did it better than John Templeton and Peter Lynch.
Both were guests on the 20th Anniversary show in 1990 and shared some timeless principles. Their conversation is a good reminder of how distracting the market can be.
Whether it’s market predictions, the latest economic indicator, someone else making fast money, or a spike in volatility, it diverts your attention from what matters. That’s when investors get into trouble.
The solution is patience. Focus on the long term. Understand what you own. Bigger market swings should be expected. Always keep price and value front of mind.
A transcript of their conversation is below.
Louis Rukeyser: Earlier this year we asked viewers whom they would nominate as their own favorites for the new Wall Street Week With Louis Rukeyser Hall of Fame. Four guests were honored in the first installation this year. Two of them, unfortunately, are no longer living but the other two are sitting together at this table — a happy coincidence — Peter Lynch, who led the Fidelity Magellan Fund to the best record of any mutual fund over the past 15 years and John Templeton, that giant of two generations of international investing, who reminded us that the financial world does not end where people stop speaking English.
Peter, you retired in June at the ripe old age of 46 and that was one month before the Dow Jones Industrials hit their all-time high. Was this timing intentional? Were you just getting out while the getting was good?
Peter Lynch: No. Obviously, I had no idea what was going to happen in Kuwait. I think the most important thing I’ve learned in the last 20 years is what’s happened to corporate profits. It’s magic, that in 20 years, the Dow Jones Average has tripled and the profits of the Dow Jones companies have tripled. It’s a direct relationship — what happens to a company’s earnings and what happens to their stocks. And that’s the key thing over time.
Louis Rukeyser: Many people argue about whether markets are undervalued or overvalued. Are you suggesting then that they’re usually fairly valued?
Peter Lynch: They’re always fairly valued. When you look at the last 20 years, Avon products and Sears — these are great companies 20 years ago. They’ve fallen 30, 60 percent in price in the last 20 years. And over the same period of time, Merck, Coca-Cola have had their profits go up 15 fold. And guess what? Stock’s gone up 15 fold. So even if the Dow Jones today was 500, you’d been very happy to own Coca-Cola and Merck. So there’s a direct relation. That’s what you have to concentrate on.
There are people that own electronic stocks that don’t know the difference between an EEPROM and the senior prom and they’re trying to buy stocks. And the amazing part is the public is very careful with their money. When they buy a dishwasher, when they buy a TV set, when they rent an apartment, they’re careful. When it comes to the stock market for some reason they just don’t do any work. It’s not that much. A half an hour of work would save them a fortune.
Louis Rukeyser: What would they do in that half-hour?
Peter Lynch: They would first of all see if the company has sales and profits. A lot of times they buy companies, there’s nothing there. There’s literally nothing there. There’s nothing to look at.
If you look at most companies and say to yourself I’m going to tune in later on this company — I’ll give you an example. Wal-Mart started as a public company one month before this show. At that point, they had 37 stores. It was October of 1970, at that point. 10 years later you could have tuned into Wal-Mart. Their profits are up 20 fold and the stock was up over 20 fold. It still had another 10 years left. Profits went up 25 fold in the last 10 years. You can make 25 times your money again. You have plenty of time. You don’t have to make money. My best stocks have been in the third year, the fourth year, the fifth I owned them. It’s not the third week, the fourth week. People want the money very rapidly. It doesn’t happen that way. They’re gonna be very disappointed in the stock market.
Louis Rukeyser: Let me bring John in because you told me last time we talked on the air that you are now holding stocks for an average of five years. Is that still true?
John Templeton: Yes Louis. We don’t intend to hold ‘em five years but we find if you buy things when they are terribly unpopular and depressed, they don’t suddenly come back. You have to be patient.
Louis Rukeyser: Peter said the market, in the end, is fairly valued. You’ve made a career of seeking bargains. So you sometimes must think it’s undervalued.
John Templeton: Very much so. Yes. Very rarely is any share valued for its true price — true value. They go, in a single year’s time, 50 percent too high and 50 percent too low. So it really pays to judge the values of corporations by the thousands in order to be able to tell which one has the lowest price today in relation to its true value.
Louis Rukeyser: This past weekend I was with a group of academics — I mix with all segments of society — and they told me that nobody can analyze stocks. That it’s all just a random walk and a very efficient market and the kind of advice that you people give, the kind of analysis you do, is worthless. How do you reply to them?
John Templeton: That’s just resigning from the game. If you take the game of tennis, exactly as many losers as winners, but that’s no reason to give up playing tennis.
Louis Rukeyser: Peter you talked about the mistake of impatience. What are some of the other mistakes people make? And then let John answer that as well. You start off.
Peter Lynch: Well, it’s obviously not doing their homework and not looking to the company. If you don’t know what they do, you have a rough start. Because the market, in the last 20 years, had 10 declines of 10 percent or more. And great companies go down. And in those declines, you have a great opportunity. I remember when the market went down in 1987, Dreyfus fell to $17 a share. They had $17 a share in cash. I mean that was ridiculous. So you have to take the opportunities.
Most people have the brain power. Almost everybody on this planet has the brain power to make money in the stock market. The question is whether you have the stomach for it and whether you’re willing to do a little bit of work? Those are the key elements. It’s not that hard.
If anybody looked at Dunkin Donuts or if they look at General Public Utilities. I looked at General Public Utilities two years after Three Mile Island, it already doubled and I was able to make four times my money on it. The company was solid.
