Peter Lynch was a legend who beat the market in a way few greats could do. From 1977 to 1990, he averaged a 29.7% return with the Magellan Fund. It was the best-performing fund of the 1980s.
And yet, Lynch made mistakes. He jokingly admits to it often. He just did mistakes better than most investors too. Lucky for us, he had a knack for simplifying the difficulties of investing.
His ability to cut to the heart of what it takes to make money, in the long run, is refreshing. And yet it’s still mostly ignored because the riches don’t come quick enough.
As a guest on Wall Street Week, in 1990, he explained why patience is key. It was one of several common mistakes he covered during the segment. Be it market timing, predictions, not knowing what you own, or lack of effort, the mistakes are universal. Lynch’s take is a good reminder of the trouble we can get ourselves into at times.
You can find the complete conversation below.
Louis Rukeyser: For some other thoughts on what to do till the financial doctor comes, let’s go right over and meet tonight’s special guest Peter Lynch. Peter welcome. Always a joy to have you.
Peter Lynch: Great to see you.
Louis Rukeyser: When Peter Lynch first appeared as my guest on this program in 1982 his Fidelity Magellan Fund had about $350 million for him to invest. Today it has about twelve and a half billion dollars or considerably more than the entire gross national product of Guatemala. Well, you talk about a television program with an affluent audience. But while his five appearances here may not have hurt, much more to the point was that Mr. Lynch just kept on producing. Making Fidelity Magellan not just the largest but the single best performing mutual fund of the entire decade with a gain of more than 1,100%. Peter, what are you gonna do for an encore in the 90s?
Peter Lynch: Well I hope, I’ve said this earlier, my goal over a long period of time, not every year, would be the ability to beat the market by four or five percent. I think that’s a real fair objective. If I can do it, I’d be very happy and I think that would be an accomplishment for my shareholders.
Louis Rukeyser: You’ve told us over the years not to expect much from you. That your fund was getting too big but you keep on performing well. What are you doing differently? Why isn’t everybody doing as well as you are?
Peter Lynch: I think a lot of people spend so much time predicting the big picture. What the economy’s gonna do. What interest rates are gonna do. Alan Greenspan heads the Federal Reserve. He doesn’t know what’s gonna happen with interest rates. How the heck am I supposed to know what’s gonna happen with interest rates? So they spend too much time on that.
I think if you look at 10 companies, you’re gonna find one that’s interesting. You look at 20, you’ll find two. I mean, I looked at General Public Utilities after it doubled and I got a triple out of it. I’ve looked at companies with unions. I’ve looked at companies that are in, you know, very dead industries. People have been too focused. They’ll just say, “I only want to look at rapid growth fields.” I think that’s a big mistake.
Louis Rukeyser: What do you think of some of the other common mistakes small investors make?
Peter Lynch: Well one thing they do is they don’t understand what they own. And they also play the market. That single term “play the market” has done more damage. To think we’ve had this great eight-year bull market and people have lost money. It’s obvious they got into the market, they bought options, they get out.
You own a company. You don’t own a lottery ticket. If the company does well, like Walmart or Limited, you can do very well. You don’t have to buy it the first day. You could have bought Limited after it had 50 stores open. You could have bought Limited after it had 100 stores open. You have plenty of time to do a little bit of work. It’s not that hard.
People are very careful with their money. When they buy a refrigerator, they do some work. When they buy an apartment or rent an apartment, they’re careful. For some reason, when it comes to stocks, they just go coo-coo. They don’t do any work at all.
Louis Rukeyser: You have exemplified the patience you preach. You’ve said yourself, you’re big winners tend to come the second, third, fourth year you own them, not the first week or the first month. Where do you as a patient investor look now?
Peter Lynch: I think the great values today are more the obscure, the secondary companies. Companies such as Bergen Brunswig, Circuit City, Collins Foods, Henley Group, Hudson Bay Company. Companies like NERCO. I mean, those kinds of companies SIMS, Stewart & Stevenson, United Technologies, U.S. Shoe is attractive. I’ve got 25 more. I’m sure we run over The Masterpiece Theater. I mean, it’s more the obscure companies. The mainstream of companies have done very well. They need a rest.
Louis Rukeyser: You were ahead of the market last year in one respect in that you always avoided technology companies because you say you don’t understand what they do.
Peter Lynch: Right.
Louis Rukeyser: Are these all companies where you understand what they do.
Peter Lynch: I have a very good idea. Yes, a very good idea. U.S. Shoe I can understand. They finally have a comfortable shoe for women. Carolyn thinks this thing’s gonna work. Easy Spirit. She’s tried it. It’s comfortable. And they have a turnaround in Lenscrafters. I can understand these companies.
I do get caught up in technology. Normally near the high, I finally wind up and give up and buy ‘em. Now some of the technology stocks are actually cyclicals. There is a chance of companies like Intel. There’s a chance in companies like a turnaround could occur. Companies like Control Data or IBM. I’m looking at those as special situations.
Louis Rukeyser: Peter, before I turn over to the panel, I want to ask you one other question about your own performance. Which has been so spectacular, but I think it would be instructive to people. How often have you had big declines in your fund in the past decade?
Peter Lynch: Well I’ve had, in the 12 years I’ve run the fund, eight times the fund has declined 10 to 30%. Which is about equal to the stock market. In the last 70 years, the market has had 40 declines of 10%. 13 of those have averaged about 33%. Big ones. You know, I don’t think we’re having one like that coming but I think it’s very possible.
