The Motley Fool

Who Is: Peter Lynch

Photo Credit: Matt Koppenheffer

Photo Credit: Matt Koppenheffer

Peter Lynch ran one of the most successful managed funds of the 1980s, wrote two of the most well-regarded books on investing, and is held in great esteem by Motley Fool co-founder Tom Gardner. There’s obviously a lot we can learn from Lynch, but what was the secret to his success?

Born in 1944, Lynch grew up near Boston, Massachusetts. At the age of 11 he started caddying at the local golf course, and eventually started taking note of the stock tips he overheard as he worked. Although he had no money to invest, he became very aware of the money to be made in the bull market of the 1950s.

Lynch won a scholarship to university, and, combined with his ongoing work as a golf caddy, he was able to gather enough money together to buy his first share. Remarkably, this investment increased by a factor of 10, or, to use the term that he later coined, became a “10-bagger.”

In 1977, at the age of 33, Lynch took over as manager of Fidelity’s Magellan Fund, a growth-focused fund that largely concentrated in US stocks. By the time he retired 13 years later, he’d turned $20 million into $1.3 billion.

More importantly for investors, $1,000 invested at the start of his tenure would have grown to $28,000 during that time. It wasn’t all easy sailing, though, as the fund lost a third of its value in two trading days during the crash of 1987.

During this time he wrote his best-known book, One Up On Wall Street.

Investment philosophy
Lynch is perhaps best known for encouraging investors to “buy what they know,” rather than investing in obscure or complicated ideas that they don’t understand. As he put it, „Never invest in any idea you can’t illustrate with a crayon.“

Lynch believes a walk through the shopping mall can tell you a lot about the market, and that by simply living in the world and observing what’s happening, we already have a lot of information at our disposal. Or, in short, consumption is research.

A rule of thumb that Lynch used to combine growth and value is to take the long-term growth rate, add the dividend yield, and divide the total by the price-to-earnings ratio (P/E). So a company with a long-term growth rate of 10%, a dividend yield of 2%, and a P/E of 12 would have a price-to-earnings growth (PEG) ratio of 1 ( (10+2) / 12 = 1).

In his quest for good investments, Lynch liked to look into as many companies as possible. He’s said, „The person that turns over the most rocks wins the game. And that’s always been my philosophy.“ And having done that, you’re still going to get a considerable percentage wrong. Lynch has laid it out bluntly: „In this business if you’re good, you’re right six times out of ten. You’re never going to be right nine times out of ten.“ Emotionally, you must be prepared to handle that.

Lynch is also associated with the alternative strategy of “averaging down,” buying more shares of stock after the price has fallen. But it’s important to note that he’s not mechanical about it, and has argued that „both strategies [averaging up and averaging down] fail because they’re tied to the current movement of the stock price as an indicator of the company’s fundamental value.“