11 Peter Lynch Facts You Need To Know
Who is Peter Lynch and why as investors should we care?
Peter Lynch cemented himself as the greatest Wall Street investor of the twentieth century. He stands first among equals, alongside men such as Warren Buffet, Charlie Munger and George Soros in terms of his investment prowess. His name demands respect for reasons you will soon see.
For 13 years from 1977 to 1990 he ruled as the head of the Magellan mutual fund. Turning a tasty 20 million dollars into a whopping 17 billion dollars through his investment mastery. Then in 1990 in his prime age 46 he retires, finished, مُنْجَز, finito, No más!
If you put $1000 into Magellan in 1977 it would be worth $29,000 by the end of 1990, Lynch managed to average 29.2% compound interest during this time. With only 2 losing years out of 13.
Magellan became the most successful mutual fund in the world during this time, and Peter was not shy on why he had so much success. He was also nice enough to share his exact methods so we might replicate his success.
Lord bless us and save us we are not worthy! I nearly fell out of my chair putting that through the calculator.
So, you’ve had a peek into Peter’s investment career now let’s get into how this all came to be.
“Find something you enjoy doing and give it everything you've got, and the money will take care of itself.”- Peter Lynch
Without further ado here are 11 facts about Peter “The Market Defeater” Lynch!
1 - The Early Years
Peter Lynch was born January 19th 1944, America had just entered the war against the Axis, in the 1940s the average family was still recovering after the colossal stock market crash known as “The Great Depression”.
It had only been five years since its end and the average family still had a deep mistrust for the Stock market and the Lynch family was no exception.
“Nobody was recommending Stocks around our household. The only stock I ever heard about was the time my grandfather, Gene Griffin bought Cities Service”
“He was a very conservative Investor, and he chose Cities Service because he thought it was a water utility company. When he took a trip to New York and found out they were an oil company, he immediately sold – Peter Lynch
His father Tom Lynch was a professor of mathematics at Boston University. When Peter was 7 his father was diagnosed with cancer. His father lost his fight when Peter was 10 years old.
After his fathers passing his mother began working to support the family. Peter also began working, getting his first part time job as a caddy at the Brae Burn Country Club.
This turned out to be the most pivotal decisions in Peter’s life.
The Brae Burn Country Club saw CEO’s and executives from a Gillette, Polaroid, and Fidelity walking through its doors.
Peter would listen in as top executives discussed stock options while caddying, he spoke about the time saying this.
“I remember them talking about stocks, they mentioned the names and I'd look in the paper and look at it a month later, a year later, and I noticed they were goin' up. And I said, "Gee, this makes a lot of sense."- Peter Lynch
As a teenager Peter would exchange golf tips for stock tips learning from the best investors of his day.
“You get to know the course and can give the players advice about how to approach various holes,” he says. “Where else, at age 15 or 16, can you serve as a trusted adviser to high-powered people?”
He didn’t have any money to invest at the time, but he could see all the money being made during the bull market of the 1950’s.
2 - Education and Military Career
Peter ended up being such a good caddie that he was offered a caddying scholarship to Boston university!? You heard that right people, I originally called Bull**** on this one, but yes I looked it up it’s a real thing!
So, with his scholarship in hand and from working at the golf club Peter was able to pay his student fee’s. While at college he didn’t take the usual path of a financial analyst or a future fund manager.
Peter studied psychology, history, logic, ancient Greek philosophy, metaphysics, epistemology and political science. Instead of the typical science, math, and accounting.
“As I look back on it now, it’s obvious that studying history and philosophy was much better preparation for the stock market than, say, studying statistics”
“Investing in stocks is an art, not a science, and people who’ve been trained to rigidly quantify everything have a big disadvantage.” – Peter Lynch
During his sophomore year in college, he bought his first 100 stock shares in Flying Tiger Airlines for $8 dollars a share. He was positive that Flying Tiger Airlines was the future of aviation! It turned out to be a winner for a different reason.
In 1965 the Vietnam War started in the pacific. This meant America needed a lot of cargo planes to ferry troops and supplies, enter Flying Tiger Airlines! The big business caused the airline stocks to rise 10x times its original value.
“I started selling it, I think, at $20 and $30 and $40, sold all the way up to $80 and helped pay for graduate school. So I almost had a Flying Tiger scholarship.”- Peter Lynch
Lynch graduated from Boston university in June with a degree in History, Philosophy and Psychology.
That summer in 1966 Peter got a summer job using those caddie connections, he heard about three summer positions opening Fidelity. The President of the Fidelity D. George Sullivan was a regular at the Golf Club.
