In an exclusive interview with Israel’s Globes, mutual fund legend Peter Lynch says he thinks the past ten years have been an anomaly for the stock market, and that we are currently in an “extraordinary period” for stock investing.
“The significance of the lost decade is very simple,” Lynch said, referencing the term some have used to describe stocks’ performance over the past ten years. “Companies earn more than they did ten years ago, and they are traded at lower prices than they were then. There’s an investment opportunity here. There are companies on the market with good balance sheets and wonderful reputations, that make better profits today than ten years ago, and will continue to grow. This is an extraordinary period for investment.”
Lynch also discussed a number of aspects of broader investment strategy, and said that despite recent events and major changes in technology, investing still operates on generally the same principles that it did when he managed Fidelity’s Magellan fund from 1977-90. “In the course of my work at Magellan, I bought small companies that grew over the years. This is a strategy that worked, and still works today,” he says. “I bought companies whose performance was weak and that turned their businesses around. This method still works today. If you invest in companies whose assets are worth more than their market cap, you have found a great investment opportunity.”
Average investors need to invest in what they understand in depth, Lynch says. “The average person can get to know 5-10 companies very well, and once every few years he will come across an opportunity to make a good investment,” he says. “In principle, you need 3-4 good companies to invest in over ten years. You don’t need 3-4 good stocks every week, if you are a private investor.”
Lynch says he made his big profits at Fidelity by focusing on small- and medium-sized companies. He tried to only buy large companies when they were at a “turning point”, after they are improving following a crisis. The auto industry and housing market represent two such areas today, he says.
Lynch also reiterates an assertion he’s made for years regarding stock investing: “The most important organ in the body as far as the stock market is concerned is the guts, not the head,” he says. “Anyone can acquire the know-how for analyzing stocks. “[But most people] buy when you see that things are fine, and sell when you see that they are bad. But that’s not the way. You have to decide what position in shares you will be comfortable with, and to understand that even in a bear market, time is on your side. What the market will do for a period of a year ahead is random. If you need the money for your child for college or for a wedding in a year’s time, it’s important that you should know that the market will be random over that year. But if you’re looking at an investment range of 10 or 20 years, company profits will be on your side, and stock prices will be higher.”
“The stock exchange is a good place to be” if you have the stomach, Lynch says. “In fact, it was the best place to be in the last 100 years, even if it wasn’t like that in the past decade. I think it will be a good place to be in the 10, 20, and even 100 years to come.