Peter Lynch Talks About His Secret to Success in the Stock Market

When I was writing Magellan, one out of every 100 Americans was in the fund. Yeah, these are people that five thousand dollars and ten thousand dollars was a huge deal too. So when the market went down, you felt really badly. I mean, it's really the pressure on you when it's average people's money. Yeah, that's overwhelming. And you're nice enough to say nice things about Magellan, but in those 13 years, 10 times it declined over 10 percent.

You know, Peter Lynch is here. He is a legendary investor, he is a best-selling author, he is a philanthropist. For 13 years, he ran Fidelity's Magellan Fund with average annual returns of nearly 30 percent. From 1977 to 1990, it grew from 18 million dollars in assets to 14 billion dollars in assets. He retired at the age of 46. Since then, he dedicated his time and his resources to giving away a large portion of his personal fortune. I'm pleased to have him back at this table. Welcome.

See, I've been warning. I've been, you know, we had this wonderful interview and I said I would occasionally say, "Whatever happened to Peter Lynch" is one of those things. Because, and whatever happened to Peter Lynch, right, is my question. Well, it's fine. People said he'll start his own fund, he'll do a hedge fund. I said no. I know he had enough of it. Yeah, he wants to do it all on his own. He doesn't need the great Fidelity, you know, it's a small transmission, it's one gear overdrive, that's it.

Yes, so you can't sort of run a fund. Lovely wife Carolyn, three children. I want to do other things. So I've now worked very part-time with younger analysts. So it's been... My father died at 46. It was... That's the reason. 46 or something, I guess she's six. He took sick when he was 43, died at 46. Maybe, maybe I was going to live 146. But I said I love the job, I love the company, but I worked every Saturday for 11 years. I just want to spend more time with my wife and family.

And you're constantly on the road because that you believed in. You got to be there. In fact, you would take her with you. Yes, and family with you because, you know, in search of understanding the company. Correct, that's right.

And so what have you learned since then? I mean, do you look back and say, "Oh, I stopped too early"? "I stopped too late"? I... It's lucky. It was a perfect time. It was an absolutely perfect time to be able to see all my three children grow up, and now they're all married, and spending time with my grandchildren. You know, it's fabulous.

Tell me about your passions. Well, I think my wife and I, Carolyn, her father was a high school principal. She grew up in rural Delaware. I went to public schools, and we have the best colleges, universities in the world. No one would doubt that, right? But K through 12, we're not that hot. No. And somebody born in America today is less likely to graduate from high school than their parents. That's remarkable. Yeah, that's not true in Europe. And falling behind in scores on math and science and engineering.

And also, 25 years ago, if you were a dropout, you could work a lathe, work a press, work a tool injection bowling machine. There were lots of jobs. You don't even have to speak English today. Test equipment, assembly equipment, there's low-level jobs at fast food restaurants and hospitals. But if you want to get a decent job that's challenging and fun, you have to use a computer. You have to speak in English. All these manuals are all in... They're not in creole, they're not in Portuguese, they're not all in Spanish, they're in English. So today, being a dropout is a tragedy, and it shouldn't be happening.

And once you lose a step, then you lose the second step and third trip and the fourth step. So that and literacy, this amazing correlation. I think of a couple million people in prison, like 85 percent are illiterate. It's not their fault.

Here's the thing for me: the people you and so many people I know, some deceased, some in youth, some, but all passionate about education, passionate, all have resources, right, all have a voice. Why are we fixing this?

Well, I think first of all the greatest issue is recognizing the problem. I don't think this problem was clear 10, 20 years ago. I mean, I think when World War II started, yeah, our army was smaller than the Netherlands. I mean, we didn't realize how bad Hitler was, how terrible the Nazi Party was. We have to recognize it. I think we're getting to the phase now where we say there's 45 million kids in public school, probably half of them, two-thirds, can get a decent education. The rest, again, not so good education. That is a huge, it's an awful, not only a problem, it's a tragedy.

So I think recognizing the problem and people like yourselves are leaders in that, just getting the word out. This is not acceptable, this is bad for everybody. That's the first part.

That's starting to happen though now. There's several things that happen now to make it better, and I think that's very positive. But do you, are you convinced that we have the will to do what's necessary?

