Speaker 1: Peter Lynch, one of the greatest investors of his generation, he achieved a twenty nine point two percent annualized return over 13 years at Fidelity, making him the greatest mutual fund manager of all time. No one has achieved a return that high with that large amounts of money. Now, he did this by following simple rules and principles to investing, which I’m going to let him explain now.
Speaker 2: I’m going to try and say some words and the things I’ve used over the years when I was an amateur, when I ran Magellan, I still use today. I think they make sense. I think they make a lot of sense for investors. And I frankly think it’s a tragedy in America that the small investor has been convinced by the media, the print media, radio, television, media, that they don’t have a chance. If they don’t, the big institutions put all the computers and all their degrees and all their money have all the edges, and it just isn’t true at all. And when they’re convinced, when this happens, when this occurs, people act accordingly. When they believe it, they buy stocks for a week and they buy options and they buy the Chile Fund this week. And next week it’s the Argentina Fund and they get results, proportion to that kind of investing. And that’s very bothersome. I think the public can do extremely well in the stock market on their own. I think the fact that institutions dominate the market today is a positive for small investors. These institutions push stocks unusual lows. They push unusual highs for someone. They can sit back and have their own opinion. Know something about the industry. This is a positive. The single single most important thing to me and the stock market for anyone is to know what you own. I’m amazed how many people own stocks. They would not be able to tell you why they own it. They couldn’t say in a minute or less why they actually you really press them down that say, the reason I own this is the sucker is going up. I mean, that’s the only reason. That’s the only reason they own it. And if you can’t explain upstairs, you can’t explain to a 10 year old and two minutes or less why you own a stock. You shouldn’t own it. And that’s true. I think about 80 percent of people that own stocks and this is the kind of stock people like to own. This the kind of company people adore owning is a relatively simple company. And they make a a very narrow, easy to understand product. They make a one megabit s ram CMOs, bipolar risk floating point data, IO array processor on optimizing compiler, a 16 dual part memory, a double diffused metal oxide semiconductor monolithic logic chip with a plasma matrix vacuum fluorescent display. It has a sixteen bit memory. It has a Unix operating system for wetstone magufuli polysilicon emitter, a high bandwidth that’s very important. Six gigahertz dubeau memorization, communication protocol and asynchronous backward compatibility. Peripheral Busse architecture for wavin to leave memory a token ring and change backplane. And it does in fifteen nanoseconds of capability. Now if you want a piece of crap like that, you will never make money. Never. Somebody’ll come along with more wetstone the less what stones or bigger mega flop or smaller mega flop. You won’t have the foggiest idea what’s happened. And people buy this junk all the time. I made money and Dunkin Donuts, I can understand it. I when there was recessions, I didn’t have to worry about what was happening. I could go there and people were still there. I didn’t have to worry about low priced Korean imports. I mean, I just found out, you know, I can understand it. And you laugh. I made ten or fifteen times my money in Dunkin Donuts. Those are the kind of stocks I can understand. If you don’t understand, it doesn’t work. This is the single biggest principle. And it bothers me that people are very careful. The money, the public, when they buy a refrigerator, they get to Consumer Reports, they buy microwave oven. They do that. They ask people what’s the best kind of radar range or what kind of car to buy. They do research on apartments. When they go to when they go on a trip to Wyoming, you get a mobile travel guide or California. When they go to Europe, they get the Michelin travel guide. People here hear a tip on a bus, on some stock, and they’ll put half their life savings in before sunset. And they wonder why they lose money in the stock market. I’m trying to convince people there is a method. There are reasons for stocks that go up Coca Cola. This is very magic. It’s a very magic number. Easy. Remember, Coca-Cola is earning thirty times per share what they did thirty two years ago. The stock has gone up thirty fold. Bethlehem Steel is earning less than they did 30 years ago. The stock is half its price of thirty years ago. Stocks are not. Lottery tickets is a company behind every stock. The company does well, the stock does well. It’s not that complicated. People get too carried away. And first of all, they try and predict the stock market. That is a total waste of time. No one can predict the stock market. They try to predict interest rates. I mean, this is a, if any, interest rates, right? Three times in a row there’d be a billionaire. It’s there’s not that many billionaires on the planet. It’s very you know, I took logic. So I had a syllogism in the study of these when I was in college. They can’t be that many people are going to get interest rates because there be lots of millionaires and no one can predict the economy. I mean, a lot of people this room. Around in nineteen eighty one in 82, when we had a 20 percent prime rate with double digit inflation, double digit unemployment, I don’t remember anybody telling me in 1981 about it. I didn’t read. I said if I remember every time we had the worst recession since the Depression. So what I’m trying to tell you, it would be very useful to know what the stock market’s going to do, would be terrific to know that the Dow Jones average a year from now would be X, that we won’t have a full scale recession. Our interest rate is going to be 12 percent. That’s useful stuff. You’d never know it, though. You just don’t get to learn it. So I’ve always said if you spend 14 minutes a year on economics, you’ve wasted 12 minutes. And I, I really believe that now I have to be I’d be fair. I’m talking about economics and the broad scale predicting the downturn for next year or the upturn or M1 and M2 three B and all these all these M’s at the I’m talking about economics to me is when you talk about scrap prices, when I own auto stocks, I want to know what’s happening. Used car prices when used car prices going up. It’s a very good indicator. When I don’t hotel stocks, I’m in a hotel. Occupancies don’t chemical stocks. I know it’s half the price of. These are facts. VALONE Inventories go down five straight months. That’s relevant. I can deal with at home affordability. I want to