Peter Lynch On How To Beat The Market | 2019
Summary
TLDRPeter Lynch, a renowned investor, discusses his philosophy of investing in what you know and the importance of research. He warns against blindly 'playing the market' and emphasizes the value of understanding a company's financials. Lynch advises investors to recognize potential in familiar industries and products, and to avoid deteriorating companies. He also shares insights on market downturns, the importance of long-term investment, and the impact of secular changes on industries. Lynch highlights the potential in the energy sector, particularly given the current oil glut and the challenges in the shale industry.
Takeaways
- π Peter Lynch emphasizes the importance of investing in what you know and understand, suggesting that a basic understanding of a company's financial health can help avoid risky investments.
- π He warns against the dangers of 'playing the market' and the tendency of investors to make impulsive decisions without proper research, like buying stocks on hearsay.
- π¬ Lynch suggests that regular investors can gain an advantage by focusing on industries they are familiar with, using the example of noticing retail trends in malls to identify potential investment opportunities.
- π He stresses the significance of doing due diligence beyond just recognizing a good product or service, highlighting the need for further research into a company's financials.
- π Lynch discusses how to beat the market index by avoiding stocks of companies that are in decline and focusing on those that are improving or have strong growth potential.
- π He shares his experience of receiving a call from Warren Buffett, who appreciated Lynch's philosophy of not selling great companies too early, comparing it to 'watering the weeds and cutting the flowers'.
- π‘ Lynch advises against trying to time the market, arguing that the long-term upside potential outweighs short-term market fluctuations.
- πΌ He points out the importance of considering personal financial needs and goals when investing, rather than being swayed by market predictions or fear of downturns.
- π Discussing secular changes in the market, Lynch notes that industries can shift rapidly from being highly profitable to obsolete, and investors should be aware of such changes.
- β½οΈ Lynch identifies the energy sector, particularly the potential for a turnaround in oil due to the cyclical nature of supply and demand, as an area of interest for investors.
Q & A
What does Peter Lynch mean by 'invest in what you know'?
-Peter Lynch suggests that investors should conduct research and understand the companies they invest in, rather than blindly 'playing the market'. He emphasizes the importance of looking at a company's balance sheet, debt, and cash flow to make informed decisions.
Why does Peter Lynch consider the term 'play the market' dangerous?
-Lynch views 'playing the market' as dangerous because it implies a lack of research and understanding of the companies being invested in, which can lead to risky investment decisions.
How can regular investors gain an advantage in the market according to Peter Lynch?
-Lynch believes that regular investors can gain an advantage by sticking to industries they are familiar with and recognizing great products early, like seeing the potential of brands in a mall before they become popular.
What example does Peter Lynch give about recognizing a good investment in the mall?
-Lynch mentions observing the growth potential of companies like Gap, Limited, and Sunglass Hut in malls, and understanding their business models and market potential before they became widely recognized successes.
Why does Peter Lynch emphasize avoiding companies with deteriorating performance?
-Lynch stresses the importance of avoiding stocks of companies that are performing poorly or in decline, as this is a strategy to beat the market index by not participating in losses.
How does Peter Lynch define a company as being in trouble financially?
-According to Lynch, a company is in trouble if it has high debt, low cash, and poor financial management, which can be identified through basic research and analysis of financial statements.
What advice does Peter Lynch give about holding onto great companies?
-Lynch advises investors to hold onto great companies rather than selling them too early. He shares a quote from Warren Buffett about not selling great companies, comparing it to watering weeds and cutting flowers.
Why did Warren Buffett call Peter Lynch?
-Warren Buffett called Peter Lynch to compliment him on his book and investment philosophy, particularly the idea of not selling great companies too soon, which Buffett found insightful.
What does Peter Lynch suggest about investing during market downturns?
-Lynch suggests that trying to predict and anticipate market downturns is generally unproductive. Instead, he recommends focusing on long-term investment strategies and not being swayed by short-term market fluctuations.
How does Peter Lynch view the impact of secular changes on industries?
-Lynch acknowledges that secular changes can significantly impact industries, causing some to deteriorate rapidly. He gives examples from his experience, such as the textile industry, and warns that just because an industry is struggling, it does not mean it will improve.
What is Peter Lynch's perspective on the energy sector as an investment opportunity?
-Lynch sees potential in the energy sector, particularly noting the difference between current oversupply and future potential shortages. He suggests that the decline in new investments and the natural decline of shale wells could lead to a significant change in the energy market.