The will? Well, I think if more people recognize the problem and say, and then they say we can do something about it, then things will happen. I think we're between phases one and phase two. Examples like Teach for America, there's many examples like, you know, National Mentoring. They're programs that are starting to make a difference. You can really see they make, and people recognize it, that really works.

And people want to invest, like in the stock market, they want to invest in the companies doing well, not the companies doing badly. So if they say it's a waste, why should I invest it? It's hopeless. You have to take away that hopeless and say we can make this a lot better.

And there's examples. In Massachusetts, we have these charter schools and we have some district schools, so the public schools. They're now top in the state against some of the suburban schools, so these things work. But not all the results of all charter schools is good.

Well, some of you really expect, exactly right, but some of the early ones weren't well planned, they weren't well thought out. But the ones now, plus some district schools, we're not just, we're talking public schools. This is a program called the Achievement Network that does a testing program. It's now in 300,000 students have it today. This should spread all over the country.

Is it something Carolyn did all the research on? My wife, right, it's a great thing. They basically test the child four times a year, quick test, and instead of at the end saying this student has fallen behind or classifying him, they say the reason Johnny's not doing well, he can't add a quarter to five aces or, or Susie doesn't understand adverbs. It helps the teacher four times a year to find out how to help the student around the fine at the end of the year.

Then there goes another teacher next year. There are things like that are happening right now, and it helps the teacher a lot. And we're just beginning to understand how to use technology too. You know, for a long time it was there and we did not know how to use it.

Right, right. And that would never be coming out. The Khan Academy is a great example, exactly. Perfect. And then there's the importance of the principal.

Yeah, that's something we really focus on because my wife, you know, father's high school principal. Imagine the principal spends a lot of time on the boiler or leaky roof. These are not academics. I mean, it's such an incredible job, and there's no peers to talk to. I mean, who else do you speak to? It's a lonely, hard job, and it's a difficult job.

So we're working to... We started a leadership academy at Boston College to work with principals and aspiring principals to help them get the best methods, the best tools. They're the key person in America, high school principal. Then the teacher's second most important. They're the leaders. When you talk about CEOs of companies, the Jack Welch's of the world, the Lee Iacocca's, that's a principal.

Yeah, that's what they have to do.

Take for tangent for a second. Jack Welch, Lee Iacocca, what is it they have? You would go around and do a self-analysis of companies, and you would look for things that you could identify with and know that they had the potential to grow and they had a culture to grow and they had a plan to grow.

What do great managers do? Well, there's two types. You have Fred Smith that comes up with an idea called Federal Express, right? Then he had to grow it, and that's really tricky. Sometimes people can just do the idea part; he did all the parts right. Then there's Lee Iacocca, who had to turn around and trouble with Chrysler, and even more challenging a giant company like General Electric to make something good, better. I mean, that's really hard. So all these people basically were problem solvers, and they had to manage people.

One of the things that surprised people—they don't understand the definition of management. It's getting things done through others. It's a lot easier to do something yourself than to have somebody else do it. And lots of people obviously, you're managing people. Sometimes you have to encourage them; sometimes you have to just push them a little harder. I mean, motivating, encouraging, but you have to understand what they want. You have to work with them. You have to explain yourself.

You have to set goals, and you have to be a leader yourself. And you have to put a lot of effort into it, and you have to make mistakes. There's a real amazing difference between being persistent and being stubborn. And I think great leaders to say this is... Persistence is good; stubbornness is bad. Persistence is terrific; stubbornness is terrible.

But do great managers listen? Yes, they do, absolutely.

I've come to know and believe that listening is a principal quality, and sometimes managers get so high up the people around them aren't giving them ideas that they're just filtering every house. They don't have a chance to listen, and the best manager will make sure they do hear. Yeah, and the best thing, and they go on their own to their own research independent of the people around them.

Yeah, now you—still back to you. You are still with the fund. I mean, you were the manager of the fund. You run the fund. She runs the foundation. You run the fund. Right, right. I manage the money, but she finds all the great ideas.

Oh no, she really is. So the division of labor is that you make the money and she gives it away. That's right. She actually found Teach for America. Wendy Kopp was like 21 when she found Teach for America, City Year, Early National Mentoring Partnership. I mean, she's the one that's finding. We get lots of proposals; she narrows it down. She does the other people's site visits. I attend some of these meetings. I mean, we have board meetings, but I'm basically... I'm on the investment committee.

