Fidelity legend Peter Lynch: ‘I never said to invest in the stock market’

Peter Lynch never said to invest in the stock market.

The legendary former Fidelity Magellan fund manager and author of the pioneering book on investing “One Up On Wall Street,” which will celebrate its 35th anniversary next year, drove home that point in a conversation with Yahoo Finance as we discussed what has changed since that book first came out.

“So the reason I wrote ‘One Up On Wall Street’ was to help people that wanted to do investing. I’m not saying do it, but if you do it, there’s a certain way to do it. If you don’t do it that way, you probably are gonna have an unfortunate outcome,” said Lynch, now 79.

Since the first edition published in 1989, nearly two million copies of the book have sold around the world and it’s been translated into 23 languages. Lynch’s books that followed include “Beating the Street,” and “Learn to Earn: A Beginner’s Guide to the Basics of Investing and Business.”

It’s not hyperbole to say that Lynch was the rockstar of the investing world during his 13-year tenure from 1977 to 1990 at the helm of Magellan — duties he began at the tender age of 33.

Lynch headed up one of the most lauded mutual fund successes in history. During his tenure, Fidelity’s Magellan fund racked up a 29.2% average annual return for those investors who held the shares throughout. In other words, if you invested $1,000 in Magellan on May 31, 1977, and held on until May 31, 1990, that small investment would have ballooned to around $28,000. It was the best-performing mutual fund in the world under his watch, climbing from around $18 million in assets to over $14 billion with over a million shareholders. “One out of every 100 Americans was invested in Magellan at the time of my tenure,” he said. Pretty incredible.

Peter Lynch’s fame is not one made of pixie stardust, but rather a plain approach to investing. His secret to success, ‘buy what you know,’ was the kind of common sense explanation most people could understand and act on without any special insider periscope. What goods and services are you and your family and friends buying? Use that as clues to start doing some homework to learn more about the company.

Lynch, who now serves as vice chairman of Fidelity Management & Research, retired from Magellan at the age of 46.

Edited excerpts from our interview:

Looking back at “One Up On Wall Street,” is there anything you would have changed?

I wouldn’t change a thing. The sales have been remarkable. It’s really wild. So, that’s kind of fun. All the royalties I received, you know, my wife and I gave to charity, and they’re still coming in. I didn’t do it to make a profit.

[But] it’s just bothersome to me that people aren’t more careful. Now, the internet, they didn’t have that 35 years ago, and now people look up a refrigerator, airplane tickets, vacations…but then they put $10,000 or some stock they hear about at a party or on a bus.

For some reason, people, this is the term, play the market. It’s such a dangerous verb. You don’t play the market. And maybe I didn’t stress that enough in the book. It’s very important to point out, I did not say invest in the stock market. So the reason I wrote “One Up On Wall Street” was to help people that wanted to do investing.

What are the biggest changes for investors today since you wrote One Up?

Data is more available now. The things I was talking about are a lot easier for average folks now, people who want to do some work.

Back 35 years ago, we all, say, it was Nike, used to wait for their quarterly report to come into our office, into the mailroom. We’d open the mail up, and say, ‘Yay, their inventories have finally gone down.’ They had too much. We’d go buy more Nike. Now it’s instantaneous. And Joe Q Public or Suzy Q Public gets at the same time as all the professional investors and everybody around the world.

There’s great information. They put the investor presentation up online, they put out the results. You can look at the balance sheet without having to write to [the] company and they mail you their quarterly report and then it’s a month old. The information for the public has increased dramatically. If they want to do the work today, it’s simple. There’s way more information available.

And now commissions are down a lot. But just because the costs are down, don’t be a trader. You know, buying three stocks a day and on Friday you sell three, buy three more next week. That’s not investing. That’s gambling.

Your main thesis still remains — the idea that you should buy stocks in companies that you know. Correct?

That’s step one. But you have to know other certain steps. Let’s say two companies have share prices that have gone from $50 to $4. And one has $300 million in debt, and one has no debt and $200 million in cash. They’re both losing money. Which one should you buy? Which one should you look at?

If you can add four and four and get fairly close to eight, you can handle a balance sheet. You look at the left side, how much cash they have. Look at the right side. How much debt do they have? They’re both losing money. Why would I buy the stock with a terrible balance sheet?

You need to understand the company story.

So say my stock at the start of the year is $20, sometime this year, it’s traded at $28, then $14, and finished at $20. During the year, it went from $14 to $28. So what do you do? If you understand the story, and it goes down, you buy some more.

How do you know when the story has run its course?

Companies are dynamic. Things change.

When Walmart was 25 years old. It had gone up tenfold. Wow, a 10-bagger, that’s all over now.

But they’re only in 18% of the United States — a 25-year-old company in 18% of the United States. Small towns, small cities. It then went from 18% to 23% to 26% and over the next three decades, they kept doing it and beat the hell out of Sears and Kmart. It then goes up 30-fold.

You have to ask: What’s the inning of the ball game?

I had a big position at McDonald’s in the eighties, and people were saying it’s overpriced. Well, they missed this, [that] there are 200 countries in the world. McDonald’s went overseas and for the next two or three decades kept growing. Again, I’m not recommending Walmart or McDonald’s, of course.

But what inning in the ballgame? Was McDonald in the middle innings? Maybe… they were in every city in the United States. Maybe there’s no room here, but overseas…The same thing happened to Starbucks. You know, there’s more Starbucks outside of the United States by a lot than there are in the United States.

One of your core pieces of advice is that it’s a long-range outlook.

Unless the story changes.

