Peter Lynch’s Wisdom
Peter Lynch’s Wisdom
https://www.thegoodinvestors.sg/peter-lynchs-wisdom/
A rare public appearance from an investing legend.
Earlier this month, Peter Lynch was interviewed by Josh Brown, CEO of the US-based Ritholtz Wealth Management. Lynch is one of the all-time greats in the investing world. During his tenure as portfolio manager of the Fidelity Magellan Fund from 1977 to 1990, he produced an annualised return of 29%, nearly double that of the S&P 500 over the same period.
Lynch had written a number of books in the late 1980s and early 1990s (see here and here) in which he generously shared his investing philosophy techniques. But as far as I know, he has rarely given interviews since he retired as the Magellan Fund’s portfolio manager in 1990. So, when Brown’s interview of Lynch popped up on my radar, I took notes that I want to share. What’s shown between the two horizontal lines below in italics are my favourite parts of their conversation.
- The dotcom bubble in the late 1990s saw nonsensical companies come public
Brown: I wanted to ask you if there were ever moments where you looked at something that was happening in the market, whether it was a bull market or a bear market, and said to yourself, “If I were at Magellan, I know exactly what I would be doing right now with this opportunity.” Have you had those moments?
Lynch: Yeah, I did have that moment when Pets.com came public. I said, “What? This makes no sense at all.” And then went up. I can’t short. But there were so many companies of no value. Fortunately, Fidelity didn’t own those damn things. That was a period to say, “Wow, what’s wrong here?”
- It’s really important for investors to know the businesses of the stock they own, because the average stock goes up-and-down by 100% a year and it would be easy to be scared out of them without knowing the business
Lynch: The average range for a stock on the New York Stock Exchange, the average high, average low, every year is 100%. The stock might start at $20, sell at $28, finish at $14, finish at $20. There’s a 100% move.
Brown: It’s 50% up, 50% down-ish. And that’s a 100% swing in the price.
Lynch: That’s the average stock. Most stocks you’re going to buy, they’re probably going to go down. If the story is powerful, like Watsco or Chrysler, you might buy it up. If you don’t know what they do and it goes down… I’ve had people say, “This stock’s gone from $50 to $1. How much can I lose?” And I say, “Wait a second. If somebody put $10,000 in at $50 and you put $50,000 at $1, if it goes to $0, who loses the most? Stocks go to $0. I’ve had them. I wasn’t buying them on the way to $0, but stocks go down. If you don’t understand what they do, if you can’t explain to an 11-year-old in a minute or less why you own it – not this sucker is going up, I’ve heard that one before. What’s the story of this company? They have good business, good balance sheet, they’re fine. That’s why I own it. If you can’t do that, you should buy a fund.
- Investors should not put money in the stock market if they need the money in the next few years
Lynch: The point is, if somebody has three children about to start college in two years, they shouldn’t be in the stock market. They should be in the money market fund. But if you got your house, paid down your mortgage, then you can invest and it’s been a great place to be since 1900.
- Economic forecasts are not useful – current economic facts are
Brown: One of the more timeless things that you’ve said, and it comes off as sarcastic, but I think the last 15 years have really proven the value of this idea. Coming out of the great financial crisis, the most in-vogue style of investing was macroeconomic hedge funds, because there were a small handful of people who determined that the housing crisis would ultimately bring about a recession, and those people were revered for a couple of years. You’ve never really been big on trying to outguess everyone else on the economy. You said, “If you spend more than 13 minutes analyzing economic and market forecasts, you’ve wasted 10 minutes.” I still quote you to this day when clients call up and they want to talk about the latest labor report or what the Fed’s going to do. Tell us how long did it take you to figure that out and how much push back did you get when you said it, from people that were economists or focused on the macro?
Lynch: I don’t remember if Fidelity ever had an economist. We just buy stocks…
Brown: She’s here tonight.
Lynch: Okay. So, I’d love to get next year’s Wall Street Journal. I’d pay at least $5 for next year’s Wall Street Journal. And hands off to the people who did The Big Short. I had no idea how bad the housing market was, how bad people had second mortgages, they had home improvement loans, they were underwater in their house. I had no idea. Hats off to them. But I look at facts, like what’s happened to debt, credit card debt, you can get that now. What’s happened to savings rate? What’s happened to employment? I’d love to know what’s happening in the future. I’ve been hoping I could get that in the last 81 years. It’s not available. So I just deal with what’s now. What’s happened to used car prices? What’s happened to the price of oil? And you look at industries that have gone from miserable to getting better, like Chrysler. I remember people saying, “You were really good on that show but how could you possibly recommend Chrysler? It’s going bankrupt.” They had $2 billion in cash and they had enough money for the next three years. They weren’t going bankrupt. I think the best stocks I had, I think if 100 people did work on it, 99 would say that’s better than I expected. I use this for one of our great fund managers, Joel Tillinghast. I wrote a foreword to his book and I always said, “The person that turns the most rocks wins the game.” I said, “Joel Tillinghast is a great geologist.” Because if you look at 10 stocks, you probably find one that’s mispriced. Look at 20, you’ll find two. Look at 40, you’ll find four. And that’s what we’ve been doing at Fidelity. We look at everything.
Brown: So, you’re not discounting the value of economic data. You’re saying if it’s not from the future, the market already understands this.
