"Outperform 99% Of Investors With This Simple Strategy..." - Peter Lynch

Summary

In this insightful interview, Peter Lynch, acclaimed as America's top money manager, discusses his philosophy on investing in stocks. He emphasizes the importance of understanding one's natural advantages and the value of investing in industries one is familiar with. Lynch provides practical advice from his book 'One Up on Wall Street', illustrating how everyday observations can lead to profitable investments. He also shares his thoughts on the unpredictability of economic factors and the benefits of a hands-on approach to investing, as demonstrated by a successful seventh-grade class and investment clubs. The conversation concludes with Lynch's personal transition from managing funds to focusing on family and charitable work.

Takeaways

• 📈 Peter Lynch emphasizes the importance of individual investors understanding their natural advantages in the stock market and encourages them to invest based on their own knowledge and experience.
• 📚 Lynch's book 'One Up on Wall Street' was written to help people realize their potential in the stock market and to invest in a way that aligns with their personal understanding of companies and industries.
• 😔 Despite the best decade for stocks in the 1980s, many people lost money due to flawed investment methods, which motivated Lynch to write another book to provide better guidance.
• 🤔 Lynch advises that if investors do not understand a company well enough to explain it simply to a 10-year-old, they should not invest in it, as they won't know how to react when the stock price fluctuates.
• 🏢 The transcript highlights the idea that people should invest in what they know, such as their own industry, to make informed decisions and avoid unnecessary risks.
• 💡 Lynch shares personal anecdotes, like his wife's enthusiasm for a product leading him to recognize its potential, as an example of how personal experiences can inform investment choices.
• 📉 He discusses the correlation between a company's earnings and its stock performance over time, suggesting that external factors like politics and economics are less important than a company's fundamentals.
• 🧩 Lynch mentions that even investment clubs, composed of amateurs, outperformed professional investors in the 1980s, illustrating the potential for non-professionals to succeed in the market.
• 👨‍👩‍👧‍👦 After stepping down from managing funds, Lynch chose to spend more time with his family and engage in charitable work, showing a shift in priorities from professional success to personal fulfillment.
• 🏛️ Lynch's involvement in charity work includes being on investment committees for institutions like the Museum of Fine Arts, demonstrating his continued interest in leveraging his financial expertise for social good.
• 📊 The transcript also provides examples of Lynch's investment philosophy in action, such as his investment in Dunkin' Donuts, based on understanding the company's business model and potential for growth.

Q & A

Who is Peter Lynch and what is his significance in the financial sector?

Peter Lynch is a renowned money manager, known as America's number one money manager by Time Magazine. He is famous for his successful management of the Fidelity Magellan Fund, which was a top-ranked general equity mutual fund during his tenure.

What was the purpose of Peter Lynch writing 'One Up on Wall Street' and then 'Beating the Street'?

Peter Lynch wrote 'One Up on Wall Street' to explain the advantages individuals have in investing in stocks and to encourage people to get involved in the stock market. He wrote 'Beating the Street' to further emphasize the importance of understanding the fundamentals of a company before investing and to provide advice on maximizing profits.

According to the transcript, what percentage of people's financial assets were in stocks and mutual funds in 1960, and how has this percentage changed since then?

In 1960, people had 40% of their financial assets, including their house, in stocks and mutual funds. This percentage decreased to 25% in the 1980s and further dropped to 17% in the time period being discussed.

Why does Peter Lynch believe that people lost money in the 1980s, which he considers the best decade for stocks?

Peter Lynch believes that people lost money in the 1980s because their methods of investing were flawed. They did not understand the fundamentals of the companies they were investing in, leading to poor investment decisions.

What is the main philosophy that Peter Lynch advocates for when it comes to investing in stocks?

Peter Lynch's main philosophy is to invest in what you know and understand. He suggests that if you can't explain a company's business to a 10-year-old in two minutes or less, you shouldn't invest in it.

How does Peter Lynch relate the story of his wife and her hosiery purchase to the concept of investing in what you know?

Peter Lynch uses the story of his wife's enthusiasm for a particular brand of hosiery to illustrate the idea of investing in what you know. His wife's positive experience with the product led him to believe in its quality and potential for success, which is a similar rationale one should use when choosing stocks.

What is Peter Lynch's view on the correlation between a company's earnings and its stock performance over time?

