Lynch's insightful thoughts from a popular investor talk
23-Aug-2021 •Research Desk
Known for his famous book 'One Up On Wall Street', Peter Lynch managed the Magellan Fund at Fidelity Investments between 1977 and 1990. During the time, he averaged an annual return of 29.2 per cent and made it the best performing fund in the world. In this story, we share insights from his 1994 lecture at the National Press Club (https://bit.ly/35nEPjG).
Brainwashed by the media
Made to believe by the media that they don't stand a chance against institutions, investors do funny things, such as buying options, buying stocks for a week, etc. Lynch says, "Small investors have been convinced by the media, the print media, the radio-television media that they don't have a chance, that the big institutions with all the computers and all their degrees and all their money have all the edges and it just isn't true at all." His point stands true even today, as several business channels give buy and sell calls throughout the day, while gullible investors act on them without doing any research.
Know what you own
If you can't explain why you own stock to a 10-year-old, then you shouldn't own it. Lynch says, "The single most important thing to me in the stock market for anyone is to know what you own." In recent years, frenzy in the pharma, chemical and IT sectors has led investors to buy such companies without having the faintest idea about the businesses of such companies.
Stock returns are not magic
Stocks go up and down in the long run for a reason and that reason is earnings. Lynch states, "I'm trying to convince people that there is a method, there are reasons for stocks that go up." In fact, stock returns often overshoot earnings. In the last 10 years, HUL's earnings per share have grown by 3.2 times, while the stock price has grown by 7.3 times.
Macro predictions = Waste of time
According to Lynch, there is no point in trying to predict macro indicators like interest rates, stock market, economic growth, etc. He says, "If any of them predict interest rates right three times in a row, that'd be a billionaire. Since there's not that many billionaires on the planet, that means there can't be that many people to figure out interest rates." Hit by the second wave, India's GDP growth is now expected to be less than 10 per cent for FY22, while the budget had predicted it to be around 14.4 per cent.
Insiders have an edge
Who knows the best about a company or an industry? The employees themselves. Lynch insists people working in a particular sector have an edge in understanding the trends. "There are good stocks out there looking for you and people just start listening to that but they're just not watching it and they have incredible edges."
Institutions create opportunities
Is institutional presence beneficial? Lynch describes its importance as, "These institutions push stocks on usual lows, they push them on usual highs. For someone who can sit back and have his own opinion and know something about the industry, this is a positive." Infosys fell by more than 15 per cent in 2019 following alleged whistleblower complaints. As institutions exited, investors who understood Infosys well could have invested in the company and reaped good returns.