Peter Lynch on Stock Market Losses

“Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.” – Peter Lynch

I recently came across an old Peter Lynch interview for Frontline on PBS from the mid-1990s. In it the legendary former mutual fund manager discusses a wide range of topics from how he got started in the investment business to the crash of 1987 to the psychology of average investors.

Lynch’s thoughts on losses in the stock market are still relevant today:

Now no one seems to know when they are gonna happen. At least if they know about ‘em, they’re not telling anybody about ‘em. I don’t remember anybody predicting the market right more than once, and they predict a lot. So they’re gonna happen. If you’re in the market, you have to know there’s going to be declines. And they’re going to cap and every couple of years you’re going to get a 10 percent correction. That’s a euphemism for losing a lot of money rapidly. That’s what a “correction” is called. And a bear market is 20-25-30 percent decline.

They’re gonna happen. When they’re gonna start, no one knows. If you’re not ready for that, you shouldn’t be in the stock market. I mean the stomach is the key organ here. It’s not the brain. Do you have the stomach for these kinds of declines? And what’s your timing like? Is your horizon one year? Is your horizon ten years or 20 years?

What the market’s going to do in one or two years, you don’t know. Time is on your side in the stock market.

The most important point here is that no one knows when or why corrections happen. Investors are continually searching for reasons for stocks to fall. It almost becomes a game for some to say that the can predict the exact event that does it.

There’s always something to fear that will possibly derail the market — profit margins, valuations, earnings shortfalls, economic growth, rising/falling interest rates, inflation/deflation, geopolitical risks and the list could go on forever.

The problem is sometimes stocks rise and fall for no apparent reason whatsoever.  Occasionally these issues “matter” but other times the market simply shrugs them off.

This past Thursday’s 2% loss in the S&P 500 is a case in point. The headline writers tried to come up with the news of the day to explain why the market fell, but there wasn’t much there. It’s not always a neat and tidy explanation except for the fact that there are times when there’s more selling pressure than buying pressure.

Investors need to concern themselves with the fact that stocks do go down occasionally. Trying to continually predict the spark that sets it off can lead to more harm than good. Seth Godin had a good take on the idea that bracing for impact too often can be to your detriment:

Worse than this, far worse, is that we brace for impact way more often than impact actually occurs.[…] All the clenching and imagining and playacting and anxiety—our culture has fooled us into thinking that this is a good thing, that it’s a form of preparation.

It’s not. It’s merely experiencing failure in advance, failure that rarely happens.

When you walk around braced for impact, you’re dramatically decreasing your chances. Your chances to avoid the outcome you fear, your chances to make a difference, and your chances to breathe and connect.

Understanding stocks can and will fall is helpful to prepare yourself mentally for how you’ll react once they do. But bracing for impact at all times can be counterproductive to a good process.

Betting on the market (PBS)
Brace for impact (Seth Godin)

Further Reading:
See my latest for Yahoo Finance on how 2% daily drops in the market aren’t as rare as most think (Yahoo Finance)

Thanks to @toddwenning for pointing this interview out to me.

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  • AWOCS,
    That quote is a great find. Lynch was the first to get me interested in investing. Might be a good time to go back and reread his books.

    • Ben

      One up on wall st was one of the first ones I ever read. It’s funny how simple the greats can make it sound. It’s obviously not always as easy as they make it out to be but it doesn’t have to be as hard as people try to make it either.

      • It was the first investing book I read too and what got me interested in investing in the first place. Which other books from him do you recommend?

        • Ben

          Beating the Street was his next book. Not nearly as good as the first but worth a read to hear how he thinks about building a portfolio.

  • dawn

    instead of tracker funds that will fall in value when the stock market declines is not the ‘dividened mantra’ way a better way. buying individual stocks for their dividened payment? then it wont matter that much the price of the underlying share falls aslong as income is coming in espcially when your about 10 to go before drawing on the portfolio? im coming to this conclusion
    i think trackes are ok for exposure to emerging markets but on home ground why not a HYP? i know its less diversication but in a bear market you need income from the portfolio otherwise your eating in to and selling falling asssets for income.

  • bill

    the lynch quote is obviously from someone not in retirement who lost half of everything they had saved over their entire life in the 2008 and 2009 “correction”.

    it angers me to hear the cavalier responses of those who have time on their side. the stock market is a zero sum game. the bigs win, the smalls lose. thank you gordon gekko for that gem of wisdom. of course, it doesn’t help us struggling “smalls” when the bought and paid for government stooges systematically help the “bigs”. there used to be at least of semblance of discretion in their greedy unity, but now they have so much control that blatancy is the order of the day. “screw you and in your face” struggling retirees. just try to live on the returns from money market funds and bonds. besides, you have too much money in your savings accounts, bond funds and iras that we can’t get to. let’s force you to put it out there in the market where we can manipulate your money over to our side of the ledger with the next correction.

    of course the game is rigged; the mistake made by the “smalls” is thinking that they can successfully compete tho swimming in ignorance.

    • Ben

      I think you missed the most important part of Lynch’s quote: Is your horizon 1 yr or 10-20 yrs? If it’s 1-5 and you need to spend down part of your portfolio, don’t have that section you need in stocks. Keep it in cash or bonds. If it’s 10-20 you might have to hold through some rough patches that could include a crash.

      Was the market rigged on the entire 150%+ recovery in the stock market too? It’s only rigged for those that buy at the top and sell at the bottom. That has nothing to do with bigs vs. smalls. It’s discipline vs bad behavior.

      • Falcontrader

        “The system is rigged” My electrician told me that when he was installing my solar system that he lost money selling to me. He also told me he cashed in his union pension in 2009–right at the bottom- to start his solar company.

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  • Great post – enjoyed Lynch’s “One Up on Wall Street” although I felt like it might give beginner investors the wrong idea about the “simplicity” of investing he talks about.

    For anyone reading One Up on Wall Street should balance the perspective with Winning the Loser’s Game and then come to their own conclusions!

    • Ben

      I agree. Loved One Up on Wall St but ‘invest in what you know’ can be dangerous advice for those that don’t understand how hard it can be to pick stocks.

      Make sure to check out the entire interview. Tons of good stuff in there.

  • Dan

    The 80’s and 90’s of Lynch’s heyday was the biggest, longest bull market in the history of the world. That’s not the current environment. We’ve had two declines in the past 15 years that exceed the numbers Lynch mentions here. We’re not talking about 25% declines. We’re talking about 50%+. The economy has slowed. And in this environment, if you aren’t prepared for far wilder markets than Lynch experienced during his heyday, you may regret it. However, I’m a fan of Lynch.

  • Dan

    Also, for what it’s worth, on an inflation adjusted basis, the S&P 500 is below its 2000 peak. And the Nasdaq is below it even on a nominal basis. So timing matters A WHOLE LOT.

  • Dan

    One final point too. Now one can argue that both stocks and bonds are expensive. So a decline could involve both. (If you hold bonds to maturity that is somewhat less risky than owning a bond fund — or at least less wild.)

    We’ve become too dependent on these two classes of investments. They both worked well in the 20th century, but are riskier today.

    • Ben

      Definitely true in the US. This is why investors need to think globally.

      One more point to remember about Lynch’s results — it’s easy to look back at the return numbers and assume it was easy, but inflation and interest rates were in the 10-15% range during the 77-82 period when he started out. Unemployment was double digits in the early 80s. Investors had left stocks for dead. Plus he got out on top in 1990 before things really went bonkers.

  • FareFly

    Good point. A minute ago I was still worrying a correction is overdue this year.

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