What would Peter Lynch do?
'91 Gulf War gives market guru hope
THE BOSTON GLOBE
What would Peter Lynch do?
Don't ask the famous former manager of Fidelity Investments' Magellan fund how he is managing his own investments right now and expect him to answer. We did; he didn't.
But Lynch has plenty to say about the stock market and its prospects.
Lynch hasn't managed other people's money for a living since 1990, when he ended an enormously successful and sometimes daring 13-year stint managing Magellan that spanned bull runs and a thundering stock market crash. By the end of the 1990s, he was rated the century's second-most influential investor, behind only Warren Buffett, based on one survey of 300 financial pros.
Lynch's market view and general advice rely heavily on the kind of folksy fundamentals that became familiar in his three books on investing: a general optimism about the long-term future and a discipline to realize what you don't know.
"Short-term, I always don't know," Lynch said about stocks. He was unmoved by the stock market's opening plunge Monday and described it as "very favorable," if you had anticipated that U.S. equities would quickly catch up to last week's price declines among overseas stocks.
Lynch sees the circumstances of the Persian Gulf War - a tense period with a happy investment outcome - as the best comparison for today's stock market and political environment. It's a point on which some, but not all, investment analysts agree.
There are different circumstances today that could work against investors. The seemingly open-ended potential for sudden violence in the future could be more damaging to the economy than the relatively swift certainty of the Gulf War.
Stock prices, relative to corporate earnings, are significantly higher today than they were in 1990 and may make it harder to rally like they did in the face of recession in 1991, when the Standard & Poor's 500 index rose 30.5 percent.
But many important elements are the same: a violent national crisis, an already weakening economy dragged down by slumping consumer confidence. A decade ago, scores of banks were failing while the country tried to manage its other problems.
"We had a recession, a war, and a bank crisis all at the same time, and the government raised taxes," said Lynch.
He sees other substantial advantages today: a federal budget in dramatically better shape and many states running "big-time surpluses" for the moment. Meanwhile, the primary asset of millions of homeowners has remained stable in a resilient national residential real estate market.
"We're talking about a very healthy environment," Lynch said. "That's a big positive."
But what about stock prices today? Compared to other investing alternatives, he doesn't think they're bad at all.
Consider a calculation Lynch uses: A stock purchased at a price equal to 20 times earnings would theoretically generate a 5 percent profit for an investor. That is, a company which met earnings expectations would produce profits equal to one twentieth, or 5 percent, of its stock value. Regardless of whether the entire profit is retained by the company or partially paid out to shareholders in dividends, the return should theoretically benefit the investor to that degree.
Lynch describes the stock market's current price-to-earnings ratio as "closing in on 20," though mainstream analysts could reasonably place it as high as 23 today. Compared with the 4.7 percent yield currently available on a 10-year U.S. Treasury note, he said the stock alternative offers a "pretty impressive return."
Nearly 20 years ago, Lynch made a huge bet for the era when he invested heavily in the ailing Chrysler Corp. as it was headed toward a government bailout. He won spectacularly and agreed later that the automaker was "the most significant stock I ever owned."
Now airline stocks are getting hammered and talk of possible government assistance is heard every day. Other closely related industries could follow. A buying opportunity?
It's not nearly that easy, Lynch warns. There may be some bargains in some of those stocks, but many others may just leave investors disappointed. "You can't just buy stocks saying, 'It's a distressed industry doing poorly, I'm going to buy it.' That doesn't work. I think it's a tragic mistake. You have to be able to say that this industry is depressed but this company is doing better, it's solvent."
Despite his uncertainty about the immediate future and warnings about the price of making mistakes, Lynch remained very optimistic on the opportunity to find long-term bargains in the stock market now.
"When the market goes down you can sort through and find companies that have industry leadership and a good financial situation. They go up a lot and the mediocre ones go up a little. For people who are interested in the market and like to do some work, this would be a good time to do it." |
