Peter Lynch: Inside The Brain Of An Investing Genius

Ted

FYI: ( I owned Fuidelity Magellan from 1972-1996 and made a lot of $$$ from Lynch's skill as Magellan's manager. It is the single best investment I ever made.)

Consider that Lynch’s Magellan fund averaged +29% per year from 1977 – 1990 (almost doubling the return of the S&P 500 index for that period). In 1977, the obscure Magellan Fund started with about $20 million, and by his retirement the fund grew to approximately $14 billion (700x’s larger). Cynics believed that Magellan was too big to adequately perform at $1, $2, $3, $5 and then $10 billion, but Lynch ultimately silenced the critics. Despite the fund’s gargantuan size, over the final five years of Lynch’s tenure, Magellan outperformed 99.5% of all other funds, according to Barron’s. How did Magellan investors fare in the period under Lynch’s watch? A $10,000 investment initiated when he took the helm would have grown to roughly $280,000 (+2,700%) by the day he retired. Not too shabby.
Regards,
Ted
http://investingcaffeine.com/2015/08/15/inside-the-brain-of-an-investing-genius-2/

Mark

Well worth the read.

LewisBraham

The interesting question is how would Lynch fare today when there are thousands of mutual fund and hedge fund managers scrutinizing almost every stock from multiple angles. Also, the flow of information on companies thanks to the Internet occurs in milliseconds. Even Buffett has observed how much times have changed for active managers in the U.S. It's a much harder game than it was in their heyday when comparatively few managers were exploiting market inefficiencies.

MJG

Hi Guys,

Like Ted, I made some money investing in Peter Lynch and Magellan. Unlike Ted, I only invested small amounts, and only after Lynch had piloted Magellan for a half dozen years. The percentage returns were impressive, the dollar amounts much less so. During that phase of my investment learning cycle, I was still heavily committed to individual stock positions. My bad decision, and also bad timing.

Like Lewis Braham, I question if Lynch would be as successful in today’s marketplace as he was in yesteryear’s investing world. I doubt it.

Peter Lynch's record is unarguably outstanding. There can be no debate over his superior 13 years of active Magellan fund management. Today’s investing environment is significantly different. In his hay-day, Lynch enjoyed several advantages that do not currently exist.

His Fidelity boss (Ned Johnson) allowed him to go anywhere; today, a manager is more tightly constrained by a discipline to stay within prescribed box styles. Lynch was permitted to invest internationally, a rare option in the late 1970s and early 1980s. He invested in countless stocks, some after merely visiting a busy store; one wonders about the sagacity of that tactic. It is often said that Lynch never saw a stock that he didn’t want to buy.

Thirty-five years ago, Lynch was mostly investing against Joe Six-Pack. The competition was definitely inferior when contrasted against today’s fully trained money managers. This is the most common explanation for the disappearing Alpha phenomenon. It is tough to build long winning streaks when nobody owns an advantage for very long. Information exchange quickly erodes any such advantage.

I’m sure Lynch would do a competent managerial job today. Given the highly sophisticated and competitive environment that currently exists, becoming a superstar fund manager is far less likely. This is not a knock specifically aimed at Peter Lynch. The financial field is presently loaded with talented, deeply supported folks.

Institutional agencies carefully research and hire successful active fund managers. It is a laborious process. These institutions are finding that a much more challenging task. The selected management’s performance records are deteriorating. Alpha is more elusive. In response, these same institutions are now punting, and are presently hiring more passively managed sub-units. Things change.

Best Wishes.

LewisBraham

The one advantage managers like Buffett and Lynch have that is even greater today than it was when they were running money is patience. Since everything moves so quickly--too quickly really--today, a patient investor who really does their homework on a cheap stock can win in the long-term. The problem is this strategy doesn't fit so well in a mutual fund format because mutual fund investors are as impatient as money managers if not more so. A lot of patient money managers get fired when they fall behind their peers or a benchmark so they feel pressured to follow the herd--a phenomenon Jeremy Grantham has astutely described in his research. That's why the second big advantage only Buffett enjoys is he acquires companies in their entirety as opposed to just shares of their stock. As such, he doesn't have to care about the daily fluctuations of the share prices of his acquired businesses. He can think of them as businesses with long-term prospects not stocks with daily market noise. Buffett has said his ideal holding period is forever--a period that truly patient mutual fund managers can only envy. Sad to say, we are part of the problem. I almost never see anyone post here about a mutual fund that is stinking up the place currently but could be a bargain long-term. The fact that almost everyone loves winners and hates losers is the reason value investing continues to work long-term. It's a strategy that's easy to talk about in the abstract but hard to stomach in reality.

bee

LewisBraham said:

I almost never see anyone post here about a mutual fund that is stinking up the place currently but could be a bargain long-term.

