In the first chapter of “One Up on Wall Street”, Peter Lynch wanted readers to know that no one is a born stock picker. To make the case, he cites his own early history:
“There was no ticker tape above my cradle, nor did I teethe on the stock pages in the precocious way that baby Pelé supposedly bounced a soccer ball.”
Indeed, his family and extended family had grown up during the Great Depression of the 1930s and urged him to stay away from stocks and the stock market. A counter-argument emerged during his teens, however, when he was a golf caddy at a high-end golf course near Boston.
There, he caddied for presidents and CEOs of major companies, including Gillette, Polaroid and privately-held Fidelity Investments (where he was later to work).
“If you wanted an education in stocks, the golf course was the next best thing to being on the floor of a major exchange. Especially after they’d sliced or hooked a drive, club members enthusiastically described their latest triumphant investment.”
While he didn’t have enough saved to be an investor in high school, he did while in college, buying Flying Tiger Airlines in 1963. He chose this stock, he said, “on the basis of some dogged research on a faulty premise.” Whatever the circumstances, Flying Tiger became a five-bagger for Lynch in just two years, and helped finance his graduate school education.
Lynch said this investment also proved to him that big-baggers existed, and it was likely many more of them could be found. To cap off his good luck, the president of Fidelity Investments encouraged Lynch to apply for a summer internship at his firm. He got the job and spent a summer as an intern researching the paper and publishing businesses, traveling around the country by bus:
“Since the airlines were on strike, I traveled by bus. By the end of the summer the company I knew most about was Greyhound.”
Returning for his second year of graduate school, Lynch said he found himself doubting much of the academic knowledge he was gathering. For example, he had learned the efficient-market hypothesis in school, but had seen enough “odd fluctuations” to make him doubt that everything in the stock market was known and, subsequently, that prices were always rational. What’s more, he had seen that “the success of the great Fidelity fund managers was hardly unpredictable.”
Among those great fund managers were Gerry Tsai, who ran Fidelity Capital, “one of the two famous go-go funds of this famous go-go era." There was also Ned Johnson, son of the founder of Fidelity and manager of the Fidelity Trend fund. Lynch said the two of them handily outperformed competitors by large margins and dominated the industry between 1958 and 1965.
After finishing grad school, and before becoming a permanent employee at Fidelity, Lynch spent two years in the U.S. Army, serving in Texas and Korea.
Throughout these years he continued to buy and sell stocks, with mixed degrees of success. With his familiar, self-deprecating humor, Lynch told stories of his early investing experiences. For example, there was Maine Sugar, a company that had visited Maine’s potato farmers, urging them to grow sugar beets in their off-season. It was a big win-win, Lynch thought, because sugar beets were a perfect complement to potatoes, would allow farmers to make extra income and replenish their soil at the same time. In addition, Maine Sugar would pay planting costs to get feedstock for a new refinery it had built.
This seemed a wonderful idea to Maine Sugar and to Lynch, and they expected each farmer would plant hundreds of acres of sugar beets. However, in Lynch’s telling at least, they hadn’t reckoned with the cautiousness of the farmers. Instead of planting hundreds of acres, farmers started with a quarter acre, then a half acre the next year. By the time they reached a full acre, the refinery closed for lack of feedstock. Later, Lynch said:
“After the Maine Sugar fiasco, I vowed never to buy another stock that depended on Maine farmers chasing after a quick buck.”
Perhaps a couple of broader lessons might include the elusiveness of sure things, that unanticipated external events can confound the best business case reasoning, and that you should not expect others to think the way you do.
In 1977, eight years after starting as a permanent employee at Fidelity, Lynch took over the Magellan Fund, which at that time had $20 million in assets and 40 stocks in the portfolio (when he wrote this book 11 years later, that valuation had climbed to $9 billion and many, many stocks). At the time, Johnson, then head of Fidelity, recommended a reduction from 40 to 25 stocks; Lynch, though, went the other way, increasing to 60, 100 and 150 stocks while still a rookie in the job. He says he wasn’t being insubordinate:
“I didn’t do it to be contrary. I did it because when I saw a bargain I couldn’t resist buying it, and in those days there were bargains everywhere.”
At the time he finished writing this book, Lynch had some 1,400 stocks in the portfolio. Among his buying strategies (or impulses) at the time was buying many names in the same group or sector. He tells, for example, of owning 150 savings and loans at one time (each bought on a rational business case). He took the same approach at one point to convenience stores; rather than just buying Southland for its 7-Eleven stores, he bought at least a half dozen other convenience store operators.
Not referenced here is the matter of putting new money to work. A successful performance record draws new money into a fund, and that means searching for new companies to absorb that capital.
In conclusion, this first chapter of “One Up on Wall Street” introduces us to Lynch the man and how he grew into his success at the Magellan Fund. It’s also the long-way around in letting us know that great investors are not born—instead, they learn their craft. And like every one of us, they’ve made their share of bad investments, too.
Note that none of the companies named in this review are still listed on American stock exchanges; presumably they were delisted, went bankrupt or were merged on the watch of Lynch or a successor.
GuruFocus provides the Peter Lynch Screener tool for quickly finding companies that meet his criteria for prices below the earnings line (more on this later). In addition, it can be used to create a Peter Lynch chart for any company followed by GuruFocus. Members can access the screener here, and non-members can get started here.
(This review is based on the Millennium Edition (2000) of “One Up on Wall Street”; by the time this edition appeared, the book had already sold more than a million copies. More of these chapter-by-chapter reviews can be found here.)
