Peter Lynch - Finding Investments At Home

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We have discussed finding promising companies using stock screens and stock research reports in the last few blogs.  This is the typical way a fundamental investor would find new investment opportunities.  You could call this the "top down" method, i.e., start with a universe of stocks and whittle the list down to a few companies which meet the investor's financial metrics.  The other method could be described as "bottom up."

Like Philip Fisher before him, Peter Lynch is a growth investor.  Mr. Lynch was the portfolio manager for the Fidelity Magellan mutual fund from May, 1977 to May, 1990.  During his legendary career, he posted market leading returns for his fund investors year after year.  It has been calculated that if someone had invested $10,000 in the Magellan Fund in 1977, by 1987 the money would have grown to $190,000, an enviable return by any calculation.  This outstanding performance resulted in the Fidelity Magellan Fund growing from $20,000,000 when he took over in 1977 to $14,000,000,000 (yes, you read that right - 14 billion dollars) when he retired exactly thirteen years later.  At that point, it was the largest stock mutual fund in the world.

Mr. Lynch wrote his best selling book, One Up On Wall Street, in 1989 with noted financial writer, John Rothchild.  Although a poster boy for Wall Street success, Mr. Lynch tells his readers that individual investors have an advantage over him and other Wall Street professionals.  He opens his book with the following:

This is where the author, a professional investor, promises the reader that for the next 300 pages he'll share the secrets of his success.  But Rule number one, in my book, is: Stop listening to professionals!  Twenty years in this business convinces me that any normal person using the customary three percent of the brain can pick stocks as well, if not better, than the average Wall Street expert.

In an conversational manner, Mr. Lynch writes about the highs and lows of his career and explains why the individual investor can win over the professional investors.  His advice is to look around you and find the companies whose products or services you use or are familiar to you.  News of how well a company's new product or service is doing might not reach Wall Street, in many instances, until well after the company's stock has started to rise as a result. 

His best example concerns L'eggs.  I do not know if they are still being sold, but L'eggs were panty hose packaged in plastic eggs and displayed on racks in grocery stores in the nineteen seventies.  Mr. Lynch explains that the manufacturer of L'eggs realized that women went to department stores to buy their stockings only once every six weeks.  However, they found that these same women went to the grocery store usually twice a week.  L'eggs remains one of the most successful products of its era.  Mr. Lynch points out that he did not discover this investment opportunity; his wife did.  She told him about the product and he found out that Hanes was the company which came up with this unique selling concept.  He did his research and discovered that the company was financially solid.  His investment in Hanes stock turned into a "sixbagger", Mr. Lynch's term for a stock whose value increased sixfold.

This is what I would call "bottom up" stock research.  Surely there are products or services you buy all the time without thinking about it.  You use the product or service on a regular basis and are a satisfied customer.  Well, maybe there are several million (or billion in this global economy) other folks who agree with you.  You start with a good product or service.  You then identify the manufacturer or service provider and research the company if it is publicly traded.  If the company meets your fundamental investment requirements, buy the stock!

I know an individual who had a bout with cancer several years ago.  Fortunately, his form of cancer was very treatable.  His doctor recommended daily radiation treatments for a couple of weeks.  Every day, he climbed up on a moving table and was run through a radiation machine.  He noticed the brand of radiation machine and checked out the company.  This story has a happy ending.  Both he and the company's stock, which he bought, are doing fine more than seven years on.


One Up On Wall Street has gone through several editions and is still in print.  You will find it to be as entertaining as it is informative.

Comments are always welcome.