Better Than Buffett!?
Meet Peter Lynch
$
18 million to $14 billion in 13 years? Check. Averaged more than double the return of the S & P 500 during his tenure? Check. In the 1980s managed the best performing mutual fund in the world? Check. Down to earth, nice guy? Check.
Bio
This is Peter Lynch, who rose from humble beginnings to become a financial legend. Born in 1944 in Newton, Massachussetts, Lynch did not seem destined to become a financial titan. Unfortunately, when he was ten Peter's father passed away from brain cancer, leaving his family struggling to make ends meet. Lynch's mother had to work very hard to support the family, with Peter caddying during his teens to help. Lynch graduated from Boston College in 1965, then earned his M.B.A. from the Wharton School of the University of Pennsylvania in 1968.
One Up On Wall Street
In 1989, Lynch received a call from none other than the Oracle of Omaha himself. According to Peter, it started, "This is Warren Buffett, from Omaha, Nebraska. And I love your book One Up On Wall Street." One Up On Wall Street is full of wit and wisdom and is highly recommended to all Financial Education Today readers. In case you don't have time to read it, here are five lessons from the book:
Lesson One: Beating The Market Is Possible
Smart money isn't always so smart:
Lynch encourages the amateur investor to beleive in him or her self and to take the advice doled out by professional investors with a grain of salt.
"To the list of famous oxymorons- military intelligence, learned professor, deafening silence, and jumbo shrimp- I'd add professional investing."
This is supported by the data, over thirty years after the original publication of One Up On Wall Street. According to CNBC in 2022, nearly 80% of active fund managers fail to even match the performance of the S and P 500! Read more about it here.
Lynch goes on to say, "Since 70 percent of the shares in major companies are controlled by institutions, it's increasingly likely that you're competing against oxymorons whenever you buy or sell shares. This is a lucky break for you. Given the numerous cultural, legal and social barriers that restrain professional investors (many of which we've nailed up ourselves), it's amazing that we've done as well as we have, as a group."
Lesson Two: Boring Is Beautiful, Embrace The Ick
Invest in boring, depressing, gross things:
Yes, you read that correctly. One of Lynch's more counterintuitive yet valuable insights is to invest in companies and businesses that are off-putting but still profitable. The idea is that these stocks are often overlooked so you can buy them at a discount, whereas one often has to purchase sexy, exciting stocks at a premium.
In One Up On Wall Street, Lynch states, "Better than boring alone is a stock that's boring and disgusting at the same time. Something that makes people shrug, retch or turn away in disgust is ideal."
Conversely, regarding exciting stocks Lynch says, "If I could avoid a single stock, it would be the hottest stock in the hottest industry, the one that gets the most publicity, the one that every investor hears about in the car pool or on the commuter train- and succumbing to the social pressure, often buys." A modern champion of this method is Codie Sanchez, who has made a small fortune off buying boring businesses.
Lesson Three: What's Your Area of Expertise?
Invest in what you know:
One of Lynch's best insights is to invest in things you are familiar with. This is related to Warren Buffett's idea of staying within one's "circle of competence". However, Lynch takes it one step further and encourages people to invest in their areas of concentration or their chosen profession.
As he eloquolently states in One Up On Wall Street, "In general, if you polled all the doctors, I'd bet only a small percentage would turn out to be invested in medical stocks, and more would invested in oil; and if you polled the shoe-store owners, more would be invested in aerospace than shoes, while the aerospace engineers are more likely to dabble in shoe stocks. Why it is that stock certificates, like grasses, are always greener in somebody else's pasture I'm not sure."
Lesson Four: Hunt The Big Game
Find "tenbaggers":
Lynch attributes much of his success to investing in and holding onto tenbaggers.
"In Wall Street parlance a "tenbagger" is a stock in which you've made ten times your money. I suspect this highly technical term has been borrowed from baseball, which only goes up to a fourbagger, or a home run. In my business a fourbagger is nice, but a tenbagger is the fiscal equivalent of two home runs and a double. If you've ever had a tenbagger in the stock market, you know how appealing it can be."
An important aspect of how this works is the asymmetric risk/reward profile of stocks. Consider this scenario you invest in five stocks, one of which goes bust, three of which matched the market's return and one which becomes a ten bagger. Your investments would greatly outpace the market return due solely to the performance of the tenbagger.
According to Lynch, "in a small portfolio even one of these remarkable performers can transform a lost cause into a profitable one. It's amazing how this works."
Lesson Five: Stay In Or Get Out
Don't try to time the market:
Want to try to time the market to know exactly when to be in and when to be out? According to Lynch this is a probably a bad idea. Instead of analyzing geoolitics trying to know when to get in and out of the market, Lynch advocates for seeking out exceptional stocks in industries and fields you understand.
As Lynch states, "there are 60,000 economists in the U.S., many of them employed full-time trying to forecast recessions and interest rates, and if they could do it successfully twice in a row, they'd all be millionares by now."
Conclusion
So there you have it, five lessons from one of the greatest investors of all time. For a more in depth look inside the mind of Peter Lynch, his books One Up On Wall Street and Beating The Street are highly recommended. They are chock full of financial wisdom, as well as being witty and well-written. Click here for more financial wisdom in our "Five Lessons From" series.
Invest in yourself and your financial education today. Click here to purchase One Up On Wall Street.