“D. George Sullivan, outstanding person, big tipper, bad golfer. There were 100 applicants for three summer jobs at Fidelity, but I caddied for the president for eight years. So that was the only job interview I ever took. It was sort of a rigged deal.” – Peter Lynch
Sometimes it’s not about what you know, but who you know. In 1967 Peter joined the military getting stationed at Fort Bliss, Texas.
While in the military Peter continued his education graduating from Penn’s Wharton School of Business. Earning a master’s in business administration (MBA) in 1968.
Fun fact Elon Musk, Donald Trump, John Sculley and Edmund T. Pratt Jr. went to Wharton to name a few.
Peter said this about Wharton
“After that Interlude at Fidelity, I entered Wharton more sceptical than ever about the value of academic stock-market theory. It seemed to me that most of what I learned at Wharton, which was supposed to help you succeed in the investment business, could only help you fail.” – Peter Lynch
He continued
I studied Statistics, Advanced Calculus and Quantitative Analysis. Quantitative Analysis taught me that the things I saw happening at Fidelity couldn’t really be happening. It also was obvious that Wharton professors who believed in Quantum Analysis weren’t doing nearly as well as my colleagues at fidelity, so between theory and practice, I cast my lot with the practitioners” – Peter Lynch
Finishing with
“It’s very hard to support the popular academic theory that the market is irrational when you know somebody who just made a twentyfold profit in Kentucky Fried Chicken, and furthermore, who explained in advance why the stock was going to rise.” – Peter Lynch
Peter met his wife to be, Caroline while studying at Wharton. The two got married two weeks before he left for Korea, where he ended up teaching economics of all things.
Peter also led air defence artillery soldiers in the 2nd Infantry Division. By the age of 24 he had made Lieutenant before finishing his tour in 1969.
3 - Fidelity Investments
By age 25, Lynch found his first full-time job making $16,000 per year as an analyst specialising in metal and textiles at Fidelity Investments.
From 1970-1973 Lynch worked his way up the ladder eventually becoming Fidelity’s director of research in 1974.
In May,1977 at age 33 Lynch was offered to head up the now legendary Magellan mutual fund, this modest fund had $20 million in assets from mostly small investors when Lynch took over.
From 1977 to 1990 the Magellan fund went (11-2) outperforming the SMP500 all but 2 years, averaging 29.2% interest over a 13-year period.
“The secret of my success is that I never went to business school. Imagine all the lessons I never had to unlearn.” – Peter Lynch
From 1977 to 1983 the stock market really didn’t do much, but with Peter at the helm it outperformed 99% of funds during this time. This was also just before the mid-80s bull market.
“The fund was not very big in 1982, even though I had ran it for five years and in '80- to the end of '82 when the market really started to come up. I think it was April of '83 the fund passed one billion. That was a big number. I remember that number had a lot of zeros and it was kind of a magic number.”- Peter Lynch
The stock market was at 777 points in 1982, by 1987 just before "Black Monday" it peaked at 2,700 point in just over four years. When the crash of 1987 came Peter’s portfolio shrunk by one 3rd, he was asked about the crash of 87 saying this
“People forget that basically it was unchanged in 12 months. If you looked at September, 1986 to October '87, the market was unchanged. It had a thousand point up and a thousand points down and they only remember the down. They thought, "Oh, my goodness, this is the crash. It's all over. It's going to go to 200 and I'm going back to selling apples and pencils," you know. But it wasn't. It was a very unique phenomenon because companies were doing fine.” – Peter Lynch
By 1990 Peter had built the Magellan Mutual fund into the most successful fund of all time, growing from $20 million to $17 billion dollars in just thirteen years!
By the age of 46 Lynch had achieved what most Investors twice his age could never achieve, but something began to change in Peter’s mind at this point.
He decided to quit his job leaving the fund he had built and also leaving massive shoes to fill. This was quite a shock of everyone at the fund, The Fidelity shareholders scrambled at the news and said this at the time
''What do you want to do? Name it. Would you like to run a small fund, run the group, run the kitchen, anything?''- Fidelity Management
Peter gave this speech during a press conference announcing his retirement in 1990, I did my best to shorten the speech down, but it wasn’t easy.
“I was fairly close to turning in my Quotron after the 1987 crash. But I didn't want to leave with the market down 1,000 points. It is way above the 1987 high now, I feel this is a responsible time to leave.”
“I work six days a week I get up at five and I'm in here at 6:45. I stay till six. I'm home around seven. I visit about 500 companies a year. My partner has three daughters too. I've worked every Saturday since 1982, but not because I want to.”
“I'm not one of those workaholics. I've had to. Running so big a fund, and always looking for ideas, I've even started working four hours Sunday morning before church. On Washington's Birthday, I was working and my family was up in New Hampshire skiing. That really got to me.
