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This May Be Your Best Investment Ever

January 14, 2016

I was enjoying lunch with a friend recently and the subject of Peter Lynch came up. Mr. Lynch managed Fidelity’s Magellan mutual fund between 1977 and 1990. His thirteen year record as manager of the fund stands as one of the greatest long-term stock management performances of all time, with the fund’s share price rising on average more than 29% per year (2700% cumulative return), far outpacing the market. Mr. Lynch co-authored three best-selling books in the 80s and 90s.

 

One of Peter Lynch’s books, One Up on Wall Street, is very possibly the first book on stocks I ever read. At the time, I was fifteen years old and I did not know the first thing about stocks or stock-picking.

 

Today, grabbing my copy from the bookshelf, I am revisiting the pages first read so long ago – the book is hard to put down. One Up on Wall Street is interesting, educational, and humorous. Two decades after first reading the book, I find that Mr. Lynch’s philosophies apply well to investors today. Learn the business underlying the stock, do your own research, and don’t pay attention to what the so-called “smart money” on Wall Street is doing. These ideas have influenced my own philosophy a great deal.

 

One of Mr. Lynch’s mantras – perhaps the one he is best known for – is the idea that by investing in what you know, you can outperform Wall Street professionals. Mr. Lynch’s claim is based on a belief that investors on Main Street see clues to developments in businesses well before analysts on Wall Street spot them. He tells the story of a fireman who becomes a millionaire:

 

“There is a famous story about a fireman from New England. Apparently back in the 1950s he couldn’t help noticing that a local Tambrands plant… was expanding at a furious pace. It occurred to him that they wouldn’t be expanding so fast unless they were prospering, and on that assumption he and his family invested $2,000. Not only that, they put in another $2,000 each year for the next five years. By 1972 the fireman was a millionaire…”

 

Unfortunately, many who read Mr. Lynch’s book mistakenly think he was suggesting that people simply buy based on initial clues, such as a popular new store or restaurant in the community. Such readers miss Mr. Lynch’s critical advice on page 42 (paperback edition), where he states:

 

“Finding the promising company is only the first step. The next step is doing the research.”

 

I don’t generally encourage people to pick their own stocks, since I know too well about the potential pitfalls (I’ve had my share of costly mistakes). I also know that most people spend more time researching their new car or television than they spend researching their favorite stock (even though the stock may represent a larger investment). Shoddy research always leads to shoddy results.

 

On the other hand, I know that lots of folks are willing to do the work and eager to learn. These people may be found among my neighbors and friends. They are engineers, plumbers, teachers, accountants, and yes, firemen. You and I have all the tools we need to succeed in stocks, if we would only apply sound methods and patience. If you’re like me and you prefer to do your own research, $10 spent to purchase Peter Lynch’s book One Up on Wall Street offers great value. You may one day look back on it as your best investment ever.

 

In addition to the book, consider watching a 1994 speech Mr. Lynch gave before the National Press Club (link below). The hairstyles and eyeglasses are out of date, but his investment principles are still relevant.

 

Link to 1994 Peter Lynch speech: https://youtu.be/Lxypq_qIw7M?t=508

 

Link to Peter Lynch’s book on Amazon.com: http://www.amzn.com/0743200403

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