Sunday, 9 October 2016

Famous investors: Peter Lynch

I just finished reading 'One up on Wall Street' (for the 7th time or so). A really insightful book and I think it is a shame that not more investors look to this legend. Never invest in any idea you can’t illustrate with a crayon." Peter Lynch wasn’t just a great investor, he had a wonderful way of getting across the secrets of his success in everyday language, exemplified by this warning of the perils of putting money into businesses that you don’t understand.

Another of his catchphrases was to "invest in what you know” and Lynch, who ran the giant Fidelity Magellan fund in America from 1977 to 1990, producing gains of 29pc a year, said everyone could use this advice to spot successful companies.
In fact, he got many of his best ideas at home or when wandering around shopping malls, rather than by poring over company accounts.

“I stumble on to the big winners in extracurricular situations,” he said. “Apple computers – my kids had one at home and then the systems manager bought several for the office. Dunkin’ Donuts – I loved the coffee.”

He summarised this approach in one of the 21 “Peter’s principles” from his book Beating the Street: “If you like the store, chances are you’ll love the stock.”

Afbeeldingsresultaat voor Peter lynchHe didn’t just go straight out and buy shares in the companies he spotted this way, of course, but used these insights as a basis for further research. Lynch looked for shares that offered “growth at a reasonable price”. The idea was to avoid two common investment mistakes: either paying too much for fast-growing companies, or buying seemingly cheap firms without realising that they have stopped growing.

“Peter’s principles” contained more good advice for amateur stock pickers. One was: “In business, competition is never as healthy as total domination.”
He explained: “A great industry that’s growing fast, such as computers or medical technology, attracts too much attention and too many competitors. When an industry gets too popular, nobody makes money there any more.” He preferred “great companies in lousy industries” because “in a lousy industry, one that’s growing slowly if at all, the weak drop out and the survivors get a bigger share of the market”.

How did he spot the great companies? Again, the advice could not have been simpler.
“All else being equal, invest in the company with the fewest colour photographs in the annual report,” he said, reflecting his belief that “the extravagance of any corporate office is directly proportional to management’s reluctance to reward its shareholders”.
Great companies share certain characteristics, Lynch believed. “They are low-cost operators… they avoid going into debt. They reject the corporate caste system that creates white-collar Brahmins and blue-collar untouchables. Their workers are well paid and have a stake in the companies’ future.”

Another two of Lynch’s principles are characteristically self-explanatory: “The best stock to buy may be the one you already own” and “Corporations, like people, change their names for one of two reasons: either they’ve got married or been involved in some fiasco that they hope the public will forget.”

He didn’t just have views on what to buy, he also suggested when it was best to buy.
“Buying on the bad news can be a very costly strategy, especially since bad news has a habit of getting worse,” he said. “Buying on the good news is healthier in the long run, and you improve your odds considerably by waiting for the proof [of a company’s success].”

Perhaps unsurprisingly for a stock picker, Lynch believed that shares offered the best returns for long-term investors – and he found a typically memorable way to express this conviction: “Gentlemen who prefer bonds don’t know what they’re missing.
“I believe in stocks,” he said. “If you look at the returns of the last 70 years, stocks are the undisputed champs.”

2 comments:

  1. Thanks for sharing this PL profile. He is one of the greatest investors in recent history but it seems that everyone likes to talk about WB all the time and often forgets about many other famous and successful investors of our time.

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    1. Hi Keith,

      It is a real shame that a lot of people only know Warren Buffett, because there are a lot of other great investors out there.

      Cheers,

      Dividend Collector

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