Peter Lynch’s Warning for the 2023 Recession

All right, I'm Becky Quick. I'm Andrew Sorkin. We're going to Legendary investor Peter Lynch. He's with us. Oh my God, oh my God, oh my God. Okay, it's happening! Everybody stay calm! What's your procedure?

[Applause]

By what you know is what Peter taught us, and it's so nice to see you this morning, Peter. Good to be here, guys. The man is back! Peter Lynch himself just a few days ago sat down for an exclusive interview with CNBC, where he spoke about the current state of the economy, what we should be looking at right now, and how we can use these tough economic periods to our advantage. And you betcha bought a dollar!

In this video, we're going to be discussing all of it. And for those that maybe don't know Peter Lynch, he not only wrote one of the biggest stock market bangers of all time, that being "One Up on Wall Street," but of course, he also ran the Magellan fund over at Fidelity Investments for 13 years between 1977 and 1990.

And why do I get so excited when he does interviews? Well, because of this: You managed the Magellan fund, growing it from—you're ready for this—20 million dollars to 14 billion dollars in 1990. Yeah, I think it's fair to say that the guy definitely deserves his Legend status.

But with that said, let's get into this interview. The first clip is all about how Peter is seeing the U.S. economy right now. As we've all seen, inflation is running high, interest rates are squeezing consumers, savings rates are low, and the stock market is still down versus 2021.

So, what on Earth should we be thinking right now? Well, we've had 13 recessions since World War II, and we've had 13 recoveries. Maybe we're going to have one. If this is a recession, it's probably the most predicted one ever. You know, I never know when we're going to go. I'd love to know the future; I'd be a better investor. I'd pay you five extra dollars for next year's Wall Street Journal. It would really help!

I cannot predict the future, but this one, this recession, is so expected, so predicted—it's nothing like it. Imagine 1981 with double-digit inflation, teleportation unemployment, and people thought the Japanese were going to take over the world. I mean, we were hopeless!

You know, there's always something to worry about. I'd really been—my over 50 years of doing this—I think I'd be worried if there was, you know, somebody didn't bring up something to worry about.

Payday almost sounds identical to Charlie Munger. In my last video, Charlie's mentality during recessions is very much the economists have to roll with it. Sometimes the tide is with you, sometimes it's against. It's really interesting to see Peter basically convey the exact same message here.

Yes, it would be nice to pay five dollars extra for next year's Wall Street Journal so we can see what's coming our way in terms of interest rates and inflation, but you just can't do that. So, we just have to roll with the punches, keep our heads down, and stay true to our investing strategy no matter what the macro is throwing at us.

I also find it interesting that Peter kind of takes a jab at those investors out there that are really freaking out over this. In this recession, inflation has peaked at 9.1, interest rates currently sit at five percent, and unemployment sits very low at just 3.5 percent. But Peter notes that this is really not that bad, recalling the 1980 and 81 recession.

At that time, there was 15 percent inflation, interest rates were at 19, and unemployment was over 10 percent. And at the end of the day, his view is that we got through that one, and we'll probably get through this one too. So as an investor, don't get sucked into the panic, and instead, focus on the long term.

As he said, there's been 13 recessions since World War II, and we've had 13 recoveries. And in his experience, the only time to worry is when no one's got anything to worry about. So, long story short: Don't Panic!

All right, what's next? Is your sense, though, that the style of investing that you pioneered is still doable and winnable today?

Well, I think looking for something different linked me to something that's a good story. I mean, who would have guessed TJX, a local company, would have gone up 50-fold? Or Stop and Shop? You have to find a company that's either a turnaround or a company that's going to grow, like Panera or, you know, Family Dollar stores.

I'm not saying it buys now, but that's what's made our—you know, Sears has rolled over, so, you know, so has Kmart, IBM slowed down, but we've had newcomers come along. I mean, that's the nature. You have to be looking for new companies and look at the balance sheet.

If you can add five and five and get reasonably close to ten, you should be able to look at a balance—I mean, say, here's two depressed companies. They've gone from 50 to 3; one comes good, three remain in cash and no debt; one’s got three remaining in debt, no cash. Which one are you going to buy? I mean, that's not too hard to do.

Peter raises a very important point at the end of that clip, which is extremely important to investing during recessions. You have to own companies with solid balance sheets, healthy cash balances, and low debt levels.

If we turn to Seeking Alpha and have a look at Metal, we can see that they have 40 billion dollars in cash or short-term investments, then 59 billion in current assets. But if we scroll down to liabilities, we can see that they have zero in short-term borrowings and 27 billion dollars of short-term liabilities total.

So they cover all of their short-term liabilities with just their cash and short-term investments. That's handy! Plus, only 10 billion dollars in long-term debt—practically nothing. That's a company prepared for a downturn.

Or flip over to Google instead—113 billion in cash and short-term investments, but just 69 billion in short-term liabilities. So they're even better prepared for a downturn.

But contrast that to say Royal Caribbean—1.9 billion dollars in cash, 3.2 billion in current assets, but 8.5 billion in current liabilities. Now, I'm not passing judgment on these companies simply based off of their current ratios, but you can see Peter's point.

