How Peter Lynch Became The Greatest Fund Manager Of All Time

0:28This message is brought to you by Fidelity Investments. you have more control with multi-monitor views, enhanced tools, and customization options, and integrated screen sharing with Fidelity trading specialists. Try Fidelity's most powerful trading platform yet at fidelity.com slash trader plus. Fidelity Investments and The Compound are not affiliated. Views, opinions, products, services, and strategies discussed are not endorsed or promoted by Fidelity Investments. Fidelity Brokerage Services, LLC, member NYSE SIPC.

1:17all right this is such a this is such an incredible treat I was told I don't know if you heard this the last people to sit in these chairs was Oprah Winfrey. So if anyone finds a set of keys to a new car under your seat, that's not from us. That's from a prior event. Ladies and gentlemen, this is one of the honors of my career. I've been excited about this for weeks. Peter needs no introduction, of course, in this room, but I'm going to give him one anyway. He asked me not to do a long introduction so that we don't embarrass him. but I have a couple, I got a couple of things I got to say. Is that okay?

1:55Sure, please. All right. All right. Peter is vice chairman of Fidelity Management and Research, the investment advisory firm of Fidelity Investments, where he has worked since 1969. He is also president and chairman of the Lynch Foundation, which supports programs that focus on education, cultural and historic preservation, healthcare and medical research. from 1974 to 1977, Peter was director of research at Fidelity, and from 1977 until his retirement in 1990, he was manager of the Magellan Fund at Fidelity. During his tenure at the Magellan Fund, Peter averaged a 29.2 % annual return consistently.

2:43That's right. That's right.

2:49consistently more than doubling the S &P 500 market index, making it one of the best performing mutual fund in the world and the best 20-year return of any mutual fund ever. During that time, Magellan's assets under management increased from$18 million to$14 billion. Ladies and gentlemen, Peter Lynch.

3:16All right. Anything you want to get off your chest before I start? Let's roll. All right. There are a lot of reasons why you're on the Mount Rushmore of the greatest investors of all time. One of them is obviously your track record. Another is how much wisdom you are willing to share with everyone else via books and interviews, which back then was very rare. But among your greatest achievements is the fact that you went out on top, literally at the height of your popularity and your performance in 1990. That was 35 years ago. You were 46 years old at the time. And I wanted to start by asking you about that decision.

3:58Well, I love the firm. I still love the firm. It's the best ever put together. And my father died at 46 and I was 46. I remember that number. And I was in the office every Saturday, 7 o 'clock we said at Fidelity we'd get up a basketball game on Saturday and in Wellington they couldn't play double solitaire on Saturday so every day I enjoyed it people were fantastic we had three daughters and I just wanted to spend more time with my wife and the three daughters and I was lucky enough to Fidelity, I said just stay on we'll give you a role here working with young analysts and fund managers so it's been a great company the best.

4:42Did you ever think about getting back into the game? Was there ever a moment or a temptation where you said, you know what, I think I want to, I think I could do this better than everyone else out there still, and I want to, I want to go for it? I had all these offers to do a close-end fund. Okay. One billion, two billion, two percent fees. The market's up 30-fold. Yeah. 30-fold since I left. Okay. So if I just did average, it'd be a$60 billion fund. Yeah. The temptation was never great enough, though. No, no. I'd still be working those same hours. Yeah. Because one out of every 100 Americans was a Magellan Fund.

5:23Is that right? One of every 100 Americans was a Magellan Fund. Okay. These are people that$5 ,000,$10 ,000 was very meaningful. Did the weight of that get to you at all while you were riding the fund? Yeah. The level of responsibility? Yeah. Okay. I had a perfect record. I think the market went down 10 times in those 13 years. I went down more every time in the market, every time. Okay. But you somehow managed to get through those moments when you were down. Yeah. How did you do that? In 87, I got letters from people saying, hang in there. It'll be great. Don't worry about it. Amazing. I wanted to ask you if there were ever moments where you looked at something that was happening in the market, whether it was a bull market or a bear market, and said to yourself, if I were at Magellan, I know exactly what I would be doing right now with this opportunity.

