How Peter Lynch achieved a 29,2% annual return

Peter Lynch is best known for his time as Fidelity Magellan Fund portfolio manager and for his books. During his 13 years as portfolio manager he returned a compounded annual return of 29,2% which clearly beat the S&P 500 index by 13,4%. This was a huge return over market and something many of us would like achieve.

My first post will be about Peter Lynch as he did increase the funds value over time and based on interviews is a funny person who can joke about his own misstakes, this will be a short summary of key point from Peter Lynch. There are many other known investors, like Warren Buffett and Charlie Munger to name two of my favourites. Back to Peter Lynch, compared to many other known investors what I could find was only the 13 year period I can use to mention and compare based on his thoughts and principals used in investing. There are similarities between Charlie Munger and Peter Lynchs investment principles of which a understandable business at good prices is one and that you do not need to trade to be successful in the stock market.

Peter Lynches returns as a fund manager means that the funds value doubled every 2,5 year in average while it took S&P 500 Index 4,6 years in average to achieve the same return. Obviously if you lived through the times then you most likely also experienced the very volatile market from time to time. Especially in 1987 on Black Monday when the stock markets fell more than 20 % in one single day, even though we did have the Flash Crash back in May 2010. To put it in one sentence, markets will move a lot from time to time and we have to live with it if we want to invet in stock markets.

How Peter Lynch made an annual return of 29,2% in stock market?

Based on Peter Lynches statements, achieving these returns require a lot of investigation into companies products, services and financial statements. Companies with good growth opportunities and great products will most certainly contribute with value to its owners. Peter Lynch also identified cyclical companies, such as the car industry where you only need to be on the ride from time to time to make a decent return. Simply put, it requires a lot of time to find valuable companies at good prices. A few of Peters advices summarized,;

1. Buy what you understand

2. PEG-ratio (Price/Earnings to Growth)
   

3. Invest in the long run

4. Do not be intimidated by a stock

Many of the statements Peter Lynch has made are rational and simple, being patient seem to be one important trait many investors have forgotten today as we are bombarded with trading commercials. Based on his analogy I usually neglect the commercials of trading in an dout with statements of quick returns and making money fast. Patience is a key trait when investing and that is what I follow. 

Companies Peter Lynch taht made these returns are more boring examples like Dunkin' Donuts, Taco Bell, Ford motor and Walmart, today it is easy to understand why he invested in the companies. But we have to remember that it was many years ago and today the market structure might be different than it was back in the 1980's. To summarize these companies contributed with a service or product people wanted and it gave them joy or helped through the day with a better car, fast food or a donut from time to time. The companies were not hot stock picks or loss making businesses, except Ford that had its issues depending on market situation. As mentioned with car manufacturers, they are more cyclical companies and are therefore cyclical investments from Peters perspecitve. Investing in car compnies when times start to get better and people have more cash at their disposal, based on his principles.

"You only need be to right a few times" is a statement made by Peter Lynch. A few five or ten baggers compensate for smaller losses made which is true, as a fund manager it was his job to research companies and contribute with value to the fund owners. A job he did well during the 13 years and that is why he has been praised. Compared to a retail investor (non-professional who invests own salary from time to time and smaller amounts) he should have returned more as otherwise he would have been bad at his job. The pressure should not be the same on a retial investor as we are considered amatures, we don not need to beat the market every year nor should we onl ythink about beating markets on annual basis. Instead the focus should be to beat the market in the long run, this will at least reduce trading costs. As I do not like trading that much I can read a book written by Peter Lynch or some other investor.

Peter Lynch has written a few books on investing and his thoughts are well emphasized there, here are three books Peter Lynch has written on his own or co-authored;

One Up On Wall Street

Beating The Street

Learn To Earn

You can find Peter Lynches statements in his books as well as interviews. I do recommend to listen to Peter Lynches views as they are reasonable and why not achieve a decent return based on his principles.

Sources;

mikesmoneytalks.ca

investopeida.com