At some point, Toys ‘R’ Us went from a great story to a bad story. Same with Staples. Same with Gap. Same with Limited. When Gap and Limited, when they’re in every single mall in America, where could they go? Well, unlike Starbucks and McDonald’s, Coca-Cola and Johnson & Johnson that went to, you know, another 50 countries or so. I mean, I saw four Burger Kings in Istanbul. I saw Popeyes in Hong Kong and Singapore. You have to make sure you’re following the story. You don’t just buy it and forget about it.

You have to say, whoops.

Who’d have guessed what happened to Xerox? Who would have guessed what happened to Eastman Kodak? IBM? Xerox? You have to keep following the story.

What would you tell a young person getting started investing in the market today about evaluating companies?

Put together a $100,000 paper portfolio of at least 10 stocks to see if you’re good at this. You ought to be able to write at least three or four bullets – not full sentences even. Why do I own this one? Three months later look to see what happened to the facts. And then three months later, look at the facts, value, what’s happened to the story, what’s happened to fundamentals?

Now you’re ready to go.

The main thing is to keep an eye on the fundamentals of what happens to the company’s business. You know, this crap of buy low, sell high, you know, buy high, sell higher is fine too.

Tesla and Apple are good examples. But I’m not saying to buy those.

What was your strategy for finding those home runs?

One way I did well was buying small companies. One I couldn’t even pronounce the name of: Au Bon Pain Co. They bought the St. Louis Bread Company in 1993 for $23 million and changed the company name to Panera. Then Panera was acquired by JAB Holding Co. for $7.5 billion and became a private company.

Then there are the surprise stories. Look at Stop & Shop, the grocery store near where I live, started in Boston and then they opened Super Stop & Shop and closed the other one. It might be twice the size, three times the size.

Here’s what they do. They make no money in milk, no money in bread, and a lot of things they occasionally break even. But if you buy a birthday card for your mother or your kids, you have no idea what a good deal it is for them. There’s a great profit margin on her birthday card for the grocery store — two or three times the margin, plus they added a drugstore to create traffic. It was a 10-bagger. And what a shock.

There are also the turnaround ones that you hear about if you’re working in the industry, if you’re in the steel industry, the insurance industry, shipping, chemistry, railroads, you might see things get better before the money managers on Wall Street see it.

You don’t need a lot of these in a lifetime. When things go from terrible to semi-terrible to OK, you can make a lot of money.

Any you missed that you regret?

Yes. 30 years ago, how dumb is this? I had a great opportunity to make a fortune on Apple. My daughter bought me an iPod for my music.

I did not look at Apple.

Apple is not like biotechnology companies. They are really complex. They’re in phase one, phase two, phase three. They’re large, complicated molecules. I mean, the odds of you knowing that you will make a difference in biotechnology, even if you’re a biologist is pretty, difficult.

But Apple, it’s not a complicated company. It’s not high-tech to me.

It was the early 2000s and The iPod was selling for $225, I think. [The iPod was released in October of 2001.] And they were making like $175 profit. But the company wasn’t doing that well. They were selling the computer for 900 bucks, making $25.

The iPod turned the whole company around.

That’s when it blew out. And then the iPhone can along. [It came out in 2007.] Oh, by the way, I think it was a $9 stock with no debt and four or $5 a share in cash.

Apple, unlike Bethlehem Steel or US Steel, doesn’t have these huge plants and all this equipment. Somebody else is making all this stuff. They had a very nice balance sheet. If I followed my own advice, I could have had a 10-bagger or more in Apple. I really fell asleep on that one.

What’s your perspective on the crazy things that have come out of the pandemic like the crypto craze and the meme stocks?

They’re always there. I mean, there’s always periods of time when something goes cuckoo on the upside. Remember the famous Tulip bubble hundreds of years ago?

Today, there are more gamblers. You can gamble on a basketball game. Not the who’s gonna win bet. But when he or she’s gonna make the next foul shot?

Unfortunately, people are more speculative now.

There are new kinds of stocks than when I was running Magellan. There are cannabis stocks or marijuana stocks. There are crypto stocks, sports betting stocks. I mean, there’s a zillion biotechnology stocks. Those didn’t exist. There’s more ways to gamble now than 35 years ago. That means there’s more ways to lose.

Is it all about doing the homework?

One point I made in One Up that’s still true is that the key organ in your body when it comes to investing is not the brain, it’s the stomach.

You have to do the work and use your brain, but who’s got the stomach when something bad happens, like oil goes up, or a recession, COVID, the Ukraine invasion, people being murdered left and right, January 6 and what happened in Washington, D.C. These are things that happen and then the market goes down.

What does your stomach do? Are you getting up at night? I mean, can you sleep with your stocks? If you’re getting up at 3:00 a.m. and looking things over, you shouldn’t be investing.

Any parting thoughts?

Even if something looks good, you have to say, can [the company] make money? Are they making money? You go in a store, you say, ‘Wow.’ But maybe you went into the 240th Gap or 300th Limited and thought it was attractive. But there’s only room for 248 of them. Some people have said to me, ‘I listened to you, walking into a store and buying it that day.’

Well, I never said that.

It’s the start of the exercise. That’s when it gets interesting. Let me do some work again. The key thing is that is fun and researching stocks is fun. This is not like doing your taxes. If you can’t understand the balance sheet, go to some other stock. If you can’t understand what they’re doing with the accounting, or you can’t figure out what it does, when you look at the numbers, try some other one.

You learn a lot. I was probably right six times out of 10, maybe six and a half. But the times the stock went down, if the story was good, I would buy more.

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