Take a look at the balance sheet. And once again, big thanks to Seeking Alpha for sponsoring the channel. In this video here, I'm using Seeking Alpha premium, and as you can see, I have access to a full 10 years' worth of financial data—super helpful!

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And thanks to Seeking Alpha for supporting our community. But back to Peter Lynch. So his advice is to make sure you are watching the balance sheet like a hawk.

But also, in that last clip, he described the types of businesses to be watching right now—growers or turnarounds. Look at how long devices look at Teradyne, look at TJ Maxx. We're going to turn around at Target. I mean, you can see this company coming. Look at Wingstop—I tried those wings. Wow!

I'm not saying that buys now, but they're out there. Look for a company that's going to do well in the next few years—five years. Look at their balance sheet or look at a turnaround. When companies go from crappy to semi-crappy, the stock goes up; when it goes from semi-crappy to good, they go up.

When business gets to be terrific, get out! So if you're contested in his book "One Up on Wall Street," Peter talks about the six different types of businesses: fast growers, stalwarts, slow growers, cyclicals, turnarounds, and asset plays.

So it makes sense that in a recession-type environment, where generally speaking everything is struggling, what you really want to keep an eye out for is the fast growers that are doing well enough that even a recession can't hold them down, or more likely a turnaround—a business that's not going bust but was pegged back significantly by the recession and is now starting to see some light at the end of the tunnel.

Because what happens in these recession-type environments is that many stocks tend to get way oversold, and this is due to the nature of institutional trading. But as Peter Lynch says, when there's even a glimmer of hope, the stock can really 180.

As he says, if a company goes from crappy to semi-crappy, the stock goes up. When they go from semi-crappy to good, they go up as well. And his anecdote at the end is that the only time you should really worry is when they go from great to terrific.

Because when everyone is running around saying that a Web 3 company selling pictures of gorillas is the best thing since sliced bread, you know there's probably only one way to go, which is down. And that's the kind of euphoria we were seeing in the stock market in 2021. But we all know how that played out.

But long story short, Peter's advice is to watch for improvement because time and time again, the immediate time period coming out of a recession can be a very beneficial time to invest.

Tony Robbins notes in his book "Unshakable" the returns of the S&P 500 in the 12 months after a bear market bottom, and they usually are really, really strong! If that chart doesn't hype you up to watch for a turnaround, I don't know what will.

Where do things get better? Some signs of things getting better: You have an edge; you might be in that industry where things are starting to improve. There's a lot of positive coming alive. The price of oil has gone from over 100; it's now 80. One year out is 78. Natural gas has gone from eight dollars in MCF to 2.30.

I mean, we've added over 6 million jobs in 21-22 and over a million jobs in the first quarter. A lot of people at the bottom part of the economy have had some different raises. And I like this optimistic mentality by Peter, and honestly, it's worked very, very well for him over his career.

Sure, we have problems in the economy, but at the end of the day, it could be—and has been—a lot worse. And remember, in any economic condition, there's always some companies that can benefit and do benefit. So as Peter says, use your edge.

Maybe you work in the oil industry, or maybe you're a beef farmer; maybe you've worked in luxury retail, or even you're a supermarket manager. While you may not think it, these everyday life situations give you incredible context into specific areas of business that even Wall Street analysts can't see.

So think about where your edge is and see if you can use it to your advantage. "Oh, but Brandon, all I do is watch TV!" You know, great! You probably have a solid insight into Comcast, Disney, Netflix, Paramount, Warner Brothers Discovery, the list goes on.

So find your edge and watch for the turnaround, but of course, never stray from businesses that are close to home. Well, I think people, they're investing in individual stocks—it's sad. They're careful when they buy a refrigerator or an airplane flight or they're careful with their money.

And they'll hear about a stock on the bus and they'll put five or ten thousand dollars on it; they have no idea what they do! So you really got to be careful. Look at the company, look at the balance sheet. What is the reason the stock should be higher?

The sucker’s going up is not a good reason. And this is classic Peter Lynch mentality, but I still wanted to chuck it in at the end of this video. At times like this, it's fair to say you're going to hear a lot of opinions—whether it's fund managers or media articles or, you know, your next-door neighbor—you’re going to hear a lot of random stuff from a lot of people.

But the important thing is that you don't act on any of this sort of information. As Peter said, go back to the corporate filings, go back to the financial statements, do your own valuation, construct your own thesis around a business, and make sure you're able to explain why and how this business will be worth more in five or ten years.

This exercise, which Peter talks about a lot, is not supposed to take you a really long time. You should be able to, in one minute, explain to a five-year-old why this stock is a smack bang home run. If you can't do that, it proves that you probably don't know what you own, which is arguably Peter Lynch's rule number one of investing.

But with that said, that is everything Peter Lynch spoke about in his recent interview with CNBC. Definitely let me know your thoughts down in the comments section below, and what is the best bit of advice you've ever picked up from Peter Lynch or maybe the book "One Up on Wall Street."

I'd love to hear what you guys say—leave that stuff down in the comments. But apart from that, leave a like in the video if you enjoyed. Thanks for watching, and I'll see you guys in the next video.