Peter Lynch On How To Beat The Market | 2019

Summary

Peter 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

• 📈 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.
• 🛒 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.
• 🏬 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.
• 📊 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.
• 📉 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.
• 📚 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'.
• 💡 Lynch advises against trying to time the market, arguing that the long-term upside potential outweighs short-term market fluctuations.
• 💼 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.
• 🚗 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.
• ⛽️ 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

00:00

💼 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.

05:02

📉 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.

Keywords

💡Investing Philosophy

Investing philosophy refers to a set of principles and beliefs that guide an investor's approach to making investment decisions. In the video, Peter Lynch emphasizes the importance of understanding what you invest in, rather than blindly following market trends. He suggests that investors should do their research, understand the fundamentals of a company, and avoid risky investments without proper knowledge.

💡Market Timing

Market timing is the act of making investment decisions based on predictions of short-term market movements. The video script critiques the idea of trying to time the market, suggesting that it is a dangerous approach. Lynch advocates for a long-term investment strategy, focusing on the fundamentals of companies rather than attempting to predict market fluctuations.

💡Fundamentals

Fundamentals in investing refer to the underlying financial metrics and qualitative aspects of a company that determine its value. The script mentions that Lynch advises investors to look at a company's balance sheet, debt levels, and cash flow to assess its health. Understanding these fundamentals is key to making informed investment decisions.

💡Inside Advantage

Inside advantage implies that investors can gain an edge by leveraging their knowledge and insights from personal experience or familiarity with a particular industry or product. Lynch gives examples from the script, such as recognizing the potential of brands like Gap or Limited before they became widely popular, suggesting that everyday observations can provide investment insights.

💡Information Overload

Information overload occurs when individuals are exposed to more data than they can effectively process or make use of. The video discusses how the abundance of information today can make it challenging for active investors to outperform the market. However, Lynch argues that by focusing on avoiding poor-performing stocks and identifying companies with improving prospects, investors can still beat the market.

💡Active Investors

Active investors are those who actively research and select individual securities in an attempt to outperform the market. In contrast to passive investors who might invest in index funds, active investors like Lynch believe in the potential to beat the market by making informed decisions based on research and analysis.

💡Index Funds

Index funds are investment funds designed to track the performance of a specific market index, such as the S&P 500. The video mentions that indexers argue that because everyone has access to the same information, it's impossible to consistently beat the market. However, Lynch counters this by explaining strategies to outperform the index through careful stock selection.

💡Sector Disruption

Sector disruption refers to significant changes in an industry that can disrupt the status quo and create new opportunities or challenges for companies within that sector. The script discusses how rapid secular changes, such as the impact of Amazon on retail or advancements in the auto industry, can lead to some industries becoming less attractive for investment.

💡Cyclical Turnaround

A cyclical turnaround is a temporary improvement in the performance of a company or industry that is part of its natural business cycle. Lynch uses this term in the context of industries that may be in decline but could experience a short-term recovery before potentially declining again. Investors need to be cautious not to mistake a cyclical turnaround for a sustainable recovery.

💡Energy Sector

The energy sector encompasses companies involved in the production, distribution, and sale of energy resources. In the video, Lynch identifies the energy sector as potentially interesting for investment, contrary to the general negative sentiment on Wall Street. He discusses the dynamics of supply and demand, and the potential for a shift from a glut to a shortage in the oil market, which could present investment opportunities.

💡Long-Term Investment

Long-term investment involves holding onto assets for an extended period, typically years or even decades, with the expectation of earning returns over time. Lynch emphasizes the importance of a long-term perspective in investing, suggesting that trying to predict short-term market movements is futile and that a focus on the long-term growth of companies is a more reliable strategy.

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