I first read Peter Lynch’s bestseller, “One Up on Wall Street: How to Use What You Already Know to Make Money in the Market,” many years ago. And like lots of others, I suspect, I planned to follow up by reading his subsequent but less-famous book, “Beating the Street.”
Decades later, I’m about to read it now, in part because I believe there’s still a lot of investing wisdom to pick from Lynch’s mind. I was also interested in his retrospective look at his career as the manager of the Fidelity Magellan Fund between 1977 and 1990 (to read my digest of “One Up On Wall Street,” start here).
As a broad guide to the book, published in 1993, Lynch said part of the reason for this book was to set the record straight, writing, “There are points I thought that I made quite forcefully in the hardcover edition but that the reviewers have never mentioned. There are other points that caught the reviewers’ fancy that I never intended to make at all. This is why I’m delighted to have this new preface, where I can correct what I think are three important misconceptions.”
Those three misconceptions were:
First, putting him on a pedestal, like a famous baseball player. Lynch wrote, “The Babe Ruth comparison, although flattering, is wrong on two counts. First, I’ve struck out or grounded out far too often to be compared to the Sultan of Swat.” That led into his belief that average investors have the potential to be better investors than the professionals because the latter are constrained by many rules.
In Lynch’s view, amateurs need not buy more than a handful of stocks, which they could have researched in their spare time. What’s more, amateurs have the option of sitting on cash if they don’t see any suitable opportunities. And, he ruefully added, “You don’t have to compete with the neighbors, the way professionals do, by publishing your quarterly results in the local shopper.”
For proof, he noted that nearly 70% of local clubs in the National Association of Investment Clubs (NAIC) had beaten the S&P 500 in 1992 (the organization is now known as NAIC, National Association of Investors Corporation or “BetterInvesting”—in follow-up research I have been unable to determine if the clubs continued to outperform since 1992).
Second, the idea that he, Lynch, thought everyone should plunge into balance sheets, investigating companies and buying stocks. He disagreed with that idea because he knew there are millions of people who should not buy stocks because they would not do due diligence. He said, “The worst thing you can do is to invest in companies you know nothing about.”
He pointed to people who spend weeks studying their frequent flier miles or poring over travel guides, but without a moment’s research, plunge $10,000 into a stock they know nothing about. Often, those people, who are not good at picking stocks, say they are “playing the market.” But the market is not a game where you can have instant gratification without putting in any work.
Then, there are the “chronic losers” who like to play their hunches, buying an expensive stock because they think it will make a comeback or buy a riverboat casino stock after hearing it is “hot.”
The third misconception is the idea that Lynch had “it in for” mutual funds. He argued:
“Why would I bite the hand that fed me so well? Equity mutual funds are the perfect solution for people who want to own stocks without doing their own research. Investors in equity funds have prospered handsomely in the past, and there’s no reason to doubt they will continue to prosper in the future.”
He went on to observe there is no reason why an investor can’t own both stocks and mutual funds. Further, he wrote, “Even in an equity fund that fails to beat the market average the long-term results are likely to be satisfying. The short-term results are less predictable, which is why you shouldn’t buy equity mutual funds unless you know you can leave the money there for several years and tolerate the ups and downs.”
Moving from the preface to the introduction, Lynch bemoaned the fact too many investors were being too conservative. “One message that hasn’t sunk in, apparently, is that in the long run owning stocks is more rewarding than owning bonds and CDs," he wrote. "Recently, I was dismayed to discover that in the retirement accounts that thousands of people have opened at my own firm, Fidelity, only a small percentage of the money is invested in pure equity funds.”
He offered this blunt warning: “This calamity for the future of individual and national wealth cannot go unchallenged. Let me begin, then, where I left off the last time: if you hope to have more money tomorrow than you have today, you’ve got to put a chunk of your assets into stocks.”
So far, it seems we’ve been urged either to go big or go home, as the old adage has it. Yet, Lynch sees a middle ground. Amateurs who do a “small amount of study” into companies in an industry they already know to some extent can be more successful than 98% of professional managers.
As for the skeptics, he had this rebuttal: “A sizable crowd of mutual fund managers dismisses this notion as hooey, and some have called it 'Lynch’s ten-bagger of wind.' Nevertheless, my two and a half years away from Magellan have only strengthened my conviction that the amateur has the advantage.”
Conclusion
In “Beating the Street,” Lynch began by following up on some of the misconceptions he believed arose out of his first book, "One Up on Wall Street."
Despite what others said or wrote about the book, he argued he was not necessarily a better investor than many amateurs, that not everyone should be running around with calculators and balance sheets and that he still believed in mutual funds.
Finally, he emphasized that every investor should own stocks if they want to grow their wealth beyond what it is today.
Read more here:
- Dividend Investing: Why Reinvest?
- Dividend Investing: Why Diversify?
- Dividend Investing: Due Diligence
Not a Premium Member of GuruFocus? Sign up for a free 7-day trial here.