“If Congress could legislate a nine-day week and I could work six days and have three days off, it would be great. I love the job. I love the people. But I know if Congress did that, I'd probably work eight days out of the nine. My transmission has a very small gearbox. It has overdrive and off. That's it. That's why I'm not going to run another fund or start a fund.”- Peter Lynch
Reflecting on the death of his father when he was 10 and the death of his mother in 1983 he also said this.
“When your parents are alive, you sort of feel immortal. They keep you young. Lately, I've felt old. Last year alone I gave two eulogies, one for a relative and one for a very good friend. I've had several relatives and friends die in the last few years. You say to yourself, wait a second. You're only alive for a while. You're dead a long time. After I leave, I don't want to get too boxed in.”
“I'll do what I have always done at Magellan when I'm looking for investments. I turn over ten rocks and I may find one good idea. Turn over 100, and maybe I'll find ten. I'll stumble along until I find something redeeming and enjoyable.”
“I'd like to keep doing this for another ten years. But it's like eating hot fudge sundaes. One's great. Two aren't bad. Six are horrible. With my first daughter, Mary, I was able to watch Mr. Rogers and Sesame Street, and take her to McDonald's, and go to the swings, and fly kites. I rarely get a chance to do that with Annie and Beth. But it's not too late to start. Children are a great investment. They beat the hell out of stocks.'' – Peter Lynch
Its clear Lynch reached the summit of his investing goals making millions in the process. He was ready to move on with his life while his health was with him.
4 - Lynch's Investment Philosophy
Peter believes the small-time investor has an inherent edge over large institutions. Larger firms wouldn’t invest in smaller-cap companies that hadn’t yet received attention from analysts or mutual funds.
His investing philosophy is strictly a bottom-up approach, stocks are selected from companies and industries the investor is familiar with.
According to Lynch the best tool we have in our investment toolbox is our eyes, ears, and common sense. He has proudly proclaimed some of his best stock picks came from walking around the grocery store.
Peter has written multiple book’s explaining his strategy in full detail.
They’re fantastic reads for any investor, selling millions of copies world-wide. I have summarized his ideas for your convenience below.
5 - Invest In What You Know
If you’re a farmer then you should probably invest in farming equipment, the biggest “edge” to be found is in what we understand.
This is a common advantage investor’s overlook, if you don’t understand what you’re buying, you have no way to tell it is going to be successful long-term.
“Never invest in any idea you can’t illustrate with a crayon.” – Peter Lynch
Think “local”, how many times in life do we use products and services that we absolutely love, see the demand for, but never think to look if its publicly traded. When you catch the bus, drive your car or walk down the street your next investment opportunity could be waiting around the corner!
6 - Do your homework!
Once you see a stock that really ticks the boxes its time to do your homework, get to know that stock better than you know your own children! (Jokes)
But in all seriousness research is the corner stone of every successful investor, once you find that initial spark you need to chase it down and find out where it leads!
“Actually, Wall Street thinks just as the Greeks did. The early Greeks used to sit around for days and debate how many teeth a horse has. They thought they could figure it out by just sitting there, instead of checking the horse.” – Peter Lynch
Ok so you find a stock that you really like, now what?
7 - Storylines
Now its time to map out the company’s potential storyline, for instance how does this company plan to increase profits? What is the competition? Is the company in debt? New prospects should be categorized into one of six potential storylines.
1. Slow-Growers: Large or Aging companies that are expected to grow slightly faster than the U.S economy as a whole with regular dividends being paid. This is Peters least favourite scenario.
2. Fast-Growers: Small aggressive companies that expect annual earnings of 20% to 25% per year. These do not need to be fast growing industries, in fact Lynch would prefer them not to be. Lynch believes this is where investors will make their biggest returns, but this can come with considerable risk also.
3. Cyclicals: Companies that have sales that rise and fall in predictable manners based on economic cycles, examples such as the airline industry, steel and auto industry. The point is these industries can drop in price massively during hard times.
4. Turnarounds: Companies that have become battered and bruised. Lynch calls these “no-growers”. But if the company comes back swinging the stocks of potential turnarounds can shoot back up quickly!
5. Asset opportunities: These are the companies that are yet to be picked up by Wall Street analysts. This is where the “Local” edge comes into play, use your own knowledge and experience when looking for new stocks.
6. Stalwarts: These companies used to be "fast growers" but have since matured into well known companies. The rate of return has slowed, but can still offer long term steady growth.
