How Peter Lynch destroyed the market: part 1

Peter Lynch didn’t just beat Wall Street… He destroyed it!

Ponder this for one moment. Lynch ran Fidelity’s Magellan Fund from 1977 until 1990. Beating the US S&P 500 in all but two of those years, he averaged annual returns of 29%. That is a mind-blowing figure. It means that for $1 USD invested it would grow to more than $27. If you invested as little as US $37,000 in 1977 you would be a millionaire in 1990.

Fortunately for us he has been more than willing to share his secrets for those who will listen.

And here’s the catch folks it’s mind blowingly SIMPLE!

To achieve this stunning track record he has a set of eight guiding principles, which you can take away and use them today.

1. Invest in what you know.

Seems rather too simplistic – right? Lynch is a ‘story’ investor and you’d be amazed at how many people don’t understand what they have invested in and you’d be shocked at how few investors actually do their research. It’s the old buy the ‘business’ not the ‘stock’ story.

2. It’s futile to predict the economy and interest rates, so don’t try.

After the 2008 market rout I’ve noticed an alarming increase in wanna-be-economists and investment experts. We financial boffins love our “water cooler” talk but there is an inherent danger in converting that to action.

The financial system is extremely complex with millions of people who act in their own self-interest and respond differently to external shocks, government policy and other companies’ actions. Don’t try to understand this it will just give you brain damage.

Trying to time the market is futile. Set up a financial plan that allocates your assets based on your risk tolerance, so that you can sleep at night.

3. You have plenty of time to identify and recognise exceptional companies.

Lynch mentions that Wal-Mart (NYSE: WMT) was a 10-bagger, ie. its stock rose to 10 times its initial price – 10 years after it went public. Even if you had gotten in after waiting a decade, though, you’d be sitting on a 100-bagger.

Some may argue it’s not too late to jump onto Woolworth’s (ASX: WOW). While the company is no longer a monster growth story it is still churning out a return on equity of around 30%. That sort of ROE speaks volumes of management’s ability to effectively allocate capital.

ARB Ltd (ASX:ARP) is another example of a small unloved company that has also churned consistent long-term results in the high 20’s and possess a stellar 10 year growth rate of 27% regardless of market ‘noise’ and it’s still a relatively small company.

4. Avoid long shots.

Lynch claims he was 0-25 on investing in companies with no revenue and a great ‘story’. Remember the guy who returned an average 29% yearly for 13 years? If he says long shots will almost always miss the mark then you and I aren’t likely to do much better.

With small companies you’re better off to wait until they turn a profit before you invest.

Expect to pay more for higher-growth prospects, but make sure the risk-reward trade-off on an unproven company is worth it.

There are so many more ‘Lynch pins’ to write about, I’m just going to have to leave you in suspense until next week.

Stay tuned for more of the Lynch action plan.

Nick Christian is a Financial Adviser and planner and authorised representative of Millennium3 Financial Services.

The views and opinions expressed within this letter are those of the author and do not necessarily reflect those of Millennium3 Financial Services Pty Ltd.

The above is general in nature and should not be acted upon without seeking the advice of a professional licensed financial planner.