Do you miss anything? Do you miss about the life that you had, or do you simply say I have a portion of it? I'm making investments for something that means a lot to me, and I know where the fruits of my labor are going. They're going to improve education and other projects I believe in.

Well, the nice thing, I'm actually running money for our foundation and for ourselves, so I'm actually doing the same thing and foundation fund. But I all I have to say, my wife is my only boss.

Yeah. When I was running Magellan, one out of every hundred Americans was in the fund. Yeah, these are people that five thousand dollars and ten thousand dollars was a huge deal too. So when the market went down, you felt really badly. I mean, it's really the pressure on you when it's average people's money. Yeah, that's overwhelming.

And you're nice enough to say nice things about Magellan, but in those 13 years, 10 times it declined over 10 percent. You know, and yeah, but your point was that you were confident enough to say, you know, when it's declining, to know when to give up and when not to give up most of the time, right? I'm saying when the market went down, I would always go down. So yeah, sure. Sure, but you wouldn't go scared because you'd invest in a company.

That's right. I just said if the company's fine it's fine. I mean, basically, Johnson & Johnson's hiring was 40 years ago; their earnings are higher. Xerox is lower than it was 40 years ago; the earnings are lower, yeah, of course, what happens to the company.

But you also, I mean, I know lots of people who are doing stunningly well in the world of investments in finance, and they do it by a study of macroeconomics, right? You never bought into that.

I always do. I was bottom-up. I mean, and one, I was lucky. I mean, I owned a lot of... I owned American Motors, Hospitality, United Inns. Right, right. And I said who's your best competitor? And they said La Quinta Motorist. Oh, I remember this, yes.

And it was... I owned it before sunset. If somebody ever says something nice about a competitor, you know it's true. They always dump on their competitors, and then I get them to say what they worry about—somebody's doing it maybe better than I am—they have a better formula; we can't match the formula.

So I basically then visited; I made it a big position with John. It was a huge success.

Yeah, how long did you stay with it? I think seven or eight years.

Really? Yeah, great, great success.

How do you know when to get out? Well, in baseball analogy, and I know you're a great baseball fan, you want to get in in this first, second, third inning, not when they're drawing out the lineup.

Yes, and Walmart, you could have bought Walmart. Wait, wait, wait. You don't want to do it when they're drawing up the lineup; you want to make it to the second or third, and you want at least—I've seen them at bat. They've got it right. They got the formula right. And now, there's... It's... Toys "R" Us on 20 stores on the way to 500 or Home Depot on 40 stores on the way to 4,000.

You get about Walmart 10 years after they went public, then it went up 50 fold. It's already up tenfold; that's 500 fold. Yeah. 10 years after the republic, they were only 18 in the United States; they went to 19, 20.

So you say to yourself there's a lot of room to go, but when you're in every state, when limited to every single mall in the United States, with express and unlimited, you say, so they're in the eighth and ninth inning. Where can they go?

Yeah, so that's how you define it. Well, a cyclical goes from crummy to semi-crummy. You're happy. Then it goes to good. You're happy, and it goes—they're very good. You say maybe I ought to go into something else.

So can you be greedy in your business? Yeah, I think sometimes you... I call it the three C's. It's called complacency, concern, and capitulation. So you... complacent is the "I don't agree, just everything's going right." You sort of forget to check the facts. You say things are starting to slip in the company, not the fundamentals; they're starting to mature the same competitors coming along.

So being complacent is the worst one.

And is that the one that happens most often? Yeah, well, unless you're working hard. If you're working hard, you're always checking with competitors; you're checking with customers, suppliers; you're trying to do work to find out, is this company still early? Am I... does it have years and years of growth ahead of them? Then you stay with it.

You know, the stock goes down. There's also this idea: never invest in something you don't really know you. I mean, that's... that was part of, that's why you went out on the road so much, right? If I don't understand that, I don't want to.

Yeah, the key thing is when the stock goes from 10 to 6 if you understand what they do and you know they're financially solvent, you're fine. If you don't understand it, you can call the psychic hotline. But if you don't understand it, you're probably gonna do the wrong thing.

