Peter Lynch ran the Fidelity Magellan Mutual Fund from 1977 to 1990 averaging an astounding annual return of 29% during this time. This is a staggering performance.... if you had put in $30,000 in 1977 in his fund and did nothing after that, Lynch would have turned you into a millionaire by 1990.
So how did Peter Lynch do it? What investment methods did he use? Before we go into the details of his investment style, let's first take a brief look at his early life and the start of his investment career.
Early Life
Peter Lynch was born on January 19, 1944, in Newton, Massachusetts. He studied history, psychology and philosophy at Boston University, graduating in 1965.
His introduction to the investing world came through his after-school job - caddying at the Brae Burn County Club in Newton. Caddying for several leading executives over the years, Lynch picked up several stock tips. As a sophomore in 1963, he bought his first stock - Flying Tiger Airlines, for $7 a share. Also known as Flying Tigers, it was the first scheduled cargo airline in the United States and a major military charter operator during the Cold War era.
Lynch's timing was perfect. The stock did amazingly well, benefiting in large part because the Vietnam War came along. Over the next few years, Lynch made 500% on his investment.
Investment Career
One of his caddying clients was D. George Sullivan, the then president of Fidelity Investments. Sullivan urged Lynch to apply for a summer internship at Fidelity. And, In 1965, Peter Lynch joined Fidelity as in intern.
Lynch's windfall from Flying Tiger helped pay for graduate school at the University of Pennsylvania's Wharton School of Business. He also spent two years in the army as an artillery officer.
By 1968, Lynch was back at Fidelity as a full-time investment analyst covering textiles, mining, metals, and chemicals. His huge talent landed him the position of Director of Research by 1974. Three years later, Peter Lynch was made the head of the Fidelity Magellan Fund, a small, obscure fund with $18 million in assets.
When Lynch retired from the Magellan fund in 1990, he had grown its assets to an incredible $14 billion - an unbelievable 29% average return per year, a feat unheard of in the mutual fund industry.
Investment Style - Important Lessons
Peter Lynch was a strong fundamental investor. He always bought the "company behind the stock".
His investment style was very flexible. Often described as a "chameleon," Lynch adapted to whatever investment style worked at the time.
Lynch was also a workaholic. He talked to company executives, investment managers, industry experts and analysts around the clock.
After retiring, Peter Lynch has devoted a fair amount of his time educating individual investors. He distills his investment style into these fundamental principles:
- Invest in what you know: Lynch notes that you can spot investment opportunities all around you by concentrating on what you already know and are familiar with. He always invested in industries he understood, especially if that business operated at the dim end of the glamor spectrum.
- Profitability, price, and a good business model: Lynch generally looked for these three qualities in a good company.... the company had to be making money, the stock price had to be attractive, and the business had to have a strong competitive advantage.
- Check the key numbers: Lynch's advice when looking at the fundamentals of a business....
- If a particular product or service excites you, ensure that it accounts for a sufficient percentage of total company sales and that it makes a significant contribution to profits.
- Favor companies with a strong cash position.
- Stay away from companies with high debt-to-equity ratios.
- Avoid slow growers and cyclical stocks.
- Do not hold cash: Stay fully invested, otherwise you will likely miss out on market upswings. Don't panic at the gyrations of the market - ignore the ups and downs.
- Good management is very important: Buy good businesses run by competent, investor-oriented managers.
- Summarize the story behind your stock: Before you buy stock in a company, you should be able to explain why you're buying. You should briefly describe the reasons you are interested in the company, what has to happen for the company to succeed, and the obstacles that might prevent its success.
- Base your buy and sell decisions on specifics: Your profits and losses do not depend on the economy as a whole. So ignore the ups and downs of the market. Buy whenever you come across an attractive idea with a compelling story behind it. Sell when the stock price exceeds the intrinsic value and is, therefore, in danger of being overpriced.
Books
Peter Lynch, partnering with John Rothchild, has written three powerful books on investing:
- Learn to Earn: Targeted more toward beginning investors, it covers investment fundamentals and principles - choosing stocks, picking a broker, reading an annual report, etc.
- One Up On Wall Street : How To Use What You Already Know To Make Money In The Market Lynch's main message here.... Investment opportunities abound for the layperson. By simply observing business developments and taking notice of your immediate world - from the mall to the workplace - you can discover potentially successful companies before professional analysts do. This jump on the experts is what produces "tenbaggers," the stocks that appreciate tenfold or more and turn an average stock portfolio into a star performer.
- Beating the Street: This is Lynch's Magellan story - a deep-dive into his investment methods when he operated the Fidelity Magellan Fund.
In summary, Peter Lynch is undoubtedly one of the great investing masters of our times. His easy to understand investment style and publications are valuable to the beginning investor. We have provided you with the basics of Lynch's strategy. We encourage you to dig deeper and read all three of his books to build a strong foundation for your investment approach.
About the authors:
Santosh Sequeira is an engineering professional by day who taught himself to invest in the stock market. He manages his family's brokerage, retirement, and kids' college savings accounts by himself. All his accounts have beaten the S&P500 by at least 10 percentage points over the last few years.
If you are a beginning investor, you can teach yourself to invest in individual stocks and learn to think independently by visiting him at independent-stock-investing.com
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