“The trick is not to learn to trust your gut feelings, but rather to discipline yourself to ignore them. Stand by your stocks as long as the fundamental story of the company hasn’t changed.”- Peter Lynch
8 - Selection Criteria
Now you know what kind of company to invest in, how do you go about the selection criteria? Here are some important numbers Lynch suggests investor examine.
Year-by-year earnings: The total record of earnings of a company during its life. This helps determine the strength and sustainability of a company, ideally earnings should be going up year by year.
The price to earning ratio: This is used to determine the value of a company, by comparing the current stock price to the most recently reported earnings. This helps put the company’s value in perspective.
Look at Tesla it has yearly revenue of $31 billion, but its PE ratio suggests a market cap of $635 billion! This is clearly too high and unsustainable to maintain in the long term.
Ratio of debt to equity: How much debt does a company currently have? A cash positive balance sheet provides wiggle room as a company grows and experiences problems. Lynch is also very careful of bank debt, which gives the bank the opportunity to call in the debt at any time.
Net cash per share: This is done by adding the level of cash, subtracting long-term debt and dividing the result by the number of shares outstanding. High levels indicate a strong stock.
Dividends & pay-out ratio: Big companies pay stockholders dividends, how ever during recessions dividends payments can lower considerably. Lynch suggests finding companies with 20 to 30 year records of paying dividends even through recessions.
Inventories: Peter suggests that inventory build-up is a bad sign and a red flag when inventories grow faster than sales. This is especially dangerous for companies that fall into the cyclical storyline.
Ok so we have evaluated our companies and we think we’ve found a winner! Now what? Now it’s time to see if our company possesses any of the patented Peter Lynch “Favourable Characteristics”.
9 - Favourable Characteristics
If your next stock possesses these characteristics it’s fair to say you might have a winner on your hands!
The name is boring: This one sounds silly but let me explain, it makes a lot of sense. Say a product or service is in a boring industry, say the company does something depressing or disagreeable, or maybe there is a rumour that said company has done something bad. These company are called “ugly ducklings” and the share price usually reflects their reputation. These companies can sometimes be a bargain that turn a tasty profit.
A product people keep buying: Think Coca Cola, razor blades or even drug companies. These companies usual stay cash positive even during recession times.
Insiders are buying shares: This is a sure-fire way that insiders are confident in the company’s future prospects.
The company is buying shares: Buybacks can be both a positive and negative. When companies buy back their shares it helps support the stock price. It also indicates the management feels the share price is favourable.
Low number of shares held by institutions: Some bargains slip through the all-seeing eye of Wall Street. These are perfect opportunities to get in early before the bull rush comes.
Unfavourable Characteristics
Hot Stocks: What is a hot stock you might ask? A good example is a newly public IPO these companies are in high demand and the share prices can fluctuate rapidly.
Smaller Company with big unproven plans: Hope is for the hopeless when you invest, if a company is promising big things its best to wait until their statements can be proven.
Profitable companies engaged in diversifying acquisitions: Think about when Facebook bought Oculus rift, was that really a good idea for the Facebook? In case you’re wondering the answer is no! Buying things for the sake of buying is never a good strategy! Peter has a word for this scenario “Diworsefication”.
10 - Portfolio Building
At the height of the Magellan fund, Peter held over 1,400 stocks at one time! This number would be crazy for the average investor to maintain alone.
Peter argues investors should own shares in as many “exciting prospects” they can uncover that can pass the research tests.
Overdiversification can lead to its own problems, there is no point in diversification for the sake of it.
Peter does not favour “market timing” and believes its an unnecessary drain of time and resources. He invests for the long term, this is not to say he never sells.
Rather than selling a stock Lynch suggests "rotating the stock", selling and replacing it with a company sharing a similar “storyline” or better prospects.
“The typical big winner in the Lynch portfolio (I continue to pick my share of losers, too!) generally takes three to ten years or more to play out.”- Peter Lynch
11 - Peter Lynch's Net Worth
As of 2021 Peter is estimated to be worth a cool $470 million dollars, that’s pretty good for a guy who basically retired at 46!
Peter still invests but nothing in comparison to his days as head of the Magellan Fund. Philanthropic causes take up most of his time these day's, The Lynch Foundation alone has donated $125 million dollars since its inception.
At 77 years of age, Lynch still helps out at Fidelity here and there, training and inspiring young analysts with his tried and tested investing methods.
Conclusion
I hope you enjoyed reading Peter's story as such as I enjoyed writing it. So, now you know how to trade stocks like Peter Lynch, what are you waiting for then! Put some of these tried and tested technics to the test. Did you find anything interesting about the life of Peter Lynch? Let us know in the comment section below! Thank you for reading and ill see you next time, happy trading.
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