Thursday, February 23, 2006

Personalities: Peter Lynch 0 comments

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Peter Lynch is probably the next best known pure stock investor in the world after Warren Buffett. As a mutual funds manager (that's what unit trusts are known as in the US), he is undoubtedly the most famous.

What's his life story? That is probably the least interesting of any writeup on the man, but let me try. He had a rather hard life in his younger days following the death of his father, and took to caddying to support his studies; that was where he first learnt about stocks from club members' conversations. He had a formal finance education, did an internship at Fidelity that eventually turned permanent. He was to stay there for over 20 years, where, stepping in as fund manager for the little-known Magellan fund in 1977 he managed a 29% annualised return from 1977 till 1990, which would have multiplied an initial investor's capital >25 times. His efforts also attracted new funds into Magellan and ballooning it into a $10B fund, from ~$20M when he first took over. Finally, at the peak of his career in 1990, Peter Lynch quit his job and went into private investing and social work. He is still around, writing books such as One Up On Wall Street and Beating The Street.

Of the man, his ideas and investing philosophy are more interesting. He is the archetypal small-cap growth investor, and has championed the idea of "letting the profits run". Allied to this philosophy is of course the well-used, almost cliched term which he coined to describe his stocks which multiplied to several times their original value: he called them "multiple-baggers". His stock allocation strategy varies from Warren Buffett, in that he owns thousands of stocks in his portfolio. That approach, in part, is probably due to the fact that his fund had grown so huge in later years that it had to be spread thin over many stocks to avoid huge substantial interests in any particular company. A point he shares with Warren Buffett are their aversion to selling their holdings unless the fundamental story had changed.

There are two other ideas that I find are worth taking away from Peter Lynch's philosophy. One is his classification of stocks into six categories: slow growers, stalwarts, cyclicals, fast growers, turnarounds, asset plays. That is certainly a more useful categorisation than the usual two-group division of blue chips and small caps. Indeed the approaches to investing in each of the six categories are different. The second idea is that ordinary investors can make use of their local knowledge to pick good stocks: his "searching for stocks by taking a walk around the mall" advice has become a classic and inspiration for small investors. Of course, this is nothing new: doing personal research has long been advocated by Philip Fisher ("scuttlebutt") but the idea that not much effort has to go into the research, just personal observations around oneself of consumer buying patterns, certainly appeal to the individual, and has popularised the whole concept.

Why did Peter Lynch retire at his peak? This is a question that many have asked. Indeed he missed out on another ten years of bull market in the 1990s. However, he must have made more by investing for himself, all 100% undiluted share belonging to him alone. Another likely reason is that of the curse of the large investor: entry and exit strategies, and hence trading strategies, probably became more important in order to get the desired line at a good price and avoid shaking up the market too much, as Magellan became the largest mutual fund in history with assets pouring in. Being a stock-picker at heart, he probably felt it diluted his fun.

(1) One Up On Wall Street
(2) Wikipedia article: Peter Lynch
(3) Article: The Peter Lynch Approach to Investing in "Understandable" Stocks




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