When he managed Fidelity's Magellan Fund, Peter Lynch managed to hit annual returns averaging 29.2% between 1977 and 1990. Having achieved so much, it is perhaps understandable why he retired from the professional money management business as early as he did - aged just 46.
These days, he mostly stays out of the media spotlight, so whenever he does speak on a subject, investors typically flock to listen. In an interview with Fidelity, Lynch explained his basis for investment, which has not changed significantly over the last 30 years.
Think in the long term
Lynch is a fundamentally long term oriented investor, so for him, the main question to answer is whether equities will be higher in ten years than they are today. Unfortunately, a lot of volatility can happen between today and ten years from now. Lynch's big requirement for investors is that they are able to handle the day to day volatility of the stock market:
"What's your tolerance for pain? That stock market is a very good place to be, but I could toss a coin now and it's a 50/50 chance that the market will be lower or higher a year from now - I don't know. More people lost money waiting for and anticipating corrections, than the actual corrections. You have to look in the mirror every day and ask yourself: "what am I going to do if the market goes down 10%? 20%? Am I going to sell?"
When Lynch was in charge of the Magellan Fund, the market went down by 10% or more nine times. But as someone who viewed his investment through the prism of long term thinking, that didn't bother him. If you don't need your money in the near future (and you shouldn't be investing money that you might need to cover your day to day expenses anyway), it shouldn't matter what happens a year from now. This is why, as investors get older and closer to retirement, they are advised to gradually move their investments into less volatile instruments like government bonds and money market funds.
Be your own expert
Another key tenet of Lynch's thinking is that amateur investors with a strong edge in a particular market (for example, a mechanic investing in auto manufacturing, or a pharmacist investing in biotech) can outperform professional money managers who don't have that level of in-depth knowledge about a sector.
He believes that the explosion in data available about companies has actually increased the edge of these 'amateur specialists' - if everyone gets all the information available, then those who can analyse it more thoroughly and think more deeply about it will have a natural advantage. The trick is to minimize your personal biases and to broaden your knowledge in your chosen domain.
Disclosure: The author owns no stocks mentioned.
Read more here:
- Understanding the Midstream Energy Sector Today
- Joel Greenblatt: The State of Value Investing Today
- Warren Buffett's History With Silver
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