6:14Had you had those moments? Yeah, I did have that moment when Pets.com came public. Pets.com? I said, this makes no sense at all, and then went up. So, yeah, I can't short. But there were so many companies of no value, and fortunately, Fidelity didn't own those damn things. So that was a period that you say, wow. What's wrong here? Okay. I wanted to ask you, who are the professional investors or the corporate leaders or other people on Wall Street that you either admire most today or that you looked at and learned from during your tenure managing the... Who are your heroes or who are your mentors?

7:00I'd say Lee Iacocca would be really up there, Chrysler, Ford and Chrysler, and then Bob Walter. at the... Well, let's pause. Why Lee Iacocca? What was it about him that you admired? Well, imagine him in the Thunderbird at the Mustang at Ford. Then he brings in the minivan and Jeep at Chrysler. Yeah. Incredible. He's just a wonderful person. And then, you know, this Bob Walter, when it was Cardinal, we were supplying supermarkets, had a$37 million value when it came public. It's now$37 billion. This guy, Bob Walter, I mean, he's so good. And I'm trying to think of another fellow. There's so many great entrepreneurs that aren't that well-known.

7:46I think it's Al Named. It's an amazing company in Florida. That's up 100-fold. Ben Camerata, TJ Maxx. I mean, TJ Maxx is up 100-fold. That's Ben Camerata. I mean, Those are great people. One of the things that you've talked about is your... Watsko is an income. Yeah, I'm not going to read Watsko. Watsko. One of the things you've talked about is your early introduction to Wall Street. There was a lot of disbelief about the stock market in the house you grew up in, but then you got your first job caddying on the golf course, and all you heard was how much money people were making. Tell us a little bit about that time in your life.

8:27Well, actually, you know, people, you know, if you grew up in the 40s, you heard about the big one, the depression. Yeah. There's one coming. What'd you think? Risk averse. Risk averse, the power of four. And when I was a caddy and people would talk about what stocks they buy, I'd look it up. A few months later, they were higher. Yeah. This is a pretty good deal. So I didn't have any money. but I, uh, in addition to talking about their shots, but it was a great role of a caddy because you're like an advisor to somebody. You just tell them, you know, if you miss a screen, don't miss it to the right, or don't be short, or, you know, line of putts, it's incredible.

9:09My friends were delivering newspapers, you know, at 5 a.m. I was making more on Saturdays than making the whole week, so, and the president was, Mr. Johnson was the CEO, and D. George Sullivan was the president, and I caddied for him. He said, gee, why don't you interview for a job at Fidelity? How old were you when that offer came? 21. Okay. So summer of 66, somehow I was the only one to caddye for the president, so I got the job. I think there were 75 applicants for three spots, but I got the spot in 66. So then I had to do one-year award on Tuesday in the Army, came back in 69. So I owe it all being a caddy.

9:55What did you have to do at Fidelity to pay your dues to the point where they were willing to give you money to invest for other people? Yeah, I think they forgot all my mistakes because I had the, I had the Tesla, the worst group, the Tesla stocks, the steel stocks, the metal stocks. I don't know how I ever survived that, but they were, there weren't many winners there. They gave you the stocks to cover that nobody else cared about? Well, everybody had a group. Some of you did retailers, some of you did electronics, some of you did oil, some of you did truckers, some of you did railroads. I wound up with the dregs.

10:30I wanted to ask you what were some of the traits in the investors that you were learning from or the people that you admired in money management? What were some of the qualities in those people or their habits that probably still resonate for investors today? When I started with this person, Alan Gray, he went back to South Africa about 10 years later. He would work hard, he'd research companies, he'd listen to my stories. He was probably the best role model, I remember Alan Gray. My peers were all great. I mean, all the people around me, everybody in the research part was really talented. So we're loaded with skill.