Outlines
πΌ Investing Wisdom from Peter Lynch
Peter Lynch discusses his investing philosophy, emphasizing the importance of research and understanding what you invest in. He warns against the dangers of market speculation and the tendency of investors to make impulsive decisions without proper due diligence. Lynch suggests that regular investors can gain an advantage by focusing on industries they are familiar with and by recognizing good products or services. He shares anecdotes about spotting successful companies like Gap and Limited, and the importance of further research before making investment decisions. Lynch also touches on the idea of avoiding companies that are on the decline and finding those that are improving or have potential for long-term growth. He shares a memorable quote from Warren Buffett about the folly of selling good companies too early and holding onto poor ones.
π The Pitfalls of Anticipating Market Downturns
In this paragraph, Peter Lynch addresses the common mistake of investors anticipating market downturns, suggesting that more money is lost from this fear than from actual market declines. He argues that trying to predict market movements is futile and that investors should focus on long-term investment strategies, considering their financial needs and goals. Lynch also discusses the concept of secular changes in the market, using the examples of the textile and auto industries to illustrate how entire sectors can decline or become obsolete. He warns against assuming that because an industry is currently struggling, it will inevitably improve, and instead advises investors to look for cyclical turnarounds and opportunities in undervalued sectors, such as energy, which he sees as a potentially interesting area despite its current unpopularity on Wall Street.
Mindmap
Keywords
π‘Investing Philosophy
π‘Market Timing
π‘Fundamentals
π‘Inside Advantage
π‘Information Overload
π‘Active Investors
π‘Index Funds
π‘Sector Disruption
π‘Cyclical Turnaround
π‘Energy Sector
π‘Long-Term Investment
Highlights
Peter Lynch emphasizes the importance of research and understanding before investing, warning against the dangers of 'playing the market'.
Lynch suggests that investors should be cautious, like when buying a refrigerator, not just throwing money into stocks on a tip.
He explains the concept of 'buy what you know' and how it can give regular investors an inside advantage.
Lynch recounts how observing trends in the mall could have led to successful investments in companies like Gap and Limited.
He stresses the need for further research after identifying a potentially good company, rather than investing immediately.
Lynch discusses the challenge of information overload and how it affects active investors' ability to beat the market.
He explains that avoiding stocks of deteriorating companies is key to outperforming the market index.
Lynch shares a personal anecdote about a call from Warren Buffett, highlighting the importance of holding onto great companies.
Buffett's quote about selling great companies and adding to losers is mentioned as a valuable investment insight.
Lynch advises against trying to time the market, emphasizing long-term investment over short-term predictions.
He discusses the risks of anticipating market downturns and the potential losses from such predictions.
Lynch reflects on secular changes in the market and how industries can shift rapidly, using the textile industry as an example.
He warns that just because an industry is struggling, it doesn't mean it will improve, and investors should be cautious.
Lynch identifies energy as an interesting sector, despite its current unpopularity on Wall Street.
He analyzes the difference between current oil gluts and potential future shortages, suggesting a shift in the market.
Lynch concludes with a discussion on the current state of the energy sector and the potential for a slowdown in shale production.
Transcripts
so peter your investing philosophy is
often
summed up as by what you know and
there's some truth to that and it's also
often way oversimplified can you explain
what you did mean by that and what you
didn't mean
well i think it bothers me that people
are very dangerous when they invest
this word play the market that's a
dangerous term
but if you do some work do some research
know what you own look at the research
look at the balance sheet
if you if you could add eight and eight
get fairly close to 16
you find out this company has lots of
debt no cash
they're in trouble you shouldn't own it
so a little bit of research people are
careful they buy a refrigerator
they can't really take a vacation and
they they'll put five ten thousand
dollars some stock to hear on the bus
or the party that's dangerous so when
you say
buy what you know you also thought that
the regular
investor might be able to get an inside
advantage
by sticking to an industry he's a
familiar with or seeing something that
she realizes is a great product
imagine if you were in a mall the last
50 years you would have seen gap when it
was hot you were saying limit was hot
we've seen what was not had
we've seen when they were starting
people weren't excited about gaap
anymore or
then you do some research said well gee
there's a lot of limited stores but
we're only 20. you know they can go to
400.
