Saturday, April 13, 2013

Peter Lynch on Equity Investing

Below is a discussion investing by Peter Lynch, one of the most successful investors of all time and an inspiration for me from the 1980's.  In 1989 Lynch published one of the best and most famous investment books known as, "One Up Wall Street." I recently re-read my 1989 copy for about the tenth time.  Most if not all that he wrote about in 1989 is applicable today. Folks cannot go wrong reading this book and will likely be better investors for having done so.

Peter Lynch, the retired famous fund manager than ran Fidelity's Magellan Fund. Lynch was one of the best investors of all time. His approach is as relevant today as it was when he published the runaway investment best seller known as "One Up Wall Street" in 1989. Lynch's book dealt with how individuals can improve their performance as investors based on his investing principals. Listed below is the introduction from the book and the opening paragraph from chapter one. Having recently recovered from Boston jet lag, Lynch is on my mind and seems like a good place to start.

The themes and messages in these paragraphs are timeless and are applicable today.      

The Advantages of Dumb Money
"This is where the author, a professional investor, promises the reader that for the next 300 pages he’ll share the secrets of his success.  But rule number one, in my book, is: Stop listening to professionals! Twenty years in this business convinces me that any normal person using the customary three percent of the brain can pick stocks just as well, if not better, than the average Wall Street expert.

I know you don’t expect the plastic surgeon to advise you to do your own facelift, nor the plumber to tell you to install your own hot water tank, nor the hairdresser to recommend that you trim your own bangs, but this isn’t surgery or plumbing or hairdressing.  This is investing, where the smart money isn’t so smart, and the dumb money isn’t really as dumb as it thinks.  Dumb money is only dumb when it listens to the smart money.

In fact, the amateur investor has numerous built-in advantages that, if exploited, should result in his or her outperforming the experts, and also the market in general.  Moreover, when you pick your own stocks, you ought to outperform the experts. Otherwise, why bother?

I’m not going to get carried away and advise you to sell all of your mutual funds. If that started to happen on any large scale, I’d be out of a job. Besides, there’s nothing wrong with mutual funds, especially the ones that are profitable to the investor. Honesty and not immodesty compels me to report that millions of amateur investors have been well-rewarded for investing in Fidelity Magellan, which is why I was invited to write this book in the first place. The mutual fund is a wonderful invention for people who have neither the time nor the inclination to test their wits against the stock market, as well as for people with small amounts of money in invest who seek diversification.

It’s when you’ve decided to invest on your own that you ought to try going it alone. That means ignoring the hot tips, the recommendation from brokerage houses, the latest “can’t miss” suggestion from your favorite newsletter-in favor of your own research. It means ignoring the stocks that you hear Peter Lynch, or some similar authority, is buying.

There are at least three good reasons to ignore what Peter Lynch is buying: (1) he might be wrong! (A long list of losers from my own portfolio constantly reminds me that the so-called smart money is exceedingly dumb about 40 percent of the time): (2) even if he’s right, you’ll never know when he’s changed his mind about a stock and sold; and (3) you’ve got better sources, and they’re all around you. What makes them better is that you can keep tabs on them, just as I keep tabs on mine.

If you stay half-alert, you can pick the spectacular performers right from you place of business or out of the neighborhood shopping mall, and long before Wall Street discovers them. It’s impossible to be a credit-card-carrying American consumer without having done a lot of fundamental analysis on dozens of companies-and if you work in the industry, so much the better. This is where you’ll find the ten-baggers.  I’ve seen it happen again and again from my perch at Fidelity."
Part 1
Preparing to Invest
"Before you think about buying stocks, you ought to have made some basic decisions about the market, about how much you trust corporate America, about whether you need to invest in stocks and what you expect to get out of them, about whether you are a short-or long-term investor, and about how you will react to sudden, unexpected and severe drops in price. It’s best to define you objectives and clarify your attitudes (do I really think stocks are riskier than bonds?) beforehand, because if you are undecided and lack conviction, then you are a potential market victim, who abandons all hope and reason at the worst moment and sells out at a loss. It is personal preparation, as much as knowledge and research, that distinguishes the successful stock picker from the chronic loser. Ultimately it is not the stock market nor even the companies themselves that determine the investor’s fate. It is the investor."