"THE LEGEND: New Stage, Old Song for Peter Lynch"
By EDWARD WYATT -- September 6, 1998
Peter Lynch has a thought about the global market
meltdowns that have been a consuming nightmare for
many investors over the last year. "The world," he said
last week, "will be OK." Next topic, please.
Such a blithe dismissal of the woes of the world is a
vintage response from Lynch, the former manager of the
Fidelity Magellan fund who is widely viewed as one of
the greatest stock-pickers on the planet. And he has
long maintained that if investors spend five minutes a
year trying to figure out the direction of the stock
market, that's about four and a half too many.
"Look at the headlines from 1990," he said in an
interview, proceeding to quote from a list of articles
about the real estate bust and America's competitive
and banking woes. "The year after that," Lynch noted,
"the market went up 31 percent."
"So how does that add anything, responding to
headlines?" he asked. "These headlines are just noise.
If you're going to be a factual investor, and you say,
'In my industry, I make widgets, and in every recession
since World War II, my demand has gone down quickly,
and I notice it quickly,' well, that's information. And
if you think a major recession's coming, then maybe you
ought to sell some of your stock funds."
Investing based on fact rather than feeling is not a
new theme for Lynch, but it's one that he is
emphasizing again in a new Fidelity advertising
campaign in which he stars with the entertainer Lily
Tomlin. The message, a favorite of Lynch's, is that
individuals should spend at least as much time
researching their investments -- without wasting time
trying to gauge the overall direction of the economy --
as they do for a new-car purchase or a vacation. And
that they should ignore the predictions of economists
and market strategists.
"From 1953 to 1984, a period of 31 years, the stock
market went up 920 points," Lynch said. "On Mondays, it
was down 1,565. So on non-Mondays, it was up 2,500
points. It wasn't a coincidence that the big decline in
1987, last October and this week was on a Monday.
People on the weekend become economists. They become
portfolio strategists. But they don't look at their
portfolios; they're reading the newspapers. They're
responding to all these scary stories. After that,
they're bold if they take their lunch to work on
Monday."
Lynch reserves some special scorn for the dismal
science. "I'm opposed to economic forecasts," he said,
"these people who say, 'The average economic recovery
has been 6.8 years; therefore, we have to have a
recession.' I've read the Constitution. I've read the
Bill of Rights. I didn't see anywhere that every 6.8
years we have to have a recession."
Corporate profits are what drive stock prices, Lynch
said. And as long as a company's earnings are rising,
its stock will go up. Sometimes, however, the market
gets ahead of overall earnings growth.
"Last year the corporate profits of the S&P 500 were up
less than 10 percent. The market was up 33 percent," he
said. "In the first half of this year, the market was
up 18 percent, but corporate profits were down in the
first half. I think most people expect corporate
profits to be up 5 to 7 percent this year. There's an
unbelievable correlation between corporate profits and
stock prices, but the lines started to separate."
What also matters, Lynch said, is the valuation of a
company compared with its earnings, and in that regard,
there still are some great imbalances in the stock
market. "Over the last three years and eight months,
the S&P is up 132 percent, while the Russell 2000 is up
32 percent," he said. "These are mind-boggling
divergences. Their earnings have both grown the same.
It's not like you've had huge disappointments in the
Russell 2000. If their earnings had fallen 40 percent,
you could understand this bifurcation. But the Russell
2000 is a lot of different companies.
To Lynch, all that creates opportunities in small
stocks. "At one point, Wal-Mart was not in the S&P
500," he noted. "At one point, Cisco wasn't there.
Great stocks are usually small companies or companies
that really get slogged and they turn around. Masco
went up 500-fold, then it got in the S&P 500, and it
hasn't been that great a stock since then. Great stocks
usually are really small companies, or companies that
are really depressed, as when Lockheed was $4 a share,
or Long Island Lighting fell to $3.
"Traditionally, big companies don't have big moves," he
added. "Small- and medium-sized companies have the big
moves. Look at the great rollovers of all time.
Polaroid was one of the biggest stocks in the market at
one time. Xerox was one of the biggest, then it went
down for the next 15 years. IBM went sideways for 15
years. Avon Products went from 180 to 18. It's hard
when every fourth person in America was an Avon lady.
Where were they going to go with it? Size is not a
positive. At some point, if you become 90 percent of
the carpet industry, you're going to grow with the
carpet industry."
Lynch confesses that he is primarily a stock investor,
with 90 percent of his investment assets in equities.
"But I had 20 percent of my fund in bonds in '81 and
'82," he said. "Since 1926, there have been 20 down
calendar years in the stock market. In 18 of those 20
years, you'd have had a positive total return in
intermediate bonds. Not just better, you'd have been
up. So there really is a reason to own bonds."
Copyright 1998 The New York Times Company |
