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Course 508
Great Investors: Peter Lynch


Peter Lynch ended the 1990s hobnobbing with Don Rickles and Lily Tomlin in television commercials. But when it comes to investing, Lynch should be taken seriously. He drew acclaim for his success as manager of Fidelity Magellan FMAGX, the mutual fund he ran from 1977 to 1990. When Lynch became Magellan's manager in 1977, the fund had $20 million in assets. Lynch's track record at Magellan drew investors at a rapid rate, and by 1983 the fund’s assets topped $1 billion. During the 13 years that Lynch ran the fund, Magellan underperformed the annual return of the S&P 500 stock index only twice--this even after Magellan was the nation's largest mutual fund with $13 billion in assets. (It's considered exceptional when managers can maintain high returns after their fund's assets have swelled, because gargantuan portfolios have limited investment options.) The sheer size of Magellan was part of Lynch's aura. No one else had managed such a big fund with so much success. In his seminal 1989 book, One Up on Wall Street, Lynch spelled out his stock-picking strategy.

Invest in What You Know

Lynch didn't go out of his way to try to figure out a complicated industry just because it was forecasted to be hot in the coming years. He invested in industries he already understood, such as the auto industry. That’s what led him to Chrysler (today part of DaimlerChrysler DCX) back in the early 1980s. Chrysler was getting beat up by the competition and was near bankruptcy; it seemed the carmaker would never regain its footing. But after seeing prototypes of a new thing called a minivan, Lynch liked what he saw and made Chrysler one of Magellan's top holdings. It paid off, and Chrysler more than tripled in price while Magellan owned it.

Seize a Good Opportunity

If any one word summarizes Lynch's approach to investing, it's opportunistic. Lynch writes in One Up on Wall Street, "I didn't really have a strategy. I bought everything." While he liked value stocks like Chrysler, he also invested in fast-growing up-and-comers, such as Hanes Co. (now owned by Sara Lee SLE). Lynch says after his wife raved over the fact that Hanes conveniently sold its L'eggs pantyhose in grocery stores, he figured the company was onto something good. His hunch was right. Hanes' stock rose sixfold while Magellan held it.

Profitability, Price, and a Good Business Model

Lynch generally looked for three qualities in a good company: profitability, price, and a good business model. At one time Lynch liked sleepy steelmaker Wheeling-Pittsburgh (a division of WHX Corp. WHX) because it was one of few steel mills still making money. He was also once a big fan of Federal National Mortgage Association (best known as Fannie Mae FNM), for its price/earnings ratio, which he felt was moderate for such a strong company. Finally, Lynch liked fast-food purveyor Au Bon Pain (a division of Panera Bread Co. PNRA) when it first hit the scene in the late 1980s, because it served "quality" fast food rather than "mediocre" fast food. Since stepping down from Magellan in 1990, Lynch has spent his time promoting Fidelity’s mutual funds and mentoring the company’s fund managers. Given the track record he set at Magellan, which had $13 billion in assets and an average total return of 25% per year when he retired, his investment opinions will continue to be well regarded no matter how many television ads he does.

Quiz 508
There is only one correct answer to each question.

1 It was Peter Lynch's track record with which fund that helped build his name?
a. Fidelity Megan Fund.
b. Fidelity Magellan Fund.
c. Fidelity Lynch Fund.
2 What sorts of companies did Lynch favor?
a. Those in hot industries.
b. Those in industries he understood.
c. Those in out-of-favor industries.
3 Peter Lynch's investment style is best described as what?
a. Value.
b. Growth.
c. Opportunistic.
4 What three criteria did Lynch use to evaluate a stock?
a. Profits, price, and business model.
b. Profits, price/earnings ratio, and valuation model.
c. Profits, debt, and current stock price.
5 Which was <em>not</em> a part of Lynch's approach to stock-picking?
a. Invest in what you know.
b. Seize opportunity.
c. Sell when earnings disappoint.
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