Investing Lessons from Peter Lynch
Over the last 15 years or so, opinions have shifted sharply on the issue of active versus passive investment management. Almost all investing used to be active: you paid a financial company, who would assign you a broker or salesman. This agent would pick a list of stocks for you to invest in. Or, you would invest with a fund that pooled resources to do the same thing. This model has been largely replaced by passive investing: you invest in a ticker that tracks the S&P 500, or the world’s top tech companies, or something similar.
The problems with active investing were legion: management companies charged fees, which were difficult to overcome even if performance was good. On the average, they failed to beat the benchmark. Some gambled and suffered implosions. When there were downturns, they panicked and sold everything, rather than calmly holding and returning to the mean like a passive fund would do. The replacement of active funds with passive funds has largely been better for investors in terms of both cost and returns. The people who popularized passive investing, such as Vanguard’s Jack Bogle, are generally remembered positively.
However, active investing has an undeniable romance. While it is far easier to buy an index fund, the undeniable glamor of trying to beat the market isn’t found with a passive investment that simply follows the average. Many active managers still have clients, and active investing is far from dead—just considered suboptimal.
If you’re thinking about trying active management, the best place to start might well be the lessons of Peter Lynch. Considered one of the most successful investors ever, Lynch is a white-haired Bostonian who managed the Magellan Fund at Fidelity Investments between 1977 and 1990. In that time, Lynch’s fund averaged nearly 30% a year in growth.
How did he do it? Lynch’s investment philosophy was simple. It can be summed up in the phrase “buy what you know.” Instead of looking at sophisticated analyses of income statements or scrutinizing chart performance, Lynch tried to understand how businesses worked better than anybody else. And he suggested to fellow investors to buy what they knew. Tech company do something complicated you don’t understand? Don’t buy it. Interacting with a business that does something well, that you personally know about? Consider getting some stock.
Lynch popularized this example with the story of how he discovered Dunkin’ Donuts. He did this not through technical wizardry, but by buying a coffee and having a conversation with the employees about how the business operated. He liked what he saw, and made far more from that investment than those he made using more conventional research approaches. A correct business plan may not be widely known, and it is possible to profit from getting ahead of one’s rise.
Lynch argued against trying to time the market. A stock that was recently rising shouldn’t be ignored—it could go up more. “It can’t go any lower” was another sentence Lynch disliked. He preferred focusing on a company’s story over the price and investing for the long term.
You can search for Peter Lynch on YouTube to find more about his unique investing philosophy. Lynch is a natural and humorous speaker whose discussions of investing are easy to follow for laypeople.