Peter Lynch is an investment legend that rarely gives speeches or appears in the media. You will never see him talking in CNBC or showing in Bloomberg TV. On October 21, 2006 I was fortunate to attend the second MIT Sloan Investment Management conference where Mr. Lynch was one of the speakers. For those who do not know who is Peter Lynch, this guy was the portfolio manager of Fidelity’s Magellan Fund from 1977 to 1990 and is a true investment legend. His fund is the best performing mutual fund in history. This is evidenced by the fact that he started with just $20 million in assets under management and ended managing $14 billion. Lynch has always said that the individual investor is more capable of making money from stocks than a fund manager, because they are able to find good investments in their day-to-day lives before Wall Street. I still have all the notes I took from Lynch conference and I share them in this post.
Peter Lynch prepared a 1 page summary to each speaker with the concepts that he will mention during the event. I will write his notes in bold and my personal notes taken in the event in normal type of letter. This is the exact page received from Lynch and my notes.
FUNDAMENTALS OF INVESTING
by Peter S. Lynch
The Second Annual
MIT Sloan Investment Management Conference
October 21, 2006
Know what you own
Lynch explained that he likes very simple companies, companies that he can explain the whole story in just 2 minutes. He stressed the importance of knowing why you own the stock, the story behind it and all the facts that make that story valid.
I want very simple companies that do well. I look at 100 stocks and find just 10 that could be good candidates. I call lots of people, suppliers, competitors, company executives and customers.
It is futile to predict the economy, interest rates and the stock market
There is always something to worry, just focus on analyzing companies. The people on the Fortune 500 didn’t get there by predicting the economy. General rules of the economy don’t work. You can’t expect a recession every 5 years. The market will go down, expect that it will, but nobody can tell when.
You have plenty of time
Do not try to chase stocks or be impatient. If the company is doing well, it will give you plenty of opportunities. You had 10 years to get into Wal-Mart and at the end of those 10 years you would still have been up 50 fold
The ten most dangerous things people say about stock prices:
- “If it’s gone down this much already, it can’t go much lower”: Polaroid had a huge amount of cash and lots of patents. Everyone said it couldn’t get below 100 (It had fallen from 140 to 100). In a year and a half it was 12. I did this with Kaiser Industries. It went from 29 to 9 and I was buying… and it went to 4. Ridiculous that many are limited in buying stocks under a certain amount.
- “If it’s gone this high already, how can it possibly go higher?”: This one is even worse. If you are right 7 out of 10 times you are doing exceptional. The ones that kill you are those that go up a lot and you sell too early. You don’t need many big growers.
- “Eventually, they always come back”: Popular theories don’t work
- “The stock is just $3, what can I lose?”
- “It’s always darkest before the dawn” : Terrible way to invest, stocks can take a very long time to recover. The textile industry had a saying “it is darkest before it is pitch black” Wait for symptoms of things getting better.
- “When it rebounds to $10, I will sell” : Lynch explained this is stupid as the stock does not know you own it
- “What, me worry? conservative stocks don’t fluctuate much” : Lynch advised that it is a stock and it changes fast. The utilities were a great industry for 5 decades, then 3 Mile Island, others, and many stocks in the industry fell 60-80-90%. People on their death bed had been saying to never sell so and so stock. I don’t want to hear about a “conservative stock”
- “Look at all the money I have lost!, I didn’t buy it”: Don’t kill yourself over this. I missed a lot of buys.
- “I missed that one. I will catch the next one” Avoid long shots. My success has been based on simple companies. I have done 10 long shots and never broken even. It never comes through. If you get a tip on a long shot, put it in a drawer and look at it in 3 to 6 months. See if it is still interesting. You have plenty of time to get in
- The stock has gone up, so I must be right” or “the stock has gone down, so I must be wrong”
I want a business that every fool can run explained Lynch. I like easy companies, I never buy a stock just for the management it has. I want very simple companies that are doing well.
Be flexible
Just because an industry grows fast, doesn’t mean you want to be in that industry. Companies kill themselves competing with each other.
When to sell
Write why you hold the stock. The reason you sell is because the fundamental story is not the same Lynch said. Stocks mostly go down because the fundamentals deteriorate. Focus on Earnings.
There is always something to worry about!
There is always bad news and you can not get the background noise. The list of worries always grows longer.
Q&A Session
- I wouldn’t do anything different with the Magellan Fund if I were managing it today.
- If you look at 20 stocks a week, you will find one undervalued.
- Many of Wall Street’s Ideas are never published. These people work hard. Ask what ideas they have. Wall Street is underrated. I would do more overseas.
- Q. Why did you buy IT stocks? – A. In 2001 and 2002 many companies were selling for less than cash. Some weren’t losing that much. You have to look at the Balance Sheet. Something like this happens every 10 to 20 years.
- Q. What does an analyst do? – A. Gets facts and gives perspectives. By the time it is black and white it is too late. It is valid to just know things are getting better, independent of price. Don’t try to do everything.