You know, if you understand exactly what they're doing, Instagram 10 to 6, you'll buy more. If you're confused to start with, you'll say, "Well, it must be something wrong there," and then you're out. And a lot of times stocks are going to decline.

I mean, some of my best stocks were going from 18 to 8, then to sometimes to 40, and some gone from 18 to zero. But at least I wasn't adding to it on the way to zero a lot of times. So if it's going down, you're not adding to it.

I mean, sometimes you are if the fundamentals are getting better or the same.

Yeah, but if they're deterring, I'm gonna leave.

How much do you measure your success and your ability to communicate? Well, your command on the language and the facility to express ideas in a simple and comprehensible way has always been the reason your book is so well because there was good content there. And secondly, the way you were able to communicate and become a leader in your industry.

You asked a question earlier about ability to listen, right? I think that's the skill because when you're talking to a company, if you ask all these questions, it's like a monologue, then you say at the end is it something I've forgotten or to say you don't want to... you want to have them say, by the way, a year ago when you were looking to see what things are going to be like, how has it come out? You know, what have been surprises for you?

So I'm always listening to what people say. So it's more listening rather than asking and also being nice. When you go to a company, you'll say, last year your capital spending was 125 million; it was gonna be this year; last year R&D was 73 million. You just don't go say, "How are you doing?"

Yeah, you want to be nice but courteous but precise. Precise, right? But you want to show you did some homework. Exactly. And also, you don't want to use the results... Just like interviews, don't be telling them this is like interviewing. You don't want to be mean too. If the rubber hose worked, I would have used it. No, you want to be kind and write letters to say, "I enjoyed meeting with you; it was a nice interview."

Yeah, people... they don't... they... they could turn off. They have all the answers, but they may... they don't have to do that. It's nice to see you being kind and courteous. I was a boy scout. Be prepared. You'll be prepared, exactly.

I mean, it is central to what I believe is that you ask people things like, "Did I miss something? What am I not hearing? You know, correct? What question have I missed here?"

What you know, it's almost... what I think is important—you got to engage the person in your own pursuit, right? Make them work for you.

Now, I remember that very well from the first company I was a metal zone, right? It was coming to a max. Yeah, the major product was molybdenum, and when I say, "What's the outlook for molybdenum?" I couldn't even pronounce it. And when I took chemistry, I didn't get that high on the chart, right?

So you find out these people want to help you if you go visit them? Yeah, even on the phone. Yeah, and I'm calling one company up, and the person you get to know a person's personality. Some people are very optimistic, they're very upbeat. Some people are kind of very conservative, and his tone just was not as optimistic.

I found out later, I almost sold my entire position.

Maybe some... you get that feeling? Yeah, I call him week later and say, "You know, you were just down." He says, "Yeah, my brother was in a traffic accident about half an hour before you called." I didn't know whether he was going to make it or not.

Yeah, I almost sold my entire position because he had another question to ask.

Yeah, I did fall back and I said, "Gee, you know, I will sometimes call people and say, did I do something to make you upset or angry or not in terms of the interview, but is there something in terms of the relationship between, am I missing something here? Did I do something that pissed you off?"

And now, sometimes they'll say, "Yeah, you know, you didn't see I was over there waiting to see you and you didn't walk right by."

Yeah, and a lot of times you kind of be interrupting people, they answer questions just kind of... you really have to be... listen, you really have to say that I've heard enough of that, but I’m not going to say interrupt. So, yeah, it works well.

But you still use those skills. Those are human skills, aren't they? But they're not... they're not taught anywhere. I mean, you sort of have to learn. There's no book on that.

I'm gonna do something that I haven't sort of never done, but I had a friend of mine who I know admires you greatly, and I said to him, "Okay, just give me five questions you would like for Peter to answer if you were sitting at the table with him." And in three minutes, he sent them to me.

So here they are. You know, what has changed about investing in the market since you left in 1990?

What has changed? Well, I think there's a lot of this computer-driven things, you know, where people buy stocks for a second and own for a second. Yeah, I think that's a waste of time. I don't think... I think it's disruptive. On the positive side, information to the public is so much more available today. When a company releases their numbers and they have a call, it's opening the web to everybody.

