How Peter Lynch DESTROYED the Market by 2,639%

Single most important thing to me in the stock market for anyone is to know what you own. If you have a desire to make money investing in the stock market, then you need to watch this video. And this is not coming from me; it's coming from legendary investor Peter Lynch. During the 13 years Lynch managed the Fidelity Magellan Fund, he averaged a staggering 29% annual return. To put this number into perspective, a $100,000 investment with Peter Lynch would have turned to a whopping near $2.74 million, a cumulative return of 2,639%.

Peter Lynch's track record has gone down in history as one of the most impressive careers on Wall Street. However, he didn't graduate from an Ivy League university. In fact, he didn't even study finance or business in college. The beauty of Lynch's strategy is in its simplicity. So, in this video, we're going to cover the four main elements of Peter Lynch's investment strategy. Number three on the list is my personal favorite. Now, let's get into it.

First up on our list is know what you own. The single most important thing to me in the stock market for anyone is to know what you own. I'm amazed how many people own stocks they would not be able to tell you why they own it. They couldn't say in a minute or less why they own it. Actually, if you really pressed them down, they'd say the reason I own this is because the sucker is going up. I mean, that's the only reason. That's the only reason they own it. And if you can't explain—I'm serious—you can't explain to a 10-year-old in two minutes or less why you own a stock, you shouldn't own it. And that's true, I think, about 80% of people that own stocks.

And this is the kind of stock people like to own. This is the kind of company people adore owning. This is a relatively simple company. They make a very, uh, narrow, easy-to-understand product. They make a 1-megabit SRAM Coss bipolar risk floating-point data I/O array processor, an optimizing compiler, a 16 dual-port memory, a double-diffused metal oxide semiconductor monolithic logic chip with a plasma matrix vacuum fluorescent display. It has a 16-bit dual memory; it has a Unix operating system; four Whetstone megaflops; poly-silicone emitter; a high bandwidth— that's very important—6 GHz double-metalization communication protocol; an asynchronous backward compatibility peripheral bus architecture; and four-wave inle memory.

A token ring interchange backplane does in 15 ns of capability. Now, if you own a piece of crap like that, you will never make money. Never. Believe it or not, some of Peter Lynch's great investments were in companies that many would refer to as boring. However, these businesses were simple and understandable, and that is exactly why they performed so well.

Here's an example from Peter Lynch's career to demonstrate this concept. One of the best performing stocks in Lynch's portfolio was a company named Waste Management. Waste Management is a municipal solid waste company. This is just a fancy way of saying Waste Management is a trash collection company. Talk about an unglamorous industry! Most investors didn't even look at the company because the industry was "boring" and not growing rapidly. While this turned most investors off, this was precisely why Lynch was interested in the name. Lynch noticed the garbage industry was incredibly fragmented, meaning there were thousands of small companies serving the industry.

While the industry itself wasn't growing rapidly, Lynch realized Waste Management could grow rapidly by buying up hundreds of these small companies and improving the operations of the newly acquired businesses. Waste Management's stock turned out to be a big winner for Peter Lynch. The stock had increased 100-fold from when Lynch first invested to when he released his iconic book "One Up On Wall Street" in 1989. You didn't have to be a genius to understand Waste Management and its business model.

If I had told you Peter Lynch had a stock that increased by a factor of 100, most people would have guessed it was a high-tech company in a rapidly growing industry. But nope, it was a garbage company. There's a reason why Peter Lynch says to focus on simple, understandable businesses. This leads perfectly into the second point: invest in quality companies. As a general rule of thumb, there are two types of successful investors. On one side, there are investors that invest in stocks that are incredibly cheap. Most of the time, these stocks are cheap for a reason: the business is struggling and likely isn't super attractive.

The basic thought here is that if you buy cheap enough, you can make a lot of money just because you paid so little for the stock. An example of this type of investor would be Warren Buffett early on in his career. On the other side of the equation, you have so-called quality investors. These investors buy stocks in high-quality businesses and hold these shares for the long term. This type of investing style describes Peter Lynch's approach perfectly.

However, this raises a really important question: what exactly makes a company high quality? I mean, after all, it does sound pretty arbitrary. If only there was a checklist we could use! Well, fortunately for us, our friends over at Compounding Quality put together a checklist you can use to help identify potential high-quality stocks. This video is not sponsored, but the founder is a personal friend of mine, and I would be stupid to not include this quality stock checklist on a video about Peter Lynch.

There are 10 key factors you want to look for when looking for high-quality stocks. This could be an entire video on its own, so I'll just highlight my personal favorite. Does the company have a sustainable competitive advantage? One of the key metrics to look for to see if a company has this is to look at its gross margin. In simple terms, gross margin is the difference between what a company can sell a product for and what it costs to make. The higher the gross margin, the more likely it is that the company has a sustainable advantage over the competition.

Let's take a look at the company Coca-Cola as an example. As we can see here, Coca-Cola has an incredibly high gross margin of roughly 60%. While, of course, more research needs to be done before drawing a conclusion, this is a strong sign that Coca-Cola has a sustainable competitive advantage over rival companies. If you're interested in learning more about this topic, make sure to check out the book "The Art of Quality Investing" because it goes into way more detail than a YouTube video can.

Also, if you're interested in receiving this PDF detailing the 10-step checklist for identifying quality stocks, you can download it at the link in the description of the video completely free as my gift to you for being a loyal viewer of the channel. As if that wasn't enough, you can also download this 21-page Peter Lynch Playbook because it covers in detail Peter Lynch's investment strategy in a level of detail we simply couldn't cover in just a YouTube video.

