Face to face with a master
When the student is ready, the teacher shall appear”
It was kind of like a Kung-Fu lover getting the opportunity to learn from a Kung-Fu legend. Imagine getting a golf lesson from Tiger Woods or a basket ball lesson from Lebron James or a hitting lesson from Albert Pujols. It was an opportunity of a lifetime – the chance to meet face to face with a master!
I remember the day like it was yesterday. I was a financial advisor working for Fidelity Investments and got some exciting news that Peter Lynch was coming to our branch to meet with our team of 8 advisors. For those who don’t know Peter, he is arguably one of the greatest investors of all-time. From 1977 to 1990, Lynch ran Fidelity’s Magellan Fund. During his tenure he not only beat the market, he crushed it like a grape.
Think about this:
- During his fourteen years running Magellan, he beat the S&P 500 every year except two of those years.
- He averaged annual returns of 29%.
- Every dollar invested in 1977 grew to more than $27 in 1990
- $37,000 invested in the Magellan Fund in 1977 was worth over $1million in 1990 when Lynch left.
As we anticipated the moment of meeting Peter face to face, we formulated our greatest investment questions to pick the mind of a master. I had read Peter’s One Up on Wall Street. If you are an investor, this is required reading!
Though it’s been twenty years since Peter Lynch ran the once mighty Fidelity Magellan ship. The lessons Peter taught the investment world live on. As the eight of us grilled Peter and learned some of his “inside secrets”, it became quite clear why he was so successful. He made investing simple!
Seven investment lessons to learn from Peter Lynch
1. Know what you own
This was Peter’s main philosophy. He never owned a stock he didn’t fully understand. He was concerned about how a company operated, what types of product and services they produced, what their revenue model looked like, and how much demand and potential demand existed for their products and services.
2. Don’t spend too much time trying to predict the economy.
Predicting the economy is kind of like trying to predict the weather. Yes, you can get close but very rarely are you completely right. How many people accurately predicted the 2008 financial collapse?
The U.S. economy has so many moving parts: Over 300 million people doing their own thing: spending, saving, and debt habits, unemployment rates, interest rates, inflation, and many, many other factors impact our economy. Factor in government interference, global cross currents, and political shakedowns, terrorist attacks, oil prices, etc, etc and it becomes quite clear no one really knows what the future truly holds. Trying to time the market is a skill so few can pull off so why even try? Instead set up a solid financial plan that spreads out your risk using asset classes such as stocks, bonds, alternative investments, and cash.
3. If it sounds like a long shot, skip it!
Lynch had his share of success but he also had his share of failures. Peter admits he was a dismal 0-for-25 when he bought into a “great story” but a company didn’t have the revenue to back it up.
Instead focus on companies with strong track records. Look for companies with a history of rising earnings, low to debt to equity ratios, and ones who consistently deliver high value to their shareholders.
4. Identify and invest in exceptional companies
If a company isn’t a leader in its industry or field or have the potential to be a leader, they’re not exceptional. Look for good management and leadership but focus as much on the business model. As Peter once said, “Go for a business that any idiot can run – because sooner or later, any idiot is probably going to run it.”
Look for company’s who are changing, innovating, and improving our world. Peter always looked around and saw what people were buying at the local malls, in business settings, and all around him. The companies who are exceptional not only survive but often they thrive in both good and bad times.
5. Adapt and know when to admit you’re wrong
No one, even Peter, gets it right all the time. Being flexible and able to admit you’re wrong can be as important as being right. Knowing when to cut losses and sell winners is part of the investment equation. You not only need to know to buy, you need to know what to sell, and when to do so…
6. Know why you’re buying something
If you purchase any investment – a stock, CD, mutual fund, bond, or something else, know exactly why you’re buying it, what your expectations are, and at which point(s), you will sell it. If you can’t explain your reasons so that a child would understand, rethink your rationale for buying that investment. Every good purchase can be explained in simple terms.
7. Lastly, There’s never a shortage of things to worry about
The markets have survived world wars, Great Depressions, terrorist attacks, financial meltdowns, scandals, president assassinations, and much more. We need not look too far to find bad news. It is how we react to news that separates the investment winners from the losers.
As you can see, Peter has a ton of investment wisdom. His track record speaks for itself. These seven lessons certainly added to his success. What are your thoughts? What are some great investment lessons you have learned over the years?