My "Cinderella Fund" list:

YACKX
FAIRX
TGBAX
PRPFX
TREMX

LewisBraham

@bee. Thanks. It's nice to see this kind of list. It would be nice to see more postings like yours and less about biotech. The irony is when I was just starting out as a financial writer I was given the job of writing a weekly dueling portfolios column interviewing Don Yacktman and Jean Marie-Eveillard about their best ideas. This was in the late 1990s and everybody hated their patient value investment styles and readers would complain about how boring the managers I covered for this column were. Of course, when the dot.com bubble burst they both became heroes and celebrities again. If one likes Yacktman's style, now is the time to buy his fund, not when he's a hero. Then again, there is one unique risk factor. Don isn't running the fund anymore. But I believe the style remains fairly consistent.

InformalEconomist

I wouldn't say they were stinking up the place, but my holdings in general are so valuey I worry about not getting enough growth (suddenly, those terms lost meaning). Current look-away funds:
YAFFX
VVPLX
TBGVX

Haven't heard anyone mention SLASX in years; it used to be a darling.
(And let's not talk about Asia tonight. I'll think about it tomorrow. Or next Tuesday.)

MJG

Hi Guys,

The search for mutual fund performance persistence has long been a long standing investor’s goal. It is illusive. In his seminal 1997 study titled “On Persistence in Mutual Fund Performance”, Mark Carhart summarized his findings as follows:

“The only significant persistence not explained is concentrated in strong underperformance by the worst-return mutual funds. The results do not support the existence of skilled or informed mutual fund portfolio managers.”

So, on average, Carhart had a strongly negative opinion on active fund management. Other studies demonstrated that managers who generated positive Alpha for one 5-year period, generated negative Alpha in the next 5-year period.

This is yet another illustration of a very persistent Iron Law in the investment world, the ubiquitous Regression-to-the-Mean. According to Carhart, poor fund management is consistent (and likely to disappear from the scene}, but better fund managers have difficulties maintaining their edge. Change happens.

Many researchers find the seeds of those difficulties embedded in the success of those better managers. Fund size explodes, but the better investment opportunities are more fixed. Performance erodes.

Remember when in the 1970s, Burton Malkiel claimed that a blindfolded monkey tossing darts at a listing of stocks to assemble a portfolio would do as well as a purported expert money manager making careful selections for his portfolio. Well, more recent studies find that judgment was too harsh.

Fund mangers do have skill. The problem is that almost all fund managers have substantially the same skill level. The skills tend to neutralize each other. That puts the outcomes back into the luck segment of the skill plus luck equation. Hence managerial outperformance is again in the chancy realm and persistency suffers.

Still another persistency study examines the Morningstar Star rating system for a clue. These researchers conclude that the lifetime of superior performance as measured by stars is very transient. Again on average, these researchers find that a star rating persists for only 5 months before another different star surfaces. The ratings go both up and down, so relative performance is variable. That’s no great surprise, but the short 5-month period is.

So, if established superior fund managers have recently fallen on hard times, the Regression-to-the-Mean Iron Law suggests that an investor should be patient, should keep his resolve, and should keep the faith and stay the course with these managers. These managers do exist and will recover. Some will fail, but the odds are encouraging.

How do you find these superior managers? A Stanford professor, Jonathan Berk, has a novel theory that is tied to the manager’s pay scale and assets under management. Here is a Link to a short YouTube video by him:



I’m not convinced, but Berk’s hypothesis adds another dimension to the debate. Enjoy.

Best Wishes.

Sven

Chris Davis funds (Selected American, Clipper, and New York Venture) consistently overweigh financial sector and they often performed poorly in down market than his peers.

My small emerging market allocation through Wasatch Emerging Small Cap and EEMV have not done well this year. YACKX, ARTQX, and VNQ also lagged badly. Surprisingly, the more conservative funds including Vanguard Min Voltatitly, TRP Capital Appreciation and FMI International have done well that negated the former funds.