If You Spend 13 Minutes a Year on Economics You've Wasted 10 Minutes
Wisdom from the legendary investor Peter Lynch
Note from the editor: Can you believe it? I now am at almost 400 subscribers after going live on November 1st in 2021. People keep signing up, even during this drawdown. Thanks, everyone, for the feedback, comments and for making this small community of like-minded investors special.
“It’s futile to predict the economy, interest rates, and the stock market. People keep trying to do this and this would be useful. I would love to know when we are going to have a recession. I would love to know if interest rates were going up or down. I would love to know when the stock market is going up. That would be helpful. I would like to get next year’s Wall Street Journal. Unfortunately, you don’t get it.
I remember in 1982 we had… 20% prime rate, 15% long governments, double-digit unemployment, double-digit inflation, I don’t remember anyone telling me about that in 1980? I don’t remember anyone telling me about it in ‘81? But in ‘83 I remember they said, well the economy will bounce back, but we had a recession in ‘85…
In ‘87 something happened. In October of ‘87, I think something happened, the Celtics lost seven in a row or something…
So I’ve always said that If you spend 13 minutes a year on economics you’ve wasted 10 minutes.”
— Peter Lynch
Peter Lynch is a legendary investor who is best known for running the Magellan fund at Fidelity from 1977 and 1990. Under his management, Magellan averaged a 29.2% annual return, consistently more than double the S&P 500 stock market index.
I have always been a fan of Peter Lynch and I considered him to be the great-granddad of modern stock picking. (I apologize to Millennials that don’t get any of his references, look them up on Google.)
His message was simple, he preached that the retail investor could beat Wall Street professionals. As a retail investor, you have advantages over them. The most important one was that institutional investors often avoid small-cap stocks because they can't buy enough shares to impact their bottom line. Retail investors don’t need to move big amounts of money, they can buy tiny companies and hold them as they grow to become big companies.
His most well-known book is a short, simple, easy read, that’s titled, One Up Wall Street. The first time I read it I kept thinking to myself, that’s it? That’s all you need to know? It seemed too simple, but that’s what’s great about Peter Lynch. His advice may seem simple, but to put it into practice is hard. He emphasized having the stomach to hold during a downturn, over the intellect required to predict the future (because he believed you can‘t).
With all the recent turbulence in the stock market, I thought it would be useful to consult Lynch’s writings and talks to understand how he approached drawdowns and was able to stay focused on the long term.
Here are my five favorite investments tips from Peter Lynch.
Stick With the Facts
“All you need to know about the stock market is that it goes up and it goes down. It goes down a lot, and that’s all you need to know. Again it would terrific to know what is going to happen with the economy, but I deal with facts.”
With any given stock in your portfolio do you know how well they execute on product development? Are they delivering new features that are valuable to their customers? Are they closing new partnerships that will expand their business? Are they hiring for new key roles? The more one knows about a business, the easier it will be to determine if it’s a good investment over the long term regardless of the day-to-day stock price action.
Know What You Own and Why
“The single most important thing for me in the stock market, or for anyone, is to know what you own. I am amazed at how many people own stocks, they would not be able to tell you why they own it. They couldn’t say in a minute or less why they own it.”
It’s important to know what you own. This is what will give you the conviction to hold, even through a downturn. Great stocks can be mispriced. Entire sectors fall out of favor due to macroeconomics or other issues and it has nothing to do with the quality of the business. If you know what you own and why you own it, you will have the confidence to hold when it goes down for reasons that have nothing to do with the business.
Don’t Invest in a Business Just Because You Like it
“I don’t advise you to buy stock in your favorite store just because you like shopping in the store, nor should you buy stock in a manufacturer because it makes your favorite product or a restaurant because you like the food. Liking a store, a product, or a restaurant is a good reason to get interested in a company and put it on your research list, but it’s not enough of a reason to own the stock! Never invest in any company before you’ve done the homework on the company’s earnings prospects, financial condition, competitive position, plans for expansion, and so forth.”
I see this all the time with popular brand names and products people like. Peloton is probably the best example of this right now. I love the product. I use it all the time. But business growth is anemic, they have serious supply chain issues. But worst of all, management lost all credibility, at least with me, when they said they didn’t need any cash and they then went out and did a huge raise a week later. It’s a great product, but not a great business.
Do I even need to mention the SPAC craze or stocks like SPCE which has no revenue?
I definitely don’t buy stocks in companies that don’t have revenue. Those are not investments, those are lottery tickets.
Find the Diamond in the Rough
“If you find a stock with little or no institutional ownership, you’ve found a potential winner. Find a company that no analyst has ever visited, or that no analyst would admit to knowing about, and you’ve got a double winner. When I talk to a company that tells me the last analyst showed up three years ago, I can hardly contain my enthusiasm. It frequently happens with banks, savings-and-loans, and insurance companies, since there are thousands of these and Wall Street only keeps up with fifty to one hundred.”
There are only 500 stocks in the S&P, and those receive all the attention. However, as of October 2021, the NYSE had a combined total of 2,434 listed companies, and the Nasdaq had 3,566. That means there are over 5,000 companies to pick from. If you look beyond the 500 companies that Wall Street follows you’re sure to find some great companies, with huge growth prospects that trade at reasonable prices.
You Need the Stomach for Stock Investing Not the Intellect
“People who succeed in the stock market also accept periodic losses, setbacks, and unexpected occurrences. Calamitous drops do not scare them out of the game.”
Many smart people have lost their fortunes in the stock market. Winning in the stock market is not about being smart. Sir Isaac Newton, who was way smarter than anyone reading this, lost £20,000 (or more than $3.5 million today’s money) in the South Sea Bubble of the 1700s. And then there is Mark Twain, who was way more talented than anyone reading this. He made bad bets on railroad stocks and invested in a number of high-tech startups that flopped including an early typewriter. Twain filed for bankruptcy in 1894.
Winning in the stock market requires an even-keeled temperament. To do well with stocks requires a person to not panic in the downturns and not get caught up in the euphoria in the uptrends. They just stay the course.
DISCLAIMER: Nothing here is investment advice. It’s provided for entertainment purposes only. Do you’re own due diligence and make investments decisions based on your own research and not my writing.
I love your comments and enjoy following your research ideas regularly with enthusiasm. However, there are always two sides to a coin. I worked at Legg Mason from 2000 to 2006. Bill Miller ran the Legg Mason Value Trust and holds the still unbeaten track record of outperforming the S&P 500 for 15 years in a row. However, I was also on hand when he rode Bear Stearns and Lehman Brothers and others all the way down to bankruptcy, erasing all his good returns and he was ultimately forced to leave the firm. He's doing well now but "there are no guarantees in the stock market." The market is filled with people that did great for a period then no longer. Marty Zweig and Nouriel Roubini come to mind.