11:11It's funny. I interviewed one of your colleagues yesterday. and she's a quantitative analyst at Fidelity. And it's so funny to hear you say that because she said the exact same thing. She said, any question I have about markets or the economy, this whole building is filled with talented people who know what's going on. And all I have to do is walk down the hall and get the answer to my question. You still feel that way about the organization today? Oh, it's unbelievable. Steve Weimer, John McDowell, Joel Tillyhouse, Will Dan Hoff. I mean, it's like the Yankees were in the 1920s. And we're playing the Yankees right now.

11:52I won't tell you who I'm rooting for. So I thought it would be funny to take some of your legendary quotes and witticisms. They've all been attributed to you. You'll tell me if they're not actually you. But these have been taken from interviews you've given over the years, from the books that you've written, from the things that you've written and published. I thought it'd be fun to share some of these with the audience, and the audience probably can quote some of these by heart, and just have you react to them and tell us where it came from or what the lesson is behind the thing that you were trying to get across.

12:29I've got a couple of categories for these quotes. I did a little taxonomy. me. So the first category involves the risk of investing in stocks. You said the real key to making money in stocks is not to get scared out of them. Why is that the key to making money in stocks? Well, more important to that is I have this expression, know what you own. I was going to do that one later. I'll cross it off. That's it. That's the most important lesson. Okay. Because you'll get shaken out if the stuff goes from 10 to 8, you don't know what they're doing, what are you going to do with it? I was saying earlier, I got a call, I did an ad for Fidelity with Lily Tomlin.

13:14She's very close to Barbara Streisand. So I'm on vacation, my wife and two other couples, and my secretary, Paul Slauson, says, Barbara Streisand's called three times. She'd really like to talk to you. And she's very nice. I said, sure, I'll get some time to have it. So I called me, she says, I own all these stocks and I'm getting up at 5 a.m. and looking at this stuff. She said, I never did drugs. I never did marijuana. I just can't sleep. What do I do? I says, tell me five things you own. She named five companies. I say, okay, what did they do? She didn't have any idea. She's an incredibly talented person.

13:58She had no idea what those companies did. Right. So what are you gonna do if they go down 50 %? Yeah. If you don't understand what you own, you're toast. It sounds so obvious to hear you say it, but it's amazing. You talk about people spend more time researching a refrigerator they're gonna buy than they do a stock they're gonna invest part of their life savings. People are very careful. They spend hours, get 50 bucks off on an airplane flight. They look at everything. Right. And they'll put$10 ,000 in some crazy stock they heard on the bus.

14:31And they have no idea what they're doing. And some of you have done this awful term before I got in the business called, play the market. Play the market. You don't like that term. That is a, sometimes a noun, there's a verb, it's a very dangerous verb. Play the market is not what you do. You buy good companies and some work and you have to know what they do. there was this farm in western Massachusetts the two companies, Tampax out there friendly ice cream you put a thousand dollars in a month for ten years, brilliant idea, he says, if they stop hiring I'm going to leave he made a million dollars I mean people have all these edges, people in the steel industry know it's getting better before I do these people have an edge and they They must go to a casino and bet on rent.

15:23So by knowing the companies that you're invested in, there's a higher likelihood that you'll be able to stick with them when other people are scared. The average range for a stock on the New York Stock Exchange, the average high, average low, every year is 100%. So stock might start at 20, sell at 28, finish at 14, finish at 20. It's a 100 % move every year. So it's 50 % up, 50 % down-ish. And that's how it's 100 % swing in the price. That's the average stock. Wow. And most stocks you're going to buy, they're probably going to go down. The odds sometimes they go up. If the story's powerful, like Watsko or Chrysler, you might buy it up.

16:04But if you don't know what they do and it goes down, and I've had people say, this stock's gone from 50 to 1. How much can I lose? and I say well wait a second if somebody put $10 ,000 in at 50 and you put $50 ,000 at one if it goes to zero who loses the most? I mean stocks go to zero I've had them I wasn't buying them on the way to zero but stocks go down if you don't understand what they do if you can't explain to an 11 year old in a minute or less why you own it not the suckers going up I've heard that before why What's the story of this company? They're good business, good balance sheet. They're fine.