so you you see a company i did really
well dunkin donuts a local company i do
well with stop and shop
but people can see that there's really
some people showing up or guess the
sunglass hut no one's there anymore
so i mean that's research that's
fundamentals so
you don't leave the mall though and buy
that day you have to do some more work
that's the important point yeah so today
uh there's
so much information everywhere
information overload
does that make it harder for active
investors the indexers say
everyone's got access to the same
information at the same time you can't
beat the market
well the way you beat the index is you
you avoid the stocks to go down you
avoid the steel companies and
the oil companies and sears and penny
and
where the companies are deteriorated i
mean companies are dynamic
behind every stock there's a company
these are not lottery tickets
so we you're trying to find the
companies within the s p 500 that are
doing better
they're going from crappy to semi-crabby
to good that might take a couple years
or they're going to grow for a long time
and you're trying to avoid the companies
that are
going south that's how you beat them or
you find some companies outside the
sp500
that are that are great companies carmax
what was not in the sv-500
they went up 200-fold so a lot of times
they enter and a lot of their great
performances before they go in
now a lot of people when they're lucky
enough or smart enough to get a company
that's going up
they then they take their profits and
then you made the case
in a book that you should actually hang
in there with the really great stocks
and you even got a call from warren
buffett as a result
yeah 1989 i'm at home the phone rings
and
that was one of my friends but one of my
daughters he was six-year-old annie
picked up and said
she just there's a mr buffett online i
said this could be a joke
i pick it up and this warren buffett
from omaha nebraska
you know i read your book my aim reports
doing two weeks i use a line he said
that all about seven
seconds and i said that's great i'd love
to do it
what what's the line he said i love this
it's been waiting to do this
when you sell your great companies
and add to the losers it's like watering
the weeds and cutting the flowers
he said i want to put it in he said if
you ever come to nebraska you don't call
me you
nailed me mud all over nebraska so did
he call him oh yeah i
said several times we play bridge
together we've had several meetings
great guy
another point you've made and this is i
think particularly relevant ten years
into a bull market
is that i think you said more money has
been lost anticipating a downturn than
actually in the downturn can you explain
well obviously the market's market's
gone up
tenfold since i stopped running magellan
so you make more money the upside the
market's been a lot higher 10 years from
now
20 years from now 30 years from now
trying to predict the market
is really a waste i don't know what's
going to do it can go down
when i ran magellan 13 years it declined
10
or more nine times the market wow i had
a perfect record i went down more than
10
every time where the market went down
and went down more but over the long
term
the upside is more than the downside so
you're gonna save yourself do i need the
money
in the next month do i need money next
year do i have kids going to college
they have a wedding coming up then
you're a bad investor
if you can keep putting money in your 5
10 15 20
25 year you should do well one thing
we're thinking a lot about at barons is
the
secular changes we're seeing in the
market where there's so much disruption
that we wonder if certain industries
they may be cheap and they may just keep
on getting cheaper i mean retail would
be an obvious one in some cases victims
of amazon
but even the auto industry very low
price earnings
multiples maybe the market sees
something do you think secular changes
is moving more rapidly now than it did
in the 80s when you were running money
no i saw the textile industry
deteriorate i was recommending all the
stocks of the way down
i saw this industry go away industries
are the industries
can go from terrific to terrible it's a
great expression the intentional
industry that helped me a lot
textile industry yeah it's always
darkest before pitch black
just anything things are terrible they
get terrible squared i mean so just
because the industry's getting bad
that's not a reason vest wait for things
to get better
because again somebody might be involved
in distilling it might be involved in
coal it might involve in iron ore they
might involved in plastics
they'll see it aluminum pick up before i
do so you might that's a cyclical
turnaround
that might last two or three years you
might see way before wall street season
one broad area that you've recently said
might be interesting
is energy and it's very unloved on wall
street right now uh what do you see in
there
well the difference between a glut right
now and a short
it's like 1 million barrels a day you
know the world consumes 100 million
a day 1 million each way
so if the economy stays okay and these
shale wells
you do a thousand barrels a day the
first month a year later that
300 wow then they're 150 big drop off
it's a real treadmill
and right now there's no private equity
money there's no ipos there's no bond
market the banks want out
private equity wants out shale's going
to slow down so these people think
the chair is going to keep growing 2-3
million barrels a day we've gone from 5
million barrels in the u.s
producing to 12 and a half people think
that's going to continue i don't believe
it will
peter lynch thank you very much thank
you
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