Peter Lynch has a blunt warning in chapter two of his 1993 book, “Beating the Street”: Don’t be scared out of your stocks. He wrote:
“This point cannot be overemphasized. Every year finds a spate of books on how to pick stocks or find the winning mutual fund. But all this good information is useless without the willpower. In dieting and in stocks, it is the gut and not the head that determines the results.”
He followed up by noting that people who don’t worry about the economy and ignore the state of the stock market—but invest on a regular schedule—will be better off than people who carefully study and try to time their investments. He went on say: “I’m reminded of this lesson once a year, at the annual gathering of the Barron’s Roundtable, when a group of supposed experts, yours truly included, gets involved in weekend worrying.”
Attendees at the Roundtable meetings included such luminaries as Mario Gabelli (Trades, Portfolio), Michael Price (Trades, Portfolio), John Neff, Paul Tudor Jones (Trades, Portfolio), Felix Zulauf, Marc Perkins, Oscar Schafer, Ron Baron (Trades, Portfolio), Archie MacAllaster and, of course, Lynch.
Each discussed his own stars and dogs, how they interpreted past events, what they expected in the future—and a lot of worries. Lynch wrote, “Weekend worrying is what our panel of experts, in the first half of the Barron’s session, practices year after year.” What did they worry about? In 1986, they worried about M-1 versus M-3 money movement. In 1987, they worried about a collapse of the dollar and dumping by foreign companies.
Still, not all panelists worried all the time. For example, they were all quite optimistic in the January 1987 meeting, a year which produced the biggest collapse in stock prices ever seen to that date. Naturally, they were all very pessimistic the following year, expecting more of the carnage they’d just seen the previous autumn—and nothing seriously negative happened.
There’s much more in this vein, entertainingly described by Lynch, but his bigger point is that none of it mattered; it was all essentially noise. Some of the world’s best investors had implicitly or explicitly forecast the future and it was meaningless.
What, then, are amateur investors, for whom Lynch wrote this book, to make of it all? He wrote, “If you had paid close attention to the negative tone of most of our 'whither the economy' sessions over the past six years, you would have been scared out of your stocks during the strongest leg of the greatest market advance in modern history, when investors who maintained their blissful ignorance of the world coming to an end were merrily tripling or quadrupling their money.”
Don’t be scared out of the market, either by gloomy predictions or anything else. The author encouraged his readers to do the opposite: buy stocks on a regular schedule, every month (dollar-cost averaging). Those who have done so outperform those who jump in and out of the market with every new rumor.
Doing so forces you to keep your faith in the market. He said, “You can put your assets in a good mutual fund, but without faith you’ll sell when you fear the worst, which undoubtedly will be when the prices are their lowest.”
How does Lynch cope with times when he becomes worried? He answered, “Whenever I am confronted with doubts and despair about the current Big Picture, I try to concentrate on the Even Bigger Picture. The Even Bigger Picture is the one that’s worth knowing about, if you expect to be able to keep the faith in stocks.”
The Even Bigger Picture was what stocks had done over the previous 70 years (and now nearly 100 years). Over that period, stocks had averaged annual gains of 11% per year, compared to less than half that amount from Treasury bills, bonds and certificates of deposit.
In his words, “In spite of all the great and minor calamities that have occurred in this century—all the thousands of reasons that the world might be coming to an end—owning stocks has continued to be twice as rewarding as owning bonds.”
Over those 70 years, stocks took no fewer than 40 “scary” dips of more than 10%. Despite all that trouble, stocks still averaged 11% growth per year.
Lynch went on to point out that the 1929 crash was followed by the Great Depression of the 1930s, and since then we have come to associate stock market plunges with economic depressions. Yet depressions don’t always follow market collapses. From his vantage point in 1993, Lynch could look back and see that neither the “underpublicized” crash of 1972 nor the Black Monday crash of 1987 led to severe economic situations.
Not surprisingly, then, he argued, “A decline in stocks is not a surprising event, it’s a recurring event…You know it’s coming, and you’re ready to ride it out, and when your favorite stocks go down with the rest, you jump at the chance to buy more.”
Conclusion
In chapter two of “Beating the Street,” we saw a solid argument for getting into the market and staying in, despite turbulence from time to time.
It’s natural to be worried; as we saw, even the great investors were plagued by concerns. But, in almost all cases, they overcame those worries, exercised discipline and went on to make a lot of money for their clients (and themselves). It’s also natural to expect corrections from time to time. In fact, Lynch reported that there were 40 of them between 1923 and 1993.
Finally, we’ll give the last words to Lynch himself: “The story of the 40 declines continues to comfort me during gloomy periods when you and I have another chance in a long string of chances to buy great companies at bargain prices.”
Read more here:
- Beating the Street: In Praise of Amateur Stock Pickers
- Beating the Street: Tackling Misconceptions
- Dividend Investing: Why Reinvest?
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