Louis Rukeyser: What’s your answer, John?
John Templeton: The main thing that people need to learn is that selecting assets is totally different from almost every other activity. If you go to 10 doctors and they tell you the same medicine that’s the thing to take. You go to 10 engineers to build a bridge they tell you the same thing that’s the way. But if you go to 10 investment advisors and they pick out the same asset, you better stay away from ‘em.
To say the same thing, in other words, the time when an asset is selling at its best bargain price is when most people are trying to sell. There’s no other reason why an asset will go down to a bargain price. And if you wait until it gets through the tunnel and out into the sunshine you’ll have to pay a premium price. If you even wait until you can see the light at the end of the tunnel, you already passed the best bargain days.
Louis Rukeyser: Many people think it’s foolish to be a long-term optimist because we have so many problems in this country — with problems of debt public and private, problems of less than perfect political leadership in either party, problems of a growing international competition. How can you buy stocks? Why don’t you just run for the hills?
Peter Lynch: Well, the beauty of a stock is if you put a thousand dollars in a stock, all you can lose is a thousand. I mean, I’ve proven that many times. If you’re right, you can make five thousand. You can make ten thousand. And you don’t have to be right half the time. If you’re right three times out of 10, and the times you recognize the company’s doing well and you understand what they do, you add to it and you take advantage of it. You can make a lot of money.
Louis Rukeyser: You’re talking about finding companies. Does the overall state of the economy not affect you at all?
Peter Lynch: You never can predict the economy. You can’t predict the stock market.
When you look at Dunkin Donuts, you say they have the best donut chain. You don’t have to worry about Korean imports. You don’t have to worry about what’s happening with M1 and M3b. You just say to yourself they’re doing well.
Louis Rukeyser: We know what to give you for dessert.
Peter Lynch: That’s what it all comes down to — what happens to the company. You don’t own a lottery ticket. Time’s on your side when you own a stock. You work with that company and you’ll do well.
Louis Rukeyser: What do you think, John? We look to the future. You never think it’s a dark future but what do you say about these problems?
John Templeton: There will be bear markets about twice every 10 years and recessions about twice every 10 or 12 years but nobody has been able to predict them reliably. So the best thing to do is to buy when shares are thoroughly depressed and that means when other people are selling.
Louis Rukeyser: Is this one of those times right now?
John Templeton: In all of my 50 years of investment counsel, I cannot recall a month in which there was such an almost universal pessimism as the one last month in October. So that doesn’t prove that we can’t get still more pessimistic, but if you’re already the most pessimistic in 50 years you must be somewhere near the bottom.
Louis Rukeyser: At the start of the past decade you electrified our audience by predicting that we could get to around 3,000 in the next decade. They laughed when you sat down to play but it turned out to be almost precisely right. Carter has now stolen a march on you. He predicted 10,000 in 20 years. But what do you see in 10 and 20 years?
John Templeton: I think the next 20 years will be just as marvelous as the past 20. In the past 20 years, the standard of living has gone up 60 percent, the earnings have gone up threefold. The dividends have gone up threefold. The gross national product has gone up fivefold. And I would think, our studies indicate, that that would be what we expect for the future including share prices. The share prices have normally doubled in America about every 10 years. So 20 years out, they should be four times as high.
Louis Rukeyser: People say to me, John, now you’re approaching middle age yourself so when you get there you’ll have to answer this question personally. People say to me, “Gee, I’m 62 years old. I can’t afford to buy stocks. I need income.” What do you say to those people?
John Templeton: They would come out much better if they would buy a well-managed common stock fund and then just tell the fund to send them what income they need to spend. Almost every mutual fund will send you whatever you request per year or quarter or month. So it’s a standard system and if you trace it back, investing that way will give you the income you want plus capital gains.
Louis Rukeyser: Peter, do you believe that stocks will continue to outperform other investments?
Peter Lynch: Absolutely. Particular stocks. You have to be very careful. That’s the key point. Some stocks, in the next 20 years, a lot of money is gonna be made and a lot of money is gonna be lost.
I think the people that gamble and they buy options, what a tragedy if you’re right on a company and you have a three-month option on it or a six-month option. Times on your side, if you own the right companies and you follow them.
Some people are playing, it’s like playing poker without looking at your cards or playing bridge without looking at your cards. They own companies and they don’t look at it. They call the broker twice a day to get the price of the stock. That doesn’t count. You have to do a little bit of work. You have to be out to the malls. Maybe half an hour a month looking at why do you own this company. If the reason is this sucker is going to go up, that’s not a very good reason.
Louis Rukeyser: You said earlier that you like companies to have earnings. You realize that many brokers will think that that’s needlessly picky.
Peter Lynch: Well, when I when I look over the last 20 years, I think more of the turnaround at Chrysler, the turnaround of Ford, the turnaround of Boeing. You have to say yourself does this company have a reasonable chance of turning around, do they have good products, and are they going to be solvent?
It would be really sad to own a company when they’re doing badly. Because I used to follow the textile industry. They had a great expression. It’s always darkest before pitch black. When you thought things were bad, they always get worse. You want to look to see is this company gonna be around? It’s a very important statistic.
Louis Rukeyser: Thank you both for your common sense and your optimism at a time when we need both. We look forward to years more of your very special wisdom from both of you.
Wall Street Week, November 16, 1990