Peter Lynch believes there is a 100% correlation between a company's earnings over several years and its stock performance. He asserts that if a company like McDonald's does well, its stock will also do well, regardless of external economic factors.

Why does Peter Lynch discourage investors from trying to predict interest rates or the economy?

Peter Lynch discourages this because even experts like Alan Greenspan, the head of the Federal Reserve, cannot accurately predict interest rates or the economy. Therefore, investors should focus on what they can understand and control, such as a company's fundamentals.

What advice does Peter Lynch give to investors who are not involved in a specific industry?

Peter Lynch advises such investors to buy local companies or stocks they are familiar with. He uses the example of Walmart, suggesting that investors could have made significant profits by investing in companies they understand and that are part of their local economy.

What is the significance of the seventh-grade class example mentioned in the transcript?

The seventh-grade class example demonstrates that even young students can successfully pick stocks when they understand the companies they are investing in. The students' stocks outperformed the market, showing the effectiveness of Lynch's investment philosophy.

What changes did Peter Lynch make in his life after managing the Fidelity Magellan Fund for 13 years?

After managing the Fidelity Magellan Fund, Peter Lynch decided to spend more time with his family and engage in charitable activities. He reduced his work hours and became involved in hands-on charity work, such as helping with inner-city schools, libraries, and housing.

Outlines

00:00

📈 Stock Investing Misconceptions and Peter Lynch's Philosophy

In this paragraph, the speaker discusses the common misconceptions about stock investing, emphasizing that people often fail to recognize and utilize their natural advantages. Peter Lynch, renowned as America's top money manager, introduces his book 'Beating the Street,' which aims to guide individuals on stock selection and profit maximization. He highlights the importance of understanding one's industry and the company's earnings as key to successful investing, rather than being swayed by external economic factors. Lynch also shares anecdotes from his personal life to illustrate the concept of investing in what one knows and understands, advocating for a simple yet effective approach to stock picking.

05:02

💼 The Pitfalls of Short-Term Stock Trading and the Importance of Knowledge

This paragraph focuses on the pitfalls of short-term stock trading and the importance of understanding the companies one invests in. The speaker criticizes the approach of treating stock investments as gambles, which often leads to loss of money due to high transaction fees and poor decision-making. He advises that if one cannot explain a company's business to a 10-year-old in two minutes, they should not invest in it. The speaker shares examples of successful investments in well-known companies like Walmart, illustrating the potential for significant returns when investing in familiar industries. He also discusses his own future plans post his book release, emphasizing his desire to spend more time with his family and engage in charitable work, while still maintaining a connection to the investment world through mentoring young analysts.

10:02

🤝 Peter Lynch's Involvement in Philanthropy and Community Development

In the final paragraph, the speaker elaborates on his post-retirement activities, particularly his involvement in philanthropy. He mentions his work on the investment committees of various organizations, such as the Museum of Fine Arts, and his hands-on participation in charitable activities aimed at improving inner-city schools, libraries, and housing. This paragraph underscores Lynch's commitment to giving back to the community and using his expertise to make a positive impact beyond the financial sector.

Keywords

💡Natural Advantages

Natural advantages refer to inherent benefits or strengths that individuals possess, often related to their personal experiences or professional knowledge. In the video, Peter Lynch emphasizes the importance of leveraging these advantages when investing in stocks, suggesting that people should invest in areas they understand and are familiar with, as it can lead to better investment decisions.

💡Stocks

Stocks represent shares in the ownership of a company and are a common form of investment. The script discusses the general public's declining involvement with stocks and the misconceptions about the complexity of investing in them. Lynch advocates for a more informed approach to stock investment, based on personal understanding and industry knowledge.

💡Peter Lynch

Peter Lynch is an American investor, author, and former manager of the Fidelity Magellan Fund, known for his successful investment strategies. In the script, he shares his insights on stock investment, emphasizing the importance of understanding the companies one invests in and the advantages of investing in familiar sectors.

💡Mutual Funds

Mutual funds are investment vehicles that pool money from many investors to invest in a diversified portfolio of stocks, bonds, or other assets. The script mentions that the percentage of people's assets in stocks and mutual funds has decreased over time, indicating a shift away from these traditional investment methods.

💡Investment Clubs

Investment clubs are groups of individuals who pool their resources and knowledge to make investment decisions collectively. The script highlights that many amateur investment clubs outperformed professional investors in the 1980s, suggesting that group knowledge and shared understanding can be effective in stock investment.

