One of my favorite Peter Lynch interviews is one he did with PBS. Lynch ran Fidelity’s Magellan Fund for thirteen years (1977-1990). In that period Lynch he averaged a 29.2% annual return, consistently more than doubling the S&P 500 market index and making it the best performing mutual fund in the world. During his tenure, assets under management increased from $18 million to $14 billion. Lynch has also written three great books, Beating The Street, Learn To Earn, and One Up On Wall Street.
While it’s a very long interview worth reading in its entirety, I pulled out four of his most important lessons for investors. Here’s an excerpt from that interview:
On what is the secret to investing:
Well, I think the secret is if you have a lot of stocks, some will do mediocre, some will do okay, and if one of two of ’em go up big time, you produce a fabulous result. And I think that’s the promise to some people. Some stocks go up 20-30 percent and they get rid of it and they hold onto the dogs.
It’s sort of like watering the weeds and cutting out the flowers. You want to let the winners run. When the fun ones get better, add to ’em, and that one winner, you basically see a few stocks in your lifetime, that’s all you need. I mean stocks are out there. When I ran Magellan, I wrote a book. I think I listed over a hundred stocks that went up over ten-fold and I owned thousands of stocks. I owned none of these stocks. I missed every one of these stocks that went up over ten-fold. I didn’t own a share of them.
I still managed to do well with Magellan. So there’s lots of stocks out there and all you need is a few of ’em. So that’s been my philosophy. You have to let the big ones make up for your mistakes.
In this business if you’re good, you’re right six times out of ten. You’re never going to be right nine times out of ten. This is not like pure science where you go, “Aha” and you’ve got the answer. By the time you’ve got “Aha,” Chrysler’s already quadrupled or Boeing’s quadrupled. You have to take a little bit of risk.
On investors lack of research before making a stock purchase:
Well, for some reason, the public looks at stocks differently than they look at everything else. When they buy a refrigerator, they do research. When they buy a microwave oven, they do research. They’ll get Consumer Reports. They’ll ask a customer “What’s your favorite kind of oven? What kind of car would you buy?” Then they’ll — they’ll put $10,000 in some zany stock that they don’t even know what it does that they heard on a bus on the way to work and wonder why they lose money, and they do it before sunset. Well, you’ve got plenty of time. You could have bought Wal-Mart ten years after it went public — Wal-Mart went public in 1970. You could have bought it ten years later and made 30 times your money. You could have said, “I’m very cautious. I’m very careful. I’m gonna wait. I want to make sure this company — they’re just in Arkansas and I want to watch ’em go to other states.”
So you watch, five years later the stock’s up about four-fold. You say, “I’m still not sure of this company. They have a great balance sheet, great record.” I’m going to wait another — wait another five years, it goes up another four-fold.
It’s now up twenty-fold. You still haven’t invested. You say, “Now I think it’s time to invest in Wal-Mart.” You still could have made 30 times your money because ten years after Wal-Mart went public they were only in 15 percent of the United States. They hadn’t saturated that 15 percent and they were very low cost. They were in small towns. You could say to yourself, “Why can’t they go to 17? Why can’t they go to 19? Why can’t they go to 21? I’ll get on the computer. Why can’t they go to 28?” And that’s all they did. They just replicated their formula. That doesn’t take a lot of courage. That’s homework.
On market timing:
People spend all this time trying to figure out “What time of the year should I make an investment? When should I invest?” And it’s such a waste of time. It’s so futile. I did a great study, it’s an amazing exercise. In the 30 years, 1965 to 1995, if you had invested a thousand dollars, you had incredible good luck, you invested at the low of the year, you picked the low day of the year, you put your thousand dollars in, your return would have been 11.7 compounded.
Now some poor unlucky soul, the Jackie Gleason of the world, put in the high of the year. He or she picked the high of the year, put their thousand dollars in at the peak every single time, miserable record, 30 years in a row, picked the high of the year. Their return was 10.6. That’s the only difference between the high of the year and the low of the year. Some other person put in the first day of the year, their return was 11.0. I mean the odds of that are very little, but people spend an unbelievable amount of mental energy trying to pick what the market’s going to do, what time of the year to buy it. It’s just not worth it.
On buy and hold investing:
They should buy, hold, and when the market goes down, add to it. Every time the market goes down 10 percent, you add to it, you’d be much — you would have better return than the average of 11 percent, if you believe in it, if it’s money you’re not worried about. As the market starts going down, you say, “Oh, it’ll be fine. It’ll be predictable.”
When it starts going down and people get laid off, a friend of yours, loses their job or a company has 10,000 employees and they lay off two. The other 998,000 people start to worry or somebody says their house price just went down, these are little thoughts that start to creep to the front of your brain. And they’re the back of your brain.
And human nature hasn’t changed much in 5,000 years. There’s this thing of greed versus fear. The market’s going up, you’re not worried. All of a sudden it starts going down and you start saying, “I remember my uncle told me, you know, somebody lost it all in the Depression. People were jumping out of windows. They were selling pencils and apples.” It must have been a great decade to buy a pencil or an apple, but they were always — there must have been everybody selling pencils. That start to — we laugh about it. People start to think about these things with the market going down. These ugly thoughts start coming into the picture. Gotta get ’em out. You have to wipe those out and you — you either believe in it or you don’t.
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