16:47That's why I own it. You've instructed investors to write a script for the stock they're going to buy. Write the story down. Why is this stock going to work? Or why is it undervalued? I've told this to people in high school and college saying, make a paper portfolio, pick 10 stocks, and watch them over a year or two and say why you bought them. List the reasons and see what happens. That's what we're about. We do this, we have those, our fund managers, they don't wait for the analysts to come in. They're out researching companies. They're on the phone talking to companies. Every fund manager, the highest roll of failure is an analyst, a fund manager analyst.

17:25We have analysts under that. We have all this information coming in. It's staggering all the information. Go back in time, we own a lot of Nike. This story's amazing. Owned a lot of Nike, and their inventories were out of whack. Not a good sign. It's before the internet. We had to go to a library and get their quarterly report. Our library fell. We got the came in. We opened up. Inventories went down. We backed up the truck. I mean, the concept of, you know, they used to mail it out by mail to the shareholders. Now they have a website. It's everybody on the planet knows what they do. Yeah. Information today is unbelievable.

18:04If you, you can't understand they have company presentations. It's a lot easier to understand what you own today. So I think you're saying in today's day and age, you have no excuse not to know the companies you own. It's too easy. It's too easy. You don't need a Bloomberg. It's websites. Here's another one on risk. You said far more money has been lost by investors preparing for corrections or trying to anticipate corrections than has been lost in corrections themselves. Talk about that. Well, I think people, you know, they're always worried the market's going around. And it does, as I mentioned.

18:41And, you know, two years ago they were saying 2024 was going to be a down year for the economy. And 25 is going to be a down year. I mean, I think economists have predicted 33 of the last 11 recessions. Yes. With great certainty. Yeah. my head. And I think, you know, people are, they're basically, it's a, you look dumb in this business. You're terrific in this business. You write six and a half times out of ten. That's a great score. Even if you write five times out of ten, if you own Costco or Walmart or, I can't pronounce the video. I'm getting close to the video. I think you nailed it just there.

19:31That offsets your mistakes. Yeah. You have to have these winners offset your mistakes, and that's what we've done for 70 years at Fidelity. So you've got two more on this topic. I'll read them both. You said you get recessions. You have stock market declines. If you don't understand that's going to happen, then you're not ready. You won't do well in markets. You also said people who succeed in the stock market also accept periodic losses, setbacks, and unexpected occurrences. How important is it for the average, I hate the term average investor, for the typical investor to go into this business understanding there's no way to dance around these things.

20:13They're going to take place. You're going to have to live through them. Would you say that's one of the paramount things? Because that's what I think. Well, the point is, when if somebody has three children about to start college in two years? they shouldn't be in the stock market. That's right. They should be in the money market fund. It depends. If you've got your house, paid down your mortgage, then you can invest. And it's been a great place to be since you're 1900. Yeah. One of the more timeless things that you've said, and it comes off as sarcastic, but I think the last 15 years have really proven the value of this idea.

21:00Coming out of the great financial crisis, the most in vogue style of investing was macroeconomic hedge funds because there were a small handful of people who determined that the housing crisis would ultimately bring about a recession. And those people were revered for a couple of years. You've never really been big on trying to outguess everyone else on the economy. And you said, if you spend more than 13 minutes analyzing economic and market forecasts, you've wasted 10 minutes.

21:35I still quote you to this day when clients call up and they want to talk about the latest labor report or what the Fed's going to do. Tell us, how long did it take you to figure that out? And how much pushback did you get when you said it from people that were economists or focused on the macro? Well, I don't remember if Fidelity ever had an economist, so we just buy stocks. She's here tonight.

22:03Okay. So I'd love to get next year's Wall Street Journal. Yeah. I'd pay at least$5 for next year's Wall Street Journal. And hands off, the people did the big short. I had no idea how bad the housing market was, how bad people had second mortgages, they had old improvement loans, they were under water in their house. I had no idea, hats off to them. But I look at facts, like what's happened to debt, credit card debt. You can get that now. What's happened to savings rate? What's happened to employment? I'd love to know what's happened in the future. I've been hoping I could get that in the last 81 years.

