OFF TOPIC . The most always sensible Peter Lynch. Interesting day for AXC.
<<Lynch: Still Bullish After All These Years
By James K. Glassman
Thursday, September 10, 1998; Page C01
A horde of giggly junior-high girls, flushed with anticipation, had gathered on the sidewalk across from the Millennium Broadway Hotel on West 44th Street in New York the other day. Had they come to see the world's most famous mutual fund manager, Peter Lynch, who was inside, I wondered?
No, they were waiting for the Backstreet Boys, who duly appeared and were swept off in a big black bus. But such is Lynch's unique standing in the world of investing that he could be mobbed by young admirers whose braces and CD players (if not bank CDs) were financed by profits their parents made through his fund.
Lynch's flame continues to glow even though he retired as manager of the Fidelity Magellan Fund in May 1990, after 13 years of brilliant stock-picking. During his run, Magellan's average annual return was a stunning 29.2 percent, compared with 15.8 percent for the Standard & Poor's 500-stock index.
The vast majority of fund managers can't beat the S&P, and edging it out by one or two points is a major accomplishment. Lynch's record, it is safe to say, will never be eclipsed. He is no Roger Maris.
I caught up with Lynch on a day when market meltdown was the operative metaphor, but as usual, he was bullish. He was especially high on small-company stocks, which after being ignored in the rallies of the past two years, had just fallen 25 percent.
Lynch is the man who discovered Dunkin' Donuts, Pier 1 Imports, General Host, La Quinta Motor Inns and Taco Bell; who bought S&Ls cheap when no one wanted them; who made 12 times his money in Fannie Mae and who, despite taking lots of risks, never suffered a losing year -- not even in the crash of 1987.
Lynch is also the greatest of investing populists, arguing in his first book, "One Up on Wall Street," that individual investors, if they keep their eyes open to great new products (like L'Eggs pantyhose), actually have an edge on Wall Street money managers.
Since Lynch's departure, Magellan has been just another large growth fund, turning in a performance slightly below the S&P. But Lynch's record was so strong that, despite his absence since 1990, Magellan's average annual return for the 20 years ended June 30, 1998, was still 24.5 percent. If you had put $10,000 into Magellan in 1978 and then added $100 per month, then, according to calculations by Value Line, you would today be a millionaire.
Lynch stopped managing Magellan to spend more time with his kids. He became vice chairman of Fidelity Management & Research Co., which may have seemed a sinecure, but, at last, the Fidelity folks realized what an asset they had on their hands, so he is now starring, with Lily Tomlin, in an ad campaign that's breaking tomorrow.
The campaign stresses a simple and important concept: "Know what you own and know why you own it." You cannot, for example, know when to sell a stock unless you know why you bought it, but Fidelity found in a survey that only 45 percent of investors could list their investments.
The poll turned up more alarming tidbits, including that 40 percent of investors believe that, to pay for a wedding a year from now, they "should invest primarily in an aggressive stock fund." (The correct answer is a money-market fund or short-term bonds.)
When I talked with Lynch at the Millennium last Thursday, the Dow was dropping 100 points. It would be down 5 percent for the week, 11 percent for the fortnight and 18 percent for the preceding month and a half.
But Lynch was optimistic. He was not the least interested in: a) what was happening in the world economy, and b) what the market was doing. "It is the same thing whether stocks are going down 20 percent or up 20 percent," he told me.
He was interested, as usual, in owning great companies at good prices -- and in figuring out ways to make Americans more sensible investors.
He wouldn't lay any specific stock tips on me (sorry), but he did say he was attracted by the imbalance between small-caps and large-caps. For example, over the past three years, the Russell 2000 index, which tracks small stocks, has returned a total of only 15 percent while the Standard & Poor's 500 Index, which tracks large-caps, has returned 80 percent. "I would not be buying index [i.e., S&P] funds in that scenario," he said. "I would be buying small-cap stocks."
Nor does Lynch fear emerging markets. Based on your own needs and tolerance for risk, you should compose a portfolio of mutual funds (remember, that's his business), with categories such as small-cap funds, balanced (stock and bond) funds and emerging-markets funds. "Then," he said, "if one category under-performs, I would add to it" -- especially if that category is "way out of line."
While Lynch has an obvious preference for funds, he does believe that investors can own individual stocks -- but "only a few." You should, he says, "know five or six companies well and own two or three." (I would push the latter number up to eight or 10.)
One of the principles he was touting last week was that "stocks go up when company profits go up -- contrary to recent popular theory that new money from Baby Boomers and eager investors ultimately drives the market."
As obvious as this principle sounds, most investors don't believe it. Instead, as the Fidelity survey found, "Only 29 percent of investors accurately indicate the main reason the stock market rises is because companies have grown their earnings per share over time." Another 23 percent believe stocks increase in value because "people keep putting new money" into the market and "an additional 21 percent believe it is because people are generally optimistic."
It is true that stock prices and profits don't move up or down in lockstep, but over time, the relationship is clear and true -- for the simple reason that, in the end, what investors buy when they buy a stock is a share in the flow of cash that the company generates, either as dividends or as profits that the firm reinvests in itself but that ultimately accrue to shareholders.
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