Lynch: I mean I just want to know facts right now.
- The hallmark of a great investor is the ability to change one’s mind
Lynch: So I pick up the phone. “This is Warren Buffet from Omaha, Nebraska. My annual report’s due in two weeks. I love a quote. Can I use it?” This is all in about three seconds. “What’s the quote?” He says, “Getting rid of your winners and holding the losers is like watering the weeds and cutting the flowers.” I said, “It’s yours.” He said, “If you don’t come to Omaha and see me, your name will be mud in Nebraska.”
Brown: Did you do it?
Lynch: Oh, yeah. Many times. He’s the best.
Brown: You built a relationship with Warren.
Lynch: Played bridge together. He’s the best. Imagine, he bought Apple like eight years after that iPod story and made fivef-old. And he had a huge position in IBM, it was going down. He says “I love stocks going down. I think IBM’s great.” He totally reversed. He got the hell out of IBM. He’s the best.
- Investors don’t need to be chasing the fad-of-the-moment
Brown: I wanted to ask you about the modern stock market, specifically the AI boom that’s been for the last 3 years arguably the biggest driving force behind earnings growth, behind revenue growth, excitement about stocks. What do you think about it when you watch it or how involved are you with AI stocks with your own money right now?
Lynch: I have zero AI stocks. I literally couldn’t pronounce NVIDIA until about eight months ago. But we have people that are very tech. I am the lowest tech guy ever. My wife is mechanical, my daughter’s a mechanical engineer, I can’t do anything with computers. I just have yellow pads and a phone.
Brown: From your position as a third party to this, do you think investors have chased these ideas too far? Are there echoes of the 1999, 2000 era to you when you look at it, or are you open-minded about it and you say “Maybe this is not going to end as badly as that instance did?”
Lynch: I have no idea. Don’t have any. I have a lot of stocks I like, but not in that category.
- The US economy has learnt many lessons over the course of decades and have built multiple buffers against crises, so the probability of another massive economic crash in the future is lower today than it was decades ago
Lynch: Yeah. So, we’ve had an incredible bull market since ‘82. We’ve had 10 or 12 declines, maybe a few more. So, people today, they’re not used to…
Everybody I knew grew up, they’re warned, the big one’s coming. We’ve had 11 recessions since World War II. We’ve never had a big one. Imagine in the Depression, we didn’t have social security. There wasn’t social security. What a criminal invention. People when they retire, they got older, they moved in with their family. The family had to cut back on their spending. We didn’t have unemployment conversation. We didn’t have the SEC. The SEC did not exist. There’s so many things that are better. And we had a Federal Reserve that was asleep, to Booth. This, 1929, no one jumped out of windows.
Brown: That was fabricated, you said.
Lynch: 1% of Americans owned stocks in 1929.
Brown: I don’t think a lot of people understand that. The losses were very contained to a small group of people.
Lynch: But we had an incredible depression. 30% of people out of work, not enough food, terrible farming environment. It was awful and people went through that. I’ve read stories about it. It was grim.
Brown: You think we have evolved the economy and the markets to the point where it would be very difficult to repeat the “Big One”.
Lynch: We’ve had 11 tests, 11 recessions since, and no one’s ever got worse than, 5%, 6% decline in GDP. There’s a lot of cushions now. 63% of Americans own their house. That was not true in the 1920s. People have IRAs that if they’re Fidelity, they’re not going to panic. People are careful with their savings. The GI Bill allowed people to buy houses with 5% down and create a lot of people with wealth. Most wealth in America is in their house. That was not true in the 20s. People were renting, rent went up. There’s so many buffers now. It’s incredible how many positives there are. We had a lot of tests. We had many opportunities to have a big one. We’ve had some probably bad presidents, some bad congresses, we’ve had bad economists, and we’ve made it through. It’s a pretty good system.
Brown: I like that message for people who are overdosing on Great Depression content on their social media feeds and constantly being fed that as a realistic possibility.
- AI may take away some jobs in the US economy, but it’s not taking away the ingenuity of the country’s entrepreneurs, and that has been, and will be, the key driver of the country’s growth
Brown: From your point of view, the people displaced by AI and other innovations to come in the future, they’ll be doing something else. It’s unlikely they’ll be sitting there saying, “I wish I still had my job that AI took away.”
Lynch: I think more importantly, one job is going to go away. These are good paying jobs. The people that drive a truck, a tractor trailer from a manufacturing firm to a distribution center on highways, not through Beacon Hill, they go back that night. That should be automated.
Brown: And likely will be, you would say?
Lynch: I would say in 20 years, we’ll lose 500,000 jobs. And safety will be better, costs go down. That’s more important to me than AI. Those are people, working hard. They don’t need a…
Brown: Sorry, automation is going to have a bigger impact than AI, you’re saying?
Lynch: Automation has been incredible the last 50 years. We’ve gone from 100 million jobs to 153, and Eastman Kodak’s gone down, [indecipherable] gone down. Sears has gone away. All the growth is new companies and companies with 100 to 200 employees or less. The largest 500 companies have fewer employees than they did 50 years ago. The largest 500 companies have fewer employees than they did 50 years ago. All the growth in this country is entrepreneurs starting a little shop, starting something else. That makes our country great.
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