Peter Lynch: Know what you own, and know why you own it

Peter Lynch is one of the most successful and well-known investors of all time. Lynch is the legendary former manager of the Magellan Fund at the major investment brokerage Fidelity. 

His investment style has been described as adaptive to the prevailing economic environment at the time, but Lynch always stressed that you should be able to understand what you own.

Barrons

How did you get interested in investing?

Lynch: My father died when I was 10. I started caddying at 11 in the '50s when the stock market was great. It went up all the time, and people were recommending stocks.

They'd talk about stocks and I'd look at them. I didn't even have any money. But I watched them go up. I said, "Wow, this looks like a great thing to do." So I did. At Boston College, I did a report on the air cargo industry, and I bought $300 worth of Flying Tiger airlines. The Vietnam War took off and they had to fly a lot of stuff to Vietnam.

I think that was just an example of luck, but I knew the reason I was buying. I looked into it, and I said, "Air cargo's the big thing." Flying Tiger wasn't carrying people, just cargo. I did work on it, and I said, "It looks like a growth area." I think I paid for graduate school with Flying Tiger.

I'm 75 now (I think middle age is 88 and old's 107). I haven't changed at all. I'm doing the same stuff I did at 19 and 20.

Barrons

What do you need to become a great investor?

Lynch: In the stock market, the most important organ is the stomach. It's not the brain.

On the way to work, the amount of bad news you could hear is almost infinite now. So the question is: Can you take that? Do you really have faith that 10 years, 20 years, 30 years from now common stocks are the place to be? If you believe in that, you should have some money in equity funds.

It's a question of what's your tolerance for pain. There will still be declines. It might be tomorrow. It might be a year from now. Who knows when it's going to happen? The question is: Are you ready—do you have the stomach for this?

Most people do really well because they just hang in there.

What should investors do when the market eventually tanks?

Lynch: You've got to look in the mirror every day and say: What am I going to do if the market goes down 10%? What do I do if it goes down 20%? Am I going to sell? Am I going to get out? If that's your answer, you should consider reducing your stock holdings today.

Fidelity

How should individual investors approach picking stocks?

Lynch: Stocks aren't lottery tickets. Behind every stock is a company. If the company does well, over time the stocks do well, and vice versa. You have to look at the company—that's what you research. That's what we do at Fidelity, and that's what I do.

What's the biggest mistake you see individual investors making?

Lynch: The public's careful when they buy a house, when they buy a refrigerator, when they buy a car. They'll work hours to save a hundred dollars on a roundtrip air ticket. They'll put $5,000 or $10,000 on some zany idea they heard on the bus. That's gambling. That's not investing. That's not research. That's just total speculation.

What advice do you have for fund investors?

Lynch: The question is: Do you understand what you own when you own a fund? Is this the flavor you want? Do you want real action or do you want something conservative? You know, we want the public to be happy. We're not going to tell people what to do. But we have people to talk to.

Source: Fidelity, Investopedia