💡Earnings

Earnings refer to the profits a company makes over a period of time. In the context of the video, Lynch explains that there is a direct correlation between a company's earnings and the performance of its stock over time, advocating for investment decisions based on a company's earnings potential.

💡McDonald's

McDonald's is used in the script as an example of a company whose stock performance has closely followed its earnings growth. This serves to illustrate Lynch's point that understanding a company's fundamentals, such as its earnings, is key to successful stock investment.

💡Recession

A recession is a period of economic decline, typically characterized by a drop in consumer spending and increased unemployment. The script mentions the recession of 1982 to illustrate the unpredictability of economic conditions and the importance of focusing on company performance rather than broader economic indicators.

💡Dunkin' Donuts

Dunkin' Donuts is mentioned by Lynch as an example of a company whose stock he owned and understood well, emphasizing the idea that investors should invest in what they know. It serves as an example of a successful investment based on personal familiarity with the business.

💡Walmart

Walmart is cited in the script as an example of a company that had significant growth potential, which an investor could have identified by understanding the market saturation and expansion plans of the company. This highlights the importance of researching and understanding the business models of companies before investing.

💡Charitable Activities

Charitable activities refer to the work done for the benefit of the community or to support non-profit organizations. In the script, Lynch discusses his transition from full-time money management to part-time work, allowing him to engage more in hands-on charitable activities, showing a personal aspect of his life post-career change.

Highlights

People often fail to recognize and utilize their natural advantages in investing.

Peter Lynch emphasizes the importance of investing in what you know and understand.

Lynch's first book aimed to encourage people to get involved in stocks based on their personal advantages.

Despite the decline in stock investments, Lynch believes in the long-term benefits of stocks.

Lynch discusses the flawed methods that led to people losing money in the stock market during the 1980s.

The correlation between a company's earnings and its stock performance over time is often misunderstood.

Lynch argues that external factors like the economy or interest rates are less predictable and should not be the focus of stock investment decisions.

Investors should avoid stocks they do not understand, as it leads to poor decision-making when the stock price drops.

Lynch shares personal anecdotes, such as his wife's enthusiasm for a product leading to a successful investment.

Investment clubs, made up of amateurs, outperformed professional investors in the 1980s.

Lynch's new book, 'Beating the Street', offers advice on stock picking and profit maximization, building on the principles from his previous book.

The importance of staying within one's industry when investing to leverage natural advantages.

Lynch's experience with the Fidelity Magellan Fund and his reputation as America's number one money manager.

The story of a seventh-grade class that successfully picked stocks by understanding the companies they invested in.

Lynch's decision to step back from managing funds to focus on family, charity work, and sharing his investment wisdom.

The impact of Lynch's investment philosophy on individual investors and the importance of a hands-on approach to charity work.

