The ‘plan’ of Peter Lynch, the Fidelity guru who swept the stock market

The former head of the Magellan fund always attached great importance to studying and analyzing the shares he bought, and not running away in a correction.

At 46, Peter Lynch had the opportunity to retire. This legendary investor was responsible for Fidelity’s Magellan fund between 1977 and 1990, which grew from $22 million in assets under management to $14 billion when Lynch retired. In those 13 years, the fund appreciated 2,475% compared to 508% for the S&P 500, according to data collected by Lipper Analytical Services published by The New York Times in 1990.

Your investment strategy could be summed up as diligent and common sense research. In 1983, he reflected in the Times on how people spend hours looking for a plane ticket, but then invest $10,000 in stocks on any advice.

In an interview with the New York newspaper after retiring, he recommended having a long-term horizon. “Don’t invest the money you may need in the next year or two, because the behavior of the market over such short periods can be random.” To this he added that “people who try to enter the market to get a quick 10% usually end up losing 10%”. For Lynch, it is only over five or ten years that the stock market becomes more predictable.

In 2015, after years away from money management, he offered this pill to readers of The Wall Street Journal: “Choosing individual stocks is hard even for professionals. So if you can’t understand the balance sheet, you probably shouldn’t own them.” To which he added: “People buy a stock and don’t know anything about it. That’s gambling and it’s not good.”

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His words from the late eighties still reverberate on the floors of the post-pandemic world. “Buy companies, not markets. Don’t try to time the market because no one can reliably predict interest rates or other macroeconomic trends,” he advised in the Times.

Peter Lynch began to rub shoulders with the financial world when as a teenager he began working as a caddy at a golf club near Boston, which was attended by the leaders of large companies, such as Gilette, Polaroid or Fidelity.

Although one of his most popular books on investment is One Step Ahead of Wall Street, another very interesting one is Learn to Earn, from which some basic ideas about his way of understanding investment can be extracted.

“In 99 out of 100 cases where investors are chronic losers, it’s because they don’t have a plan. They buy at a high price, then get impatient or panic and sell at a lower price during one of those inevitable periods.” where stocks plummet. His motto is buy high and sell low, but don’t follow it. Instead, you need a plan,” Lynch explained in the book, published in 1996.

Another one of those ideas is time. “The earlier you start investing, the better. In fact, a small amount of money invested early is worth more in the long run than a larger amount invested later,” he noted, encouraging young adults to invest. Of course, he also warned that “people who need to withdraw their money in a year, two years or five years should not invest in stocks in the first place. You just don’t know what stock prices will do from one year to the next” . For him, 20 years or more is the appropriate term.

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For long-term investors, as early as 1991 he was a strong advocate of dollar cost averaging: investing small amounts regularly lowers the average cost of fund shares. However, they point out in Investopedia, this improves investment behavior only if the price increases.

Does Lynch have a secret formula? The closest thing is what he wrote in Learn to Earn: “Buy stocks in strong companies with earning power and don’t abandon them without a good reason. A falling stock price isn’t a good reason.”

In one of his last interviews, published in November last year on the Fidelity website, he left this famous quote: “In the stock market, the most important organ is the stomach, not the brain.” It explained: “On the way to work, the amount of bad news you can hear is almost endless now. So the question is: can you handle that? Do you really have faith that 10, 20, 30 years from now the common stock Are they the place to be? If you believe in that, you should have some money in equity funds.”

Lynch’s Strategies

Invest for the long term

Do not invest the money that may be needed in one or two years.

investigate and analyze

Buy companies, not markets. Understand financial statements, research and apply common sense.

Have a plan

Don’t try to time the market because nobody can predict the changes. Have a plan.

Patience and perseverance

Buy solid stocks of companies with the ability to earn income. And not give up.

age matters

Start investing young. It is worth more than investing a larger amount later in life.

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