know about. I own Fannie Mae. I own the housing stock. These are facts. You get their economic facts. And this economic predictions and economic predictions are a total waste. But you should study history and history. The important thing you learn from what you learn from history is the market goes down. It goes down a lot. The math is simple. There’s been ninety three years, a century. This is easy to do. The markets had 50 declines of 10 percent or more, so 50 declines in 93 years. But once every two years, the market falls 10 percent. We call that a correction. That means that’s a euphemism for losing a lot of money rapidly. But we call it a correction. And so 50 declines in 93 years. About once every two years, the market falls, 10 percent of those 50 declines, 15 have been. Twenty five percent or more. That’s known as a bear market. We’ve had 15 declines in 93 years. So every six years, the markets can have a twenty five percent decline. That’s all you need to know. You need to know the markets can go down sometimes. If you’re not ready for that, you shouldn’t own stocks. And it’s good. What happens if you like a stock at fourteen, it goes to six. That’s great. You understand the company. You look at the balance sheet, they’re doing fine. You’re hoping to get to twenty two with it. Fourteen to twenty two is terrific. Six to twenty two is exceptional. So you take advantage of these declines. They’re going to happen. No one knows when they’re going to happen. It would be very people tell you about it after the fact that they predicted it but they predicted it fifty three times. And so you can take advantage of the volatility market if you understand what you own. Another key element is that you have plenty of time for an unbelievable rush to buy a stock. I’ll give an example of a well-known company. Wal-Mart went public in October of nineteen seventy nineteen seventy one public already had a great record. It had fifteen years performance. Great balance sheet. You could have waited ten years and you’re very conservative. You’re not sure this Wal Mart can make it. You want to check. You see them operate in small towns. You’re afraid they’re going to make it seven or eight states. You want to wait till they go to more states. You keep waiting. You can. About Wal-Mart. Ten years after they went public, I made thirty five times your money. If you bought it when they went public, you would’ve made five or ten times your money. But you can wait ten years after Walmart went public and made thirty over thirty times your money. You can wait three years after Microsoft went public and made ten times your money. If you knew something about software. I know nothing about software. If you are a software, you would said these guys have it. I don’t care who’s going to win Compaq. IBM always going to win Japanese computers. I know Microsoft MSDOS is the right thing. You could have bought Microsoft again. I’m repeating myself. Stocks are not a lottery ticket. There’s a company behind every stock and you can just watch it. You have plenty of time. People are an amazing rush to purchase the security. They’re out of breath when they call up. You don’t need to do this, but you need an edge to make money to. People have incredible edges and they throw them away. I’ll give you a quick example of SmithKline. This is a stock that had Tagamet. You didn’t have to buy SmithKline when Tagamet was doing clinical trials. You don’t have to buy SmithKline when Tagamet was talked about in the New England Journal of Medicine or the British version Lancet, you can about SmithKline with Tagamet first came out a year after it came out. Let’s say your spouse, your mother, your father, your nurse, your druggist, you’re writing all these prescriptions. Tagamet was doing an amazing job of curing ulcers and it was a wonderful pill for the company because of you to stop taking it. You also came back. It was it wasn’t a crummy. He took it for a buck and then went away, but it was a great product for the company, but you get about it two years after the product was on the market, it made five or six times your money. I mean, all the drugs, all the nurses, all the people, millions of people saw this product and they’re not buying. Oil companies are drilling. So it happens. And then three years later, four years later, Glaxo, even a bigger company, is a huge company. A British company brought Zantac, which was a better at that time an improved product. And you could have seen that take market share. Do well, good. But Glaxo tripled your money, so you only need a few stocks in your lifetime there in your industry. I think if people if you’d worked in the auto industry, let’s say you’re an auto dealer, the last 10 years, you would have seen Chrysler come up with a minivan. You see, if you’re a Buick dealer material, not a dealer, you would have seen the Chrysler dealership packed with people. You could have made 10 times your money on Chrysler a year after the minivan came out, Ford, etc.. SABL the most successful line of cars in the last 20 years. Ford went up sevenfold on the tourist table. So if you’re a car dealer, you only need to buy a few stocks every decade when your lifetime is over. You don’t need a lot of five baggers to make a lot of money, starting with ten thousand dollars or 5000. So in your own industry, you going to see a lot of stocks and that’s what bothers me. They’re good stocks out there looking for you and people just aren’t listening and they’re just not watching it. And they have incredible edges. People have big hedges over me. They work in the loan industry. I see aluminum industries coming down, inventories coming down six straight months. I see demand improving in America today. You know, it’s hard to get an EPA permit for a bowling alley, never mind an aluminum smelter. So, you know, when aluminum gets tight, you just can’t build seven aluminum smelters. So when you see this coming, you can say, wait a second, I can make some money. When an industry goes from terrible to mediocre, the stock goes north. When it goes from mediocre to good, the stock goes north and goes from good to terrific. The stock goes north. There’s lots of ways to make money in your own industry. You can be a supplier in the industry. You can be a customer. This thing happens in the paper industry. It happens in the steel industry. It doesn’t happen every week. But if you’re your Sonfield, you’ll see a term, you’ll see something in the publishing industry. These things come along and it’s just mind boggling. People throw it away.
Speaker 1: You see, Peter did not receive is over twenty nine per cent return by mere luck. Investing is not loto if you know what you are doing and if you can learn to understand the business behind the stock, buy when things are cheap and stick to the areas that you have an advantage, then you two can achieve a very high return.