Transcripts

people don't understand their natural

advantages and they don't use it that's

bad number one but worse number two if

you don't think you're a good ice skater

or if you're convinced you're not a good

cellist you're not going to try it but

people are buying stocks anyway they're

not discouraged they just think it's a

gamble yeah we begin with peter lynch

time magazine has called him america's

number one money manager during the 13

years he headed the fidelity magellan

fund it was a top-ranked general equity

mutual fund his new book beating the

street offers advice on picking stocks

and maximizing profits and he's here to

talk to us about a lot of things welcome

to the broadcast you wrote a book called

one up on wall street and i think that's

one of the best-selling books ever about

wall street if i'm not correct you can

correct me

so why then did you write another okay

okay i think the reason i wrote it is

the first i try to explain to people

their great advantages their edges they

have

and that they should get involved in

stocks right and they should do it on

the right basis on the first book right

yeah and obviously i didn't make a great

impression because the percent of

people's assets

involved in stocks has gone down in 1960

people had 40 of their financial assets

including their house in stocks and

mutual funds in 80 that was down to 25

it's now down to 17 and why do you think

that is well i think people in the

decade of the 80s was the best decade

this century for stocks i think people

managed to lose money in the 80s doing

it themselves because their methods were

so flawed so i i really feel as though i

wanted people to understand i don't want

anybody to buy a stock i'm saying if

you're going to buy a stock you should

do certain things right if you're not

willing to do these things you should

leave your money in the bank your

philosophy is simple and i'm remembering

this from the previous book i think

we're now talking about the previous

book correct your philosophy was if you

find something that you identify with i

remember that was the story of your wife

and her hose yeah your wife kept all the

legs

oh you got it legs and panties your wife

said these are the greatest things i've

ever seen right and when your wife said

that you knew that this was a product

that was better right you used to stay

at la quinta motel right the service was

better whatever was better the price is

good and the price was good too and you

said this is a place that i can

determine i peter lynch can tell that

this is a good product right if these

people are making a good product then

their earnings are going to go up

therefore the stock's going to go up

right and that's the kind of

decision-making process you ought to go

through right do i have it you've got it

exactly right well i do i don't think

people understand there's a 100

correlation

with what happens to a company's

earnings over several years

and what happens to the stock if the

company mcdonald's has done very well as

a company right the stock has done very

well people worry about

too much money supply what's happened

the price of oil who's the president

who's being nominated for the supreme

court it's the ozone layer there's

nothing to do mcdonald's earnings go up

the next 10 years the stock will go but

what they will say to you peter is that

as you know and why am i telling you

this but it's fun to tell you this

they're telling you that these other

things influence the amount of earnings

of a particular company if we're in a

recession people are not going to spend

as much money on going to the movies or

whatever they do right and and therefore

you got to pay attention to these other

things because they impact on earth they

are very important but you have no idea

of knowing what they're going to do alan

greenspan is the head of the federal

reserve right he cannot predict interest

rates yes he'd be the first to influence

but he can't predict them he cannot

predict what long-term interest rates

are going to be one year from now two

years from now three years he's even

surprised how low they are now right so

how am i supposed to pick interest rates

how am i supposed to predict the economy

you certainly remember the recession of

82 yes 1982 with a 20 prime rate 14

unemployment 12 percent inflation i

don't remember anybody telling me in

1980 or 81 that was going to happen all

of a sudden we had the worst recession

since the depression i didn't read about

in the paper so it's crazy to think

about these things

here's a quote from you i own dunkin

donuts when you own dunkin donuts you

don't have to worry about korean imports

you don't have to worry about m2 or m3

these are money supply figures

and what's happening to the money supply

this is the way you make money if you

don't understand what the company does

you should not be in it if you could

predict the stock market you could

predict the economy you could predict

interest rates if you go buy the wrong

stocks you're going to lose have your

money anyway right i'm saying people

have natural advantages yeah let's say

what you do for a living is you're

involved in the restaurant industry

right you supply paper products you

supply kitchen equipment you help build

restaurants

you saw mcdonald's you saw chichi you

saw chili's you saw cracker barrel you

saw dunkin donuts kentucky fried chicken

taco bell these are all these stories

these were 40 40 fold you made 40 or 50

times your money you don't need to make

that kind of money many times your life

right

that's all you had to do was follow the

restaurant industry people are in

industries they're in the publishing

industry they're in the chemical

industry the paper why don't they just

stay within industry you only need a few

stocks a decade how many good stocks you

need a lifetime instead of people

they're in the restaurant industry

they're buying biotechnology stocks the

people in the camp

the people in the chemical industry are

buying oil stocks it's absolutely absurd

people don't understand their natural

advantages and they don't use them so

that's that's bad number one but worse

number two

if you don't think you're a good ice

skater or if you're convinced you're not

a good cellist you're not going to try

it but people are buying stocks anyway

they're not discouraged they just think

it's a gamble yeah so therefore they go

forward and they they bet on one stock

for a week and a half and it goes up and

