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7am Saturday
September 28, 2019
This morning I want to share some insights from one the greatest investors of our time, Peter Lynch.
Peter managed the Fidelity Magellan fund for 13 years (1977-1990) and earned a solid reputation as one of the investing greats due to the exceptional performance of that fund. Below is a chart that shows you just how good he was. If you put $10,000 in his fund at the beginning of 1977 you would have had $267,420 at the end of 1990. For comparison, if you put $10,000 in the S&P 500 you would have ended up with $30,730.
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Not bad, eh?!
Peter also wrote several books including One Up on Wall Street and Beating the Street. Both are on my bookshelf and worth the read if you want to be a better stock picker.
I recently read an interview with Peter Lynch that gives some very simple, yet profound, wisdom to anyone seeking to become a better investor. It doesn’t matter if you like to pick your own stocks, invest in mutual funds, or prefer to have your investments managed by a professional. Everyone can benefit from Peter’s thoughts.
Here are my three biggest takeaways from that interview:
#1 – Emotions>Intelligence – You have to be able to handle the dips. Investment returns don’t occur in a straight ‘up-and-to-the-right’ pattern. No, over the long-term it looks more like walking up the stairs with a yo-yo. There will be periods of uncertainty in the market. Periods where stocks are down 10, 20, or even 30 percent from all time highs. Can you handle that? Or will your first reaction be to SELL, SELL, SELL?! When asked what you need to become a great investor, Peter’s response highlights the #1 issue when it comes to investing:
“In the stock market, the most important organ is the stomach. It’s not the brain.”
Everyday we are inundated with bad news. The question is, do you have enough faith in American ingenuity, capitalism, and innovation to believe that 10, 20, or 30 years from now stocks will be the place to be?
It really comes down to your tolerance for risk. If you’re a long term investor, declines are inevitable. But, so is progress. Historically, stock market declines have always been temporary. With every market correction or bear market in history, we eventually saw a rebound leading to new highs in the stock market. So, yes, there will be dips along the way. And, no, we can’t predict them all with certainty. So, “the question is: Are you ready – do you have the stomach for this?”
As Peter says, “most people do really well because they just hang in there.” Successful investing requires patience.
#2 – You can’t consistently time the market. – One of Peter’s most famous quotes is:
“More people have lost money waiting for corrections and anticipating corrections than in the actual corrections.”
What he’s trying to say here is that we can avoid the stock market and sit in cash based on fear and uncertainty. By doing so, more often that not, we miss out on the gains in the market. It reminds me of the stock market in 2017. So many investors were sure that we were due for a correction. But the market never dropped more than 3% from a high that year and anyone waiting for a correction to invest their cash missed out on a return of 19% (S&P 500) that year. Trying to predict highs and lows isn’t a productive strategy.
When looking at investment alternatives, the stock market is the best place to be over 10 years, 20 years, and 30 years or beyond. Just don’t put money there that you will need in the next 2 or 3 years. For long-term investing it’s better to think about what trends or themes will do well over the next decade or more. Invest in those things and stay invested in spite of the daily bumps.
#3 – It’s possible to beat the market. – There is a big trend today towards passive investing. Passive investing is simply investing in index funds knowing that you will receive a return that is in line with the index the fund is managed against. So, if you want to mimic the returns of the S&P 500, you can simply buy an S&P 500 Index Fund that tracks that index. This is not a bad way to go, because after all the S&P 500 will continue to grow as long as the large American companies in the S&P 500 continue to innovate, make money, and grow their sales (very likely!). In other words, you can do quite well investing in an index fund that tracks the US stock market. However, you can do even better by actively managing your portfolio or hiring someone to actively manage it for you.
Here’s how Peter brings this to life. When asked how an investor should approach picking stocks, his answer is:
“Stocks aren’t lottery tickets. Behind every stock is a company. If the company does well, over time the stocks do well.”
You have to research the underlying company. This is why I don’t like just blindly following an index fund. Do you really want to own all 500 companies in the S&P 500 index? Are they all really investment worthy?
Take a look at the following table. On the left are the top 10 best performing stocks in the S&P 500 over the past 10 years. On the right are the 10 worst performing stocks.
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If you owned the S&P 500 you owned all of these stocks, both the best and the worst. But, what if, through active management, you could have been more selective? What if you avoided the worst performers and happened to own the best peformers?
I will be the first to tell you that it’s impossible to know which stocks will be the best 10 stocks over the next deceade and which stocks will be the biggest losers. But, I will also tell you, that there’s some things that you can see as an active investor that will help you have a chance at doing better than average.
For instance, nearly all of the worst performers are in the energy sector. If you’ve been following oil prices you know that oil prices are down signficantly over the past 10 years:
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In the winners column we have stocks like Netflix, Amazon, and Mastercard. Another principle Peter was famous for is investing in what you know. In other words, what are the products and services that you use every day? That’s a great place to start when doing research. With 74% of US households now streaming Netflix, Amazon Prime, or Hulu, it’s no surprise to see Netflix and Amazon stock prices do well. And Amazon does soooo much more than just streaming. By the way, how do most Americans pay for streaming and other online purchases? Credit cards. The trend away from cash has been huge for Mastercard, Visa, and other credit card processors.
My point is that with a little research (or in the case of professional money management…a lot of research) it is possible to have an edge and it is possible to beat the market. And that’s why I think active investing>passive investing.
+ Deal of the week: My favorite pants are on sale! If you’re looking for some new jeans or casual pants, check out the Traveler Pants from Banana Republic. These are by far the most comfortable pants I’ve owned. You can get them now for 40% off PLUS another 20% off if you have a Banana Repullic card (which you only want to have for the extra discounts).
+ In the mood for some reflection? Try this: Head over to 10Q today and signup for a question a day for 10 days beginning September 29th. You will recieve this question in your inbox along with a link. When you click the link you will be taken to a private and personal space where you can answer the question. Your answer will be stored and automatically returned to you one year later. I’ve never done this, but heard about it from a friend. I think reflection is a great idea, so I’m going to give it a try this year. It will also be fun to see the answers returned to me in a year… kind of like those random Facebook memories that pop up years after you post them:-)
+ Speaking of Facebook, please like my page. I don’t post there as much as I used to, but I hope to change that!
+ Something I’m excited about: Volleyball! My daughter’s team is currently 15-0 and ranked #1 in the state (Ohio High School Division 3)! They are a fun team to watch, and I can’t wait to see what they will do in tournaments. Here’s a video from the local news if you’re interested.
+ Buckeye fans: You loved last week’s video, so here’s this weeks gameday trailer. #BeatNebraska
Make it a great day,
Adam
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