What would have Lynch bought in India? ITC, Maruti, Hero honda, Bharti Airtel, Pantaloon Retail, TV-18 and the likes.
Most Fund Managers are known for their investing styles rather then the investments that they make. Peter Lynch is one of them. As the fund Manager for the Magellan fund Lynch grew to fame for his "Buy what you see "school of thought". An initial Investment of US $ 10,000 would have grown over to US $ 2.50,000 in the 13 years that Lynch managed the fund. His annual rate of compounded growth averaged 29.2%. The greatness of Lynch lied in his simplicity. He was one of the few people from the Fund Manager fraternity who taught and practiced the KISS (Keep it Simple Stupid) principle.
Most often people invest in sectors and industries that they know little of. For instance a Doctor could be investing into a technology company while a software engineer could be looking at pharmaceutical stocks. Lynch often remarked “Your investor’s edge is not something you get from Wall Street experts. It’s something you already have. You can outperform the experts if you use your edge by investing in companies or industries you already understand”
Although he held more then 1400 stocks in his Magellan fund Lynch advised people to hold stocks of as many companies as they felt comfortable with. For instance he advised investors to hold fewer well researched stocks rather then own a complete index replica as such.
His advise on the number of stocks investors should hold was also simple. “Owning stocks is like having children – don’t get involved with more than you can handle. The part- time stock picker probably has time to follow 8-12 companies, and to buy and sell shares as conditions warrant. There don’t have to be more than 5 companies in the portfolio at any one time”.
Key Learning:
- Small Market capitalized companies - Lynch loved small emerging businesses with strong balance sheets,. His extraordinary returns in La Quinta Inns came at a time when the company was in the initial years of development He argued "Big companies don't have big stock moves you’ll get your biggest moves in smaller companies."
- Fast growers - Among Lynch's favorites are companies whose sales and earnings are expanding 20% to 30% a year. He cautions investors from looking at companies that grow more then 30% every year. Companies growing at 50% to 100% are bound to falter and crack. It is therefore imperative to view very high growth ideas with a sense of suspicion.
- At the same time, he advised investors to look for slower-growth businesses selling at a truly great price.
- Dull names, dull products, dead industry - Lynch loved good managements in simple mundane, colorless businesses. His arguments were that nobody creates excess capacity in dull boring industries and when you can find a winner there it makes sense to jump in.
- Lynch loved boring businesses with boring company namesL. Peter Lynch writes about both in One Up on Wall Street. No self-respecting Wall Street broker could recommend absurdly named unknown companies to his key clients. And that left the greatest money managers an opportunity to scoop up a truly solid business at a deep discount.
- Spin Offs - Lynch's dream stock at Fidelity Magellan was one that hadn't yet attracted any attention from Wall Street. One-way Lynch recommends finding these companies is to buy spin-offs. For instance, after being spun off, Toys "R" Us went on in relative obscurity to rise more than 55 times in value. Lynch also made a fortune buying into the funeral and cemetery business Service Corp, which had no analyst coverage.
- Insider buying and share buybacks: Lynch loves companies where the senior managements bought stocks of their own companies. A combination of insider buying and aggressive share buybacks really piqued his interest. "Buying back shares," Lynch writes, "is the simplest, best way a company can reward its investors."
Lynch ignores conscious asset allocation between various asset classes. He says that market players may have 50% of their portfolio in cash at market bottoms. When the market decides to move up they could miss most of the move.
Lynch was the proponent of the
PEG theory. As long as the PE of a company was lower then the growth rate that it expected to generate Lynch would have advocated a buy on the stock.
While making investments Lynch advised people not be try and catch bottoms. If you liked a company he argued take a small position and add it up as you see further visibility in earnings growth. Lynch stated that “time is on your side when you own shares of superior companies. You can afford to be patient – even if you missed Wal-Mart in the first five years, it was a great stock to own in the next five years also”. In this connection he presented a very interesting statistic.