they make two dolls on it then they sell

it they buy something else when three

years is over all they've done is

generate a lot of commissions they've

probably lost money that's a mistake so

your advice is what if you don't

understand a company if you can't

explain it to a 10 year old in two

minutes or less

yes don't own it because when it goes

down let's say the stock goes down too

you don't understand what's going on

what do you do do you buy more do you do

you do you flip a chances are your

broker doesn't either you they he or she

certainly doesn't know about it

i mean who knows what advance what all

these things are at auto back planes and

megaflops who knows what all this is so

buy what you know buy in your industry

buy what you know buy local people so so

suppose you you don't have an industry i

mean you know you don't really you what

you buy company local companies right

companies your own industry

ten years after walmart went public ten

years after walmart ten years after it

went public it's a 25 year old company

now right you could have bought the

stock and made 50 times your money on it

50 times this is if you bought it 10

years after it was public already it

already gone up five-fold so you could

have made 250-fold but i'm saying let's

say you were in a town they came into it

they said boy these prices are great

they're doing terrific i like the

bargains you checked it out you spent a

little bit of work on it yeah i mean

people are very careful when they buy a

dishwasher they do some research they'll

put ten thousand dollars in some stock

they're here on a bus so if you did a

little bit of research you say walmart's

only only ten percent in the country

they're not even saturated there why

can't they go to the rest of the country

so is this this is more of the same is

this it's more of the same plus

i show examples it's it's a touch more

detailed it actually shows me in an

action right i picked 21 stocks early in

1992.

some work some don't i follow those

companies some of the companies the

fundamentals deteriorate some they

improve i watch those companies go

through the year i also explain the

retail industry i try and make it very

simple i talk about a wonderful example

is a seventh grade class yeah the

teacher of that read my book and my

first book that you were talking about

you you and i did a show on that in

washington you remember that show this

is a long time ago

she read the book and i said if you made

it through fifth grade math

you can do it in the stock market she

says okay she started teaching it in

seventh grade seventh grade class these

kids had to study companies they had to

look at their balance sheets to see if

they're solving and they pick stocks

these stocks were up 69 percent over two

years when the market was up only 20.

they picked stocks like limited they

picked the gap they picked walt they

understood these companies they also

picked ibm i lost money on that too yeah

i mean everybody makes mistakes but it

did yeah but i'm saying this is this was

this was the school saint agnes school

in arlington mass but in addition

in the decade of the 80s there's 8 000

investment clubs these are amateurs sort

of right average people just investing

these investment clubs 62 of them these

clubs beat the market in the decade of

the 80s only 25 percent of professionals

beat the market let me go back to one

other subject you after you're coming

back to fidelity aren't you just i'm not

gonna do something when i when i finish

this book i've been working about one or

two days a week the last year and a half

on this book right now i'm done with the

book i'm going to go back to maybe one

day a week working with the younger

analysts just listening to them talking

to them i'm not telling them to buy zero

zero lifestyle not totally i'm not gonna

run another fund 13 years is plenty of

running a fund i'm just going to work

with younger analysts let them ask

questions i'll ask them questions it's

going to be a lot of fun now do you

still follow do you manage any money for

anybody other than yourself no no

i manage money with other people for

some charities right but no i don't

manage anybody's accounts you're not

doing some mutual funds

no it's nothing i'm out of it cold

turkey all right you called turkey cold

turkey

are you happy you did this i'm obviously

delighted it's been and you like your

new life oh it's fabulous four or five

years ago you just said and i'm managing

all this money i'm gonna do i'm gonna

quit yep that's right and what and you

went to do what well actually i want to

spend more time my wife and my children

right and it was an interesting

situation because i loved my job i

adored my job

and i and i liked outside activities and

when i was young

you know

i didn't wasn't involved in charity work

until i was 30. no activities younger

children you just read them a book and a

good night moon and they fall asleep but

it's all over

when they get older there's more time

involved so i enjoyed the family i was

leaving for work at six in the morning i

was getting home at seven o'clock at

night six days a week i was in boston

yeah traveling 14 days a month it was

just too much so i said

you know i i said that's it i can't take

it and fortunately i'd made enough money

to say

i could give up the jobs i didn't have

to give up the family or the outside

activities and so what happened then so

you did what with your well i cut back

from about a 80 a 90 hour a week to a 40

or 50 hour week and i in the morning i

make breakfasts and lunches for the kids

and i do the spelling words and the

spanish words carolyn does the math and

the science and i uh see carol in the

morning and off i go to a place you have

to go to my opinion you have to go

somewhere to do something if you stay at

home you want to be answering the

telephone or watching cartoons so yeah

it's like falling asleep taking a nap so

she does the hard work and i go i go

finally gave me an office i have a

secretary and i spend majority of the

time working on charity things like

inner city schools inner city libraries

inner city housing you know helping

people manage their money or no not at

all

just i'm some of the charities i'm on

the investment committee of some of the

museum of fine arts the you know i'm

involved in national hospital

boston college but united way but

all the extra things i added to were

real

hands-on

actually being involved in charitable

activities