If there were a Mt. Rushmore for investors, Peter Lynch would most likely be one of the faces on it. Lynch initially got a job with Fidelity because he caddied for the company’s President, but he took the opportunity and ran with it. After being hired full time in 1969, Lynch worked his way up the ranks until, in 1977, he was hired to run the Magellan Fund (FMAGX). The fund, which was only worth $18 million at the time, grew to be worth $14 billion by the time he left in 1990 and averaged annual returns of 29.2 percent for the same period.
However, deciphering precisely what Lynch might make of today’s markets is harder to say. Without access to the man himself, it’s not easy to peer into Lynch’s brain and suss out what he might make of the current market volatility. As such, here’s a closer look into what drove Lynch’s investment philosophy and how it might be applied to today’s market.
Part of what makes guessing at where Lynch might stand in today’s market next to impossible is that Lynch himself was known as an “investment chameleon,” shifting between sectors and styles of investment as he saw fit. However, in this lies an important lesson: the market doesn’t care what your investing philosophy is. Whatever worked for Lynch in the 1980s could very well be utterly useless today. What’s most important is to examine each investing opportunity in its own context without bringing preset ideas about investing that might lead one into trouble.
“Know what you own.”
This simple principle is most likely Lynch’s biggest legacy, but the wisdom of the maxim is as true today as it ever was. At the core of the philosophy is utilizing the specific knowledge available to an investor to its biggest effect. Technical data, price valuations, and earnings reports are available to everyone on Wall Street and available at the same time, so the advantage available in pouring over this data is not particularly distinct. However, the knowledge that grows out of personal experience can be invaluable, what Lynch would describe as intimate and exclusive knowledge. As such, an investor should examine what it is that they have real expertise in that the rest of the market doesn’t necessarily know. Lynch would even go so far as to suggest that individual investors had an advantage over fund managers because of the ability to spot solid investments in their everyday lives.
It is, incidentally, important to note that what Lynch means by “intimate and exclusive knowledge” is not the same thing as insider knowledge. If the reason why you have said intimate and exclusive knowledge is because you have beers with the Chairman of the Board and he let something slip about the upcoming earnings report after a few to many, it would be illegal to go out and profit off of that information. However, if you have lived in Topeka, KS your entire life and the local Topeka burger chain that everyone in the city loves is going public, that might be just the sort of investment where you have an inside track to a solid opportunity.
Simple Business Models
Lynch famously said that one should only invest in companies with business models that could be explained with a diagram drawn in crayon. Essentially, one should be able to simply and succinctly explain what a company does and why it will make money. What’s more, Lynch felt that one should be able to explain why they were investing in a company in a few sentences. When unable to do so, it was probably a clear sign that you didn’t have the knowledge necessary to make a wise investment and shouldn’t pull the trigger.
Making it Your Business to Know
Lynch has a number of other tips and guidelines for investing, almost all of which are detailed in his three books on investing, One Up on Wall Street, Beating the Street, and Learn to Earn. However, the core of what Lynch preached was that one should acknowledge the inherent value of knowledge. This meant never rushing into an investment without feeling confident that you know everything necessarily about a company, and that the most valuable information an investor can bring to the table is that drawn from personal experiences with businesses and products.
So what would Peter Lynch invest in? It’s impossible to say, only Peter Lynch knows. But more importantly, what would Peter Lynch say you should invest in? He wouldn’t! Peter Lynch would most likely advise individual investors not to allow Peter Lynch to guide their investments. Investing in companies that you have personal knowledge of is what Peter Lynch made his career on, and that means that speculating about what the famed fund manager would put his money in is, on some level, exactly the opposite of the Lynch’s core strategies.