Peter Lynch is one of the foremost fund managers that Wall Street has
ever seen. Lynch was made the director of the little known Fidelity
Magellan Fund in 1977 after having been the director of research at
Fidelity Investments from 1974. In the ensuing 13 years, the
investments in the Magellan Fund rose from a measly $20 million to $14
billion.
In 11 of the 13 years Lynch was at the helm, his fund gave more
returns than the S&P 500 Index. Lynch retired from active fund
management in 1990 after having delivered an astonishing return of 29
per cent per annum in the 13 years he was in charge
After retirement, Lynch passed on his investment wisdom through books.
In the book, "One Up on the Wall Street" written along with John
Rothchild, the first piece of advice given is to "avoid experts".
. Newsmakers of the week: View slideshow
"But the rule number one, in my book, is: Stop listening to
professionals! Twenty years in this business convinces me that any
normal person using the customary three per cent of the brain can pick
stocks just as well, if not better, than the average Wall Street
expert," the authors write.
The idea for investors trying to invest on their own should be to
outperform the experts. As the authors write: "Moreover, when you pick
up your own stocks, you ought to outperform the experts. Otherwise,
why bother?" If you cannot outperform the markets, then simply invest
in mutual funds. "The mutual fund is a wonderful invention for people
who have neither the time nor the inclination to test their wits
against the stock market, as well as for people with small amount of
money to invest who seek diversification,
If the idea is to beat the expert, by going it alone, of course, it
cannot be easy and calls for a lot of discipline. As the authors
write, "that means ignoring the hot tips, the recommendations from
brokerage houses, and the latest 'can't miss' suggestion from your
favourite newsletter - in favour of your own research. It means
ignoring the stocks that you hear Peter Lynch, or some similar
authority, is buying".
Now all this sounds terribly difficult to execute. What does it take
for an individual investor to do this? Most people are of the view
that an education in business, math and accounting is most necessary
for those who want to invest well.
Peter Lynch does not agree. "In college except for obligatory courses,
I avoided science, math, and accounting - all normal preparation for
business.. Investing in stocks is an art, not a science, and people
who've been trained to rigidly quantify everything have a big
disadvantage. If stock picking could be quantified, you could rent
time on the nearest Cray computer and make a fortune. But it doesn't
work that way. All the math you need in the stock market (Chrysler's
got $1 billion in cash, $500 million in long term debt, etc.) you get
in the fourth grade."
So what is it that Lynch feels you need to invest successfully in the
stock market?
"Logic is the subject that's helped me the most in picking stocks, if
only because it taught me to identify the peculiar illogic of Wall
Street. Actually Wall Street thinks just as the Greeks did. The early
Greeks used to sit around for days and debate how many teeth a horse
has. They thought they could figure it out by just sitting there,
instead of checking the horse. A lot of investors sit around and
debate, whether a stock is going up, as if the financial muse will
give them the answer, instead of checking the company."
And because of this illogic, most Wall Street Investors end up being
victims of what Lynch calls the 'Street lag'. "Under the current
system, a stock isn't truly attractive until a number of large
institutions have recognised its suitability and an equal number of
respected Wall Street analysts (the researchers who track the various
industries and companies) have put it on the recommended list. With so
many people waiting for others to make the first move, it's amazing
that anything gets bought".
This disadvantage an individual investor does not have. As the authors
write, " Most important, you can find terrific opportunities in the
neighborhood or at the work place, months or even years before the
news has reached the analysts, and fund managers they advise". So the
first thing is to keep your eyes or years open and more than that ask
some basic questions. "By asking some basic questions about companies,
you can learn which are likely to grow and prosper, and which are
unlikely to grow and prosper, and which are entirely mysterious. You
can never be certain what will happen, but each new occurrence - a
jump in earnings, the sale of an unprofitable subsidiary, the
expansion into new markets - is like turning another card. As long as
the cards suggest favourable odds of success, you stay in the hand."
Having said that it is very important that the individual figure out
whether he has the qualities it takes to make for a successful
investor. "This is the most important question of all. It seems to me
the list of qualities ought to include patience, self reliance, common
sense, a tolerance for pain, open mindedness, detachment, persistence,
humility, flexibility, a willingness to do independent research, an
equal willingness to admit mistakes, and the ability to ignore
individual panic", the authors write.
Other than this it is also important to have the ability to make
decisions without 'compete or perfect information'
clear on Wall Street, or when they are, then it is too late to profit
from them. The scientific mind that needs to know all the data will be
thwarted here."
And the most crucial thing is the ability to what the authors call
"human nature and your gut feelings".
As they write, "It is the rare investor who doesn't secretly harbour
the conviction that he or she has a knack for divining stock prices or
gold prices or interest rates. In spite of the fact that most of us
have been proven wrong again and again.
It's uncanny how often people feel most strongly that stocks are going
to go up or the economy is going to improve just when the opposite
occurs."
Hence there is no point in trying to predict where the market is
headed to. As the authors write "When it comes to predicting the
market, the important skill here is not listening, it's snoring.
The trick is not to learn to trust your gut feelings, but rather to
discipline yourself to ignore them. Stand by your stocks as long as
the fundamental story of the company hasn't changed."
BigGains !!
Change settings via the Web (Yahoo! ID required)
Change settings via email: Switch delivery to Daily Digest | Switch format to Traditional
Visit Your Group | Yahoo! Groups Terms of Use | Unsubscribe
__,_._,___
No comments:
Post a Comment