People have to say, “What’s the likelihood the markets gonna go down 10, 15%. What am I gonna do in a year when that happens? Am I gonna buy more shares? Am I gonna add to my funds?” If they’re gonna retire in a year, if they have to send their child to college in a year, they should be in a bank now. They should be in a money market. Stocks are very random over 12 months and that’s a big mistake. If you buy a three-month option, you discover that fast.
Louis Rukeyser: Let’s go to the three panelists. We’ll start with Carter Randall.
Carter Randall: Peter, your fund is highly diversified either because you want it that way or it has to be that way. How diversified should an individual be?
Peter Lynch: I think a person should only follow five or six companies. Sometimes they know something about it. They work in the chemical industry. They work in the insurance industry. They supply those industries. They have a big edge over me. They see those turn way the heck ahead of me. Or some local company they know something about. So I think we should follow five or six companies and maybe own one or two.
You only need one or two good stocks a decade. You don’t need a lot of action. People are so confused on that element. When you put $1,000 in a stock, all you can lose is a 1,000. I’ve proved it a lot of times. But you can make 10,000. You can make 15,000. You have to be patient. It doesn’t happen the first hour. For some years nobody can understand it. You lose money fast in the stock market. You can’t make it fast.
So first is, they should know what they own. That’s a huge error. If they can’t explain it to a fifth-grader, in one minute or less, and if their reason they own a stock is, “This sucker’s gonna go up,” they’re off to a rough start. It should be a real rational reason. They should be watching about five or six stocks.
John Dessauer: Peter, we seem to have a meltdown theory for everything every few years. The latest big meltdown theory and excuse for not owning stocks is because of real estate. We’re both from New England and we know there’s at least a little bit of truth to the fear. What would you say to people who are suffering from that anxiety?
Peter Lynch: There’s only been one major downturn since World War II in average housing. This occurred in Texas, Oklahoma, Louisiana. People moved there with their family, for a job in the oil boom. They moved to Alaska. They put 5% down on a house. The job went away. They left. They had no ties. They didn’t have grandchildren there. They didn’t have nephews. They didn’t have sisters. They left. They mailed in the keys.
Today, we have some very difficult commercial real estate markets. Especially in Arizona. Right now residential mortgages are doing fine in Arizona. People who moved to Arizona for a certain reason, they’re still there. 1,000 people a day are moving to California. I still really like companies that are in this business. Companies like Fannie Mae. Companies like Freddie Mac, Beneficial Corp., Primerica, Golden West Financial. The average mortgage is only $80,000 for these people. They have 65% loan-to-value. These are very strong positions. The average house rose 4% so far this year to $90,000. Apartment rentals are up 2% this year. We’re not having a wipeout in basic housing.
Louis Rukeyser: You mean last year, don’t you Peter?
Peter Lynch: Oh yeah, that’s right. What year are we? This is 1990. I never can handle that. So there isn’t a disaster coming on. There’s two in a half million more people working than a year ago.
Howard Colhoun: Peter, there are a lot of very bright people in the investment business that would like to have a record as good as yours. And they have resources similar to yours — chartrooms, analysts, statisticians. What do you think, when you look at yourself personally, is the skill that you have that differentiates you from all the other people that are maybe just as bright, trying just as hard?
Peter Lynch: Ok. I’m very lucky. I work at Fidelity. We don’t have any economists. We don’t predict the stock market. We just have about 25 or 30 very hardworking people. We’ll look at anything. We’ll look at companies in bankruptcy. I’ve bought ‘em before they went into bankruptcy. That wasn’t so great. But we look at everything. We’re very flexible. And it’s just a great company. And I think we buy companies that have all sorts of problems.
Some firms are so narrow. They won’t buy companies that start with the letter R. They say those managers are a bunch of jerks. We really emphasize company research. And I think that’s been the difference. Trying to get the big picture is so difficult.
Louis Rukeyser: Peter, we’re nearly out of time. You usually describe yourself as fully invested, not a market timer, but you have about 11% in cash. And that’s supposed to be the highest ever for you. What does that mean?
Peter Lynch: Well I’ve been buying stock every single day the last three months. For the first time in a long time, money has started coming into my fund. And I have not been able to find the stocks that I want. So I’m just gonna let it build up and put the money to work. I bought stock today. I’m gonna buy stocks on Monday. I don’t expect a big decline because the public has not been, like in 1987 and ‘83, the public came in very big. Foreign buying was extremely big. We have none of those elements today.
Louis Rukeyser: Thanks very much, Peter Lynch. Your confidence is always unfashionable but seems to work out over the years. Thanks again to our panelists. Hope you will be back with us next week.
This post was originally published on May 28, 2021.
Wall Street Week
- Marks Memo: The Illusion of Knowledge – H. Marks
- It’s Supposed to be Hard – M. Housel
- An Economist Studied Popular Finance Tips. Some Might be Leading You Astray – NPR
- How the Worst Market Timer in History Built a Fortune – Compound Advisors
- What Bond Fund Investors Get Wrong – J. Rekenthaler
- Testing the Patience of Value Investors – Evidence Investor
- It Starts with Inflation – R. Dalio
- The Taxonomy of Bear Markets – F. Martin
- Focus and Finding Your Favorite Problems – Neckar
- Defiant Energy – Orion
- How Do You Make the Perfect Toy? – The Walrus
- The 100 Greatest Albums of All Time – Consequence of Sound