Of course, all of this is completely free to you as a thank you for supporting the channel by watching the video. You can snag that at the link in the description of the video or the pinned comment. Now, let's get back to our list of Peter Lynch investment principles. Number three on our list of how to invest like Peter Lynch is to ignore the macro. Here’s Lynch to explain:

"Now, here’s a big point: remember this point. It’s futile to predict the economy, interest rates, and the stock market. I mean, people keep trying to do this. I mean, this would be useful. I would love to know when interest rates are going to go up or down. I’d love to know when the stock market’s going up. That would be helpful. I would like to get next year’s Wall Street Journal. Unfortunately, you don’t get it. I remember in 1982, we had a lot of people this room around for '82. We had a 20% prime rate, 15% government bonds, double-digit unemployment, double-digit inflation.

I don’t remember anybody telling me about that in 1980. I don’t remember anybody telling me about that in 1981. But in '83, I remember they said, 'Well, the economy's bounced back; we’re in recession.' ‘85 ‘85, they said we have recession; ‘86 in ‘87 something happened in October '87; I forget what. Something happened in '87: Celtics lost seven in a row. Something bad with '87. They said for sure we have recession; '88 and they said '89 for sure recession, and then '90 we were supposed to have the so-called soft landing, which we never had."

So, I’ve always said if you spend 13 minutes a year on economics, you’ve wasted 10 minutes." According to Peter Lynch, it is impossible to predict what's going to happen in the economy. It would be incredibly powerful to know whether there’s going to be a recession or if interest rates will increase or decrease, but the fact of the matter is that making investment decisions based on economic predictions is incredibly difficult. Instead, Lynch says to focus on the underlying fundamentals of the company. This is because, over a long enough period of time, this is ultimately all that truly matters.

Okay, so let’s revisit our example of the stock Waste Management from earlier. In 1995, Waste Management had an EPS of 55 cents. In 2023, that number had grown to $5.569 per share, an increase of about 10 times. On the last trading day of 1995, Waste Management stock closed at $18.88. On the last trading day of 2023, the stock closed at $179. Notice something interesting about these numbers? During this time period, earnings per share grew by roughly a factor of 10. Ironically, that is pretty much also what happened to the stock price.

This is exactly why Peter Lynch says it is so, so important to ignore what's happening in the economy and instead focus only on the fundamentals of the companies you are investing in. During this time period for Waste Management, there were multiple recessions. There were times when interest rates were relatively high; there were times when interest rates were low. On any given day, week, month, or quarter, Waste Management stock fluctuated wildly. However, over the long term, the stock moved in line with the company's growth and earnings.

This leads us into number four on the list: be long-term focused. Here’s what Peter Lynch had to say on the topic: "Another key element is that you have plenty of time. People are in an unbelievable rush to buy a stock. I'll give you an example of a well-known company: Walmart went public in October of 1970. In 1970, it went public and already had a great record. It had 15 years of performance, a great balance sheet. You could have waited 10 years saying you're a very conservative investor; you’re not sure if this Walmart can make it. You want to check; you see them operate in small towns; you're afraid they can only make it in seven or eight states. You want to wait till they go to more states; you keep waiting. You could have bought Walmart 10 years after they went public and made 35 times your money. If you bought it when they went public, you would have made 500 times your money. But you could have waited 10 years after Walmart went public and made over 30 times your money. You could have waited three years after Microsoft went public and made 10 times your money.

Now, if you knew something about software—I know nothing about software—if you knew something about software, you would have said these guys have it. I don’t care who’s going to win: Compaq, IBM. I know who’s going to win: Japanese computers. I know Microsoft MS-DOS is the right thing. You could have bought Microsoft. Again, I'm repeating myself: stocks are not a lottery ticket. There’s a company behind every stock, and you can just watch it. You have plenty of time. People are in an amazing rush to purchase the security. They’re out of breath when they call up. You don’t need to do this."

That clip you just saw from Peter Lynch is from all the way back in the year 1994. Lynch talked about the great run Walmart stock had and how, even through each year, it seemed like investors felt like they were late to the stock. The company still continued to generate strong returns for shareholders. To demonstrate just how good of a point Lynch made here is an interesting fact for you. In 1994, when Lynch gave this speech, Walmart stock was trading at $4 a share. At this time, investors felt like all the strong returns for Walmart stock were behind them.

Want to take a guess where Walmart stock trades at now? Maybe $15 or maybe $20? How about $30 if things continue to go really well? Well, guess again! As of the making of this video, Walmart stock trades at $66 per share. Walmart stock went on to increase by over 16 times despite everyone thinking they had "missed" the stock. This is the power of owning great businesses for the long term.

If there is one thing I want you to take away from this video, it is the importance of being a long-term focused investor. Remember this quote from Peter Lynch: "Selling your winners and holding your losers is like cutting the flowers and watering the weeds." If you resonated with Peter Lynch's style of investing, again make sure to check out the book "The Art of Quality Investing" by our friends over at Compounding Quality. You can check it out at the link in the description of this video.

This video is not sponsored, and I don’t receive any commission. I used this book to help put together the content for this video, and I want to make sure I give credit to the author. Since you have made it this far in the video, it is obvious you are serious about learning how to invest successfully and make money in the stock market. If that is the case, make sure to check out this video here on super investor Bill Ackman, because it contains the five things you absolutely must do if you want to avoid losing money in the stock market. I'll see you over there. Talk again soon.