22:44It's not available. So I just deal with what's now, what's happened to used car prices, what's happened to prices of oil. And you look at industries that have gone from miserable to getting better, like Chrysler. I mean, I remember people says, gee, you were really good on that show, but how can you possibly recommend Chrysler? It's gone bankrupt. Well, they had$2 billion in cash, and they had enough money for the next three years. They weren't going bankrupt. So I think the best stocks I had, I think if 100 people did work on it, 99 would say, that's better than I expected. So I use this for one of our great friends, Joel Tillinghast.

23:26I wrote a forward to his book, and I always said, the person that wins the most, in terms of the most rocks, wins the game. And I said, Joel Tillinghast is a great geologist, because if you look at 10 stocks, you'll probably find one that's mispriced. Look at 20, you'll find two. Look at 40, you'll find four. And that's what we've been doing at Fidelity we just don't look we look at everything so you're not discounting the value of economic data you're saying if it's not from the future the market already understands this yeah I want to know facts right now that's important you said behind every stock is a company, find out what it's doing some of the great stories about your big investment success involve hands-on observations that you had been able to make, living your real life, being in a supermarket, being in a shopping mall, looking at what people are doing.

24:26I think that over the years, that idea has kind of been mischaracterized as if you use the product, it's automatically a good stock, which is not what you meant at all. Could you explain the difference between those two ideas and why that's so important? A lot of people, I've met so many nice people earlier tonight, and a lot of them had read my book, One Up on Wall Street, and I had this story about, I had a great investment, my largest position was in Hanes, that had these pantyhose called legs. They weren't that sheer, they really fit, but most pantyhose are being sold in fancy department stores.

25:05This was at the supermarkets. People go to a supermarket once a week, they go to a fancy store once every couple months. My wife went a little more often, but the, and I went with her. So this was an incredible success, incredible success. But then a larger company called Kaiser Roth put the thing right next to it, and it was called No Nonsense Panos. So I went to two different stores, about 65 different pairs of No Nonsense Panos. Now, what kind of look did you get from the clerk in the process of that activity? Yeah. It was an odd purchase, but I spread it over three stores. But I gave it out to everybody at Fidelity.

25:53Yeah. Give me some feedback on this. They said, it's not that good. Okay. It's not that good. Okay. So... And the other one, the first stock I bought, in Magellan was Taco Bell. And I had to say, I had to say to, I own this myself, is it okay? Who is clapping for Taco Bell? It's not one of my people, was it? Okay. And so I said, can I buy some stock that I own myself? I said, sure. You just can't sell it after you buy it. You have to hold on. So that's when we had Ma Bell and all these Bell companies. So I called the trade room. I said, I want to buy Taco Bell. Ned Johnson came down. And he says, what is Taco Bell?

26:45And I explained what a taco was. They're only in Southern California. They're going to Central California. I didn't get a Burrito Supreme. But I explained what a taco was. He says, basically, a taco has very little meat, a lot of protein. You can sell a really good meal for a low price. and I got robbed on it because Pepsi-Cola bought Pizza Hut and they bought some Connecticut Fried Chicken. They bought a type of, to sell Pepsi. This stock would have gone to 500. My largest position, it was 18. They bought it at 30. Would have gone to 500, 600. But they bought it to sell Pepsi. When Chipotle came along, did you avail yourself of the opportunity?

27:25I did, I did. But how I miss Starbucks, I don't get that. Because I went to Dunkin' Donuts. how did I miss Starbucks? I mean, brain cramp. I didn't buy it well. Okay. You've got some great quotes about portfolio management and here are a few of them. You said, in the long run, a portfolio of well-chosen stocks and or mutual funds can outperform the most sophisticated investment strategy. I think there is a cottage industry today and probably there has been for a long time of people selling complexity to investors. It's one of the best sellers on Wall Street. Just that simple statement, I think, very much is something that most of us would associate with Fidelity, and very much is something that we would associate with you.