On December, 20, 2019, in an interview with a Fox Business segment, Barron’s Roundtable, Fidelity Asset Management vice chairman Peter Lynch gave his tips on how to beat the market and what made him one of the most successful mutual fund managers of all time.

Barron’s:   Peter Lynch is near the top of anyone’s list of great investors.  In the 13 years he ran the Fidelity Magellan Fund he racked up annual average returns of 29.2%.  A member of the Barons round table in the 80s and 90s, Peter is on the cover of Barron’s this week and I went to Boston to get his insights.  Here is our conversation.

Sir Peter, your investing philosophy is often summed up as by what you know and there’s some truth to that and it’s also often way oversimplified.  Can you explain what you did mean by that and what you didn’t mean.

Video Credit: Fox Business

Lynch:   Well it bothers me that people are very dangerous when they invest.  This word play the market.  That’s a dangerous term.  If you do some work , do some research, know what you own, look at  the balance sheet ,  if you can eight and eight and get fairly close to 16 you find this company has lots of debt, no cash – they’re in trouble.  So, a little bit of research.  People are careful when they buy a refrigerator, careful when they take a vacation and they’ll put five, ten thousand dollars some stock they hear on the bus or at a party, that’s dangerous.

Barron’s:  So when you say buy what you know you also thought that the regular investor might be able to get an inside advantage by sticking to an industry he’s familiar with or seeing something that she realizes as  a great product.

Lynch:  Imagine if you were in a mall the last 50 years, you would have seen Gap when it was hot, you were seeing Limited when it was hot. You would have seen when it was not hot.  You would have seen when certain people weren’t excited about Gap anymore or then you do some research say well gee, there’s a lot of Limited stores, but they are only 20 you know and they can go to 400.  So, you see a company, I did really well with Dunkin Donuts a local company. I did well with Stop and Shop.  But people could see that there’s a reason people are showing up or gets to the sunglass hut and no one’s there anymore.  So, I mean that’s research, that’s fundamentals – you don’t leave the mall and buy that thing.  You have to do some more work.

Barron’s:   That’s an important point.  So today there’s so much information everywhere information overload.  Does that make it harder for active investors?  The indexers say, “everyone’s got access to the same information at the same time you can’t beat the market.”

Lynch:   Well the way you beat the index is you avoid the stocks to go down, you avoid the steel companies and the oil companies and Sears and Penny and when companies deteriorate.   I mean companies are dynamic.  Behind every stock there is a company.   These are not lottery tickets.  So, you’re trying to find the companies within the S&P 500 that are doing better, they’re going from crappy to semi crappy to good.  That might take a couple years or they going to grow for a long time.  You are trying to avoid the companies that are going south.  That is how you beat the market, or you find some companies outside the S&P 500 that are great companies. Carmax, that wasn’t in the S&P 500 and it went up 200-fold. So, there are a lot of companies that enter and a lot of them have great performances before they go in.

Barron’s:  Now a lot of people when they’re lucky enough or smart enough to get a company that’s going up they then they take their profits and you made the case in a book that you should actually hang in there with the really great stocks and you even got a call from Warren Buffett as a result.

Lynch:   In 1989 I’m at home, the phone rings and those weren’t my friends but one of my daughters, six-year-old Annie picked up and said, “there’s a Mr. Buffett online”.  That’s got be a joke.  I picked it up and this is Warren Buffett from Omaha, Nebraska. I read your book inaudible he said it all about seven seconds and I said that’s great.  I’d love to do it.  What’s the line?  He said I love this it’s been waiting to do this.  When you sell your great companies and add to the losers it’s like watering the weeds and cutting the flowers.  He said I want to put it in.  He said if you ever come to Nebraska you don’t call me, you’ll be inaudible all over Nebraska.

Barron’s:   So, did you call him?

Lynch:   Oh yeah.  Several times we play bridge together.  We’ve had several meetings.  Great guy.

Barron’s:  Another point you’ve made and this is I think particularly relevant ten years into a bull market is that I think you said more money has been lost anticipating a downturn than actually in the downturn.  Can you explain?

Lynch:  Well obviously the markets gone up tenfold since I stopped working at Magellan.  So, you make more money on the upside.  The markets be a lot higher ten years from now, twenty years now, thirty years now.  Trying to predict the market is really a waste.   I don’t know it’s gonna do.  It can go down.  When I ran Magellan 13 years declined 10% or more nine times the market.  I had a perfect record.   I went down more than 10% every time.  Whenever the market went down, I went down more.  But over the long term the upside is more than the downside.  So, you are gonna say to yourself.  Do I need the money in the next month, do I need the money in next year when kids going to college, they have a wedding coming up, then you’re a bad investor.  If you keep putting money, in have 5 10 15 20 25 years you should do well.

Barron’s:  One thing we’re thinking a lot about it at Barron’s  is the secular changes we’re seeing in the market where there’s so much disruption that we wonder if certain industries they may be cheap and they may just keep on getting cheaper.  I mean retail would be an obvious one in some cases victims of Amazon, but even the auto industry – very low price earnings multiples.  Maybe the market sees something.  Do you think secular changes is moving more rapidly now than it did in the 80’s when you were running money?

Lynch:   No, I saw the textile industry deteriorate.  I was recommending all the stocks all the way down.   I saw the inaudible to go away.  Industries can go from terrific to terrible.  There is a great expression that textile industry that helped me a lot.

Barron’s:  Textile industry. Yeah.

Lynch:   It’s always darkest before pitch black.  Just when you think things are terrible, they get terrible squared.   I mean so just because the industry is getting bad that is not a reason to invest.  Wait for things to get better.   Again, somebody might be involved the cement, might be involved in coal, might involve in iron ore, might be involved in plastics, they’ll see it aluminum picked up before I do.  So, you might that’s a cyclical turnaround that might last two or three years.  You might see way before Wall Street sees it.

Barron’s:   One broad area that you’ve recently said might be interesting is energy and it’s very unloved on Wall Street right now.  What do you see in there?

Lynch:  Well the difference between a glut right now and shortage it’s like 1 million barrels a day. The world consumes 100 million barrels a day.  1 million each way.  So, if the economy stays ok and these shale wells you do a thousand barrels a day the first month, a year later the 300 and then the 150 big drop off.  It’s a real treadmill and right now there’s no private equity money there’s no IPOs there’s no bond market the banks went out private equity wants out.  Shale is going to slow down.   So, these people that think the shale is gonna keep growing to 2-3 million barrels a day.  We’ve gone from 5 million barrels in the US producing to 12.5.  People think that’s gonna continue.  I don’t believe in that.

Barron’s:   Peter Lynch thank you very much.