One Up on Wall Street is one of the first 5 or 6 investing books I read early on in my career when I still knew nothing about how the markets operate.
I enjoyed it mostly because Lynch’s affection for the markets is infectious. His love for the game of investing leaps off the pages from that very first story about vacationing in Ireland during the 1987 crash.
Wanting to learn more about Lynch and his sensible investing approach, I devoured his follow-up, Beating the Street. If One Up on Wall Street was the introduction to Lynch’s “buy what you know” style of investing, Beating the Street was the graduate-level course.
In the book, Lynch walks through 21 stock picks he made for the Barron’s roundtable in the early-1990s by going through the research and thought-process behind each security selection. It’s been a while since I read this but I’m guessing many of the company and industry-specific research in the book is pointless at the moment, much like the railroad stock analysis in Ben Graham’s early books.
The main point of the book was not the stock picks themselves but the process Lynch went through to pick those stocks.
When I read both of these books I was still in the first year or so of my career. I was working for an institutional consulting firm where we helped foundations, endowments, pensions and family offices set investment policies, develop coherent asset allocation strategies and follow-through on their investment plans.
One of the roles we played for these organizations was performing due diligence and monitoring the performance of the portfolio managers who ran their separately managed accounts.
We weren’t responsible for the security selection in these strategies. It was our job to understand how these investment firms managed funds on behalf of our clients to explain what was happening in their portfolios and recommend any potential manager changes.
At this stage of my career I still didn’t know exactly what I wanted to do in the investment world so the portfolio manager/analyst track was appealing to me from many of the conversations we had with these firms.
Reading Lynch’s second book was one of the first things gave me pause about this career possibility. Michael and I talked about this on last week’s podcast following a new Barron’s piece about Lynch:
Stock-picking sounds great when you read the folksy quotes from people like Lynch but when you realize how much work goes into those stock picks it’s not as easy as “buy what you know.” He wasn’t just picking companies his wife noticed at the mall. He was talking to company management, suppliers, competitors, and industry experts for hundreds of companies.
And dealing with numerous portfolio managers over the years makes you realize how rare the Peter Lynch’s of the world are. Part of me wishes for every book written about Warren Buffett or Peter Lynch, there were 10 more written about portfolio managers who underperformed and failed to find multiple ten-baggers.
Those managers I was tracking for the first 10-12 years or so of my career were all intelligent. Most went to some of the most prestigious schools in the country. They were well paid and had access to some of the best research tools in the business. And the majority of them failed to beat their benchmarks, let alone match Lynch’s results.
I get the fact that nobody in their right mind would buy a book about underperforming portfolio managers but those tales are more important for 99% of investors. They would show how unique people like Peter Lynch are in the investing world.
Amateur and professional investors alike would love to pick ten-bagger stocks like Lynch but his general views on the market are far more applicable than his stock-picking for the vast majority of investors.
Lynch told Barron’s, “The thesis underlying everything, whether you’re an actively managed fund or a passive fund, is that the U.S. will be OK. If you don’t believe that, you shouldn’t be in the stock market.”
In an interview from the 1990s with PBS, Lynch gave a much longer answer when asked about market timing:
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 stomach is the key organ here. It’s not the brain. Do you have the stomach for these kind of declines? And what’s your timing like? Is your horizon one year? Is your horizon ten years or 20 years? If you’ve been lucky enough to save up lots of money and you’re about to send one kid to college and your child’s starting a year from now, you decide to invest in stocks directly or with a mutual fund with a one-year horizon or a two-year horizon, that’s silly. That’s just like betting on red or black at the casino. 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. It’s on your side. And when stocks go down, if you’ve got the money, you don’t worry about it and you’re putting more in, you shouldn’t worry about it. You should worry what are stocks going to be 10 years from now, 20 years from now, 30 years from now. I’m very confident.
Lynch was one of the original star portfolio managers, which is a dying breed at the moment. I have nothing against stock-picking (some of my best friends are stock-pickers!) but it’s important to be realistic when entering this field.
Most investors would be better off following Peter Lynch’s long-term views about the stock market than trying to emulate his stock-picking prowess.
Peter Lynch’s Track Record Revisited