Right, all the information. We used to wait for the mail to come to see what Nike's inventories were like. You know, I mean, you find out we get in our library in the first-class mail. So, all this information.

So, the investing for the average person now is much clearer. They know the same thing as I do. Yeah, they all... you don't invest in a company whose balance sheet is, you know, they get eight billion in debt and you know they have no cash and are losing money. That's a terrible combination. You get all the information out, so information is a lot better than it was, you know, a long time ago.

You still believe in the investment mantra that you were often credited as your mantra, which is "invest in what you know"? Yeah, amazing something. Imagine you spent a long time in your field—yes, in my field.

Imagine if you're in a mall the last 30 years. Yes, you would have seen the Gap, you would have seen Best Buy, you would have seen exactly Circuit City. You've seen these companies are crowded doing something better and they're buying biotechnology stocks or oil companies. It makes no sense if you're in the steel industry, you see it go from awful to better.

Yeah, why don't you buy it? But we expect mutual funds to know that stuff. No, obviously, you're managing, but they're ahead of us. You know, if you look at Magellan or you look at Black Rock, you think they must have access to the best information in the world.

But, but they don't. They don't have that. They're not in the steelers; they don't see things get better. You know, the way they don't see the chemical industry turning as soon as the people in the chemicals you do.

I mean, you could be in the plastic spheres or lithium or whatever it is. People in the business see it first, and they see it first or go ahead in a mall.

Imagine the companies you've seen—Dunkin' Donuts goes on and on, Walmart. You know, Stop & Shop, these are all kinds that really got better. Say, "Gee, I'm shopping there." I'm not saying people should if they want to invest they'll do the same kind of research they do when they buy a refrigerator. They take your trip to Italy, do something.

You know, what is about this country that is stunning to me? For the most part, we don't do that about medicine and our health. We don't do it. We are more interested in getting the best television than we are the best medical—medical, yeah.

No, I agree. I mean the diagnostics. Talk about improvements. Diagnostics today are so much better.

Alright, the other thing is what advice we give to young investors who almost certainly will have more direct responsibility for their retirement savings than their predecessors, of which I'm going to talk about later.

Well, I think the advantage of putting money into a retirement fund—obviously a Fidelity fund I would prefer—but index fund, whatever it is, put some money aside. It's going to compound tax-free. Yeah, start saving earlier. The numbers are amazing. Compounding will do wonders.

But until you want to invest directly in individual stocks, start a paper portfolio. Say I'm going to buy these 10 companies, and then write down in like five votes why. What's the reason I bought those? And then keep checking your laid what happened. Did they really keep growing or did a competitor come along?

Do a paper portfolio, and you could do exactly what I did with a real portfolio and find out what am I good at, what am I bad at? Am I really good at turnarounds? Am I good at small growth companies? Maybe I pay too high for stocks. You can do this very... you can do this over four or five years and learn what's your skills and then specialize that.

I had owned thousands of companies. You know, the average prison—all you need is a few in a lifetime to make a difference.

When you were running 14 billion dollars, right, did you see in your mind's eye—and let's assume a lot of it was pension fund money and whatever—but did you see individuals? I'm investing for the firemen down the street. Did you?

Almost none of it was pension fund; it was almost all individual speech. Right, it was, it was incredible that thrill. Yeah, I got letters too. When the market went down in '87, my phone went down like a rock. Yeah, people were writing letters to me cheering me up.

Oh yeah, no complaints, Mr. Lynch. You've done well for me. Yeah, no, it's amazing. Don't give up now, Peter!

No, it was, I meet these people all the time, all at airports, all around. They're still... It was wonderful. It was the greatest thrill of my life—our children, my wife managing money for other people.

Now we've also seen sort of today the, you know, the whole business of hedge funds and private equity and shadow stuff. And now they're talking about getting into the mutual fund business. You think that's... yeah, what do you think about that? I mean getting into mutual funds.

Well, a couple differences, you know, between hedge fund and what I did with challenge. Right, I could only buy long, right? You couldn't sell, right? I couldn't buy commodities; I couldn't short the euro. I mean, they're into a lot, and they do it on leverage, a lot of leverage.

So you have to be careful what you get into. There are some hedge funds that are very conserved; they're only going to be 20% short, mostly long, and they... because the nice thing about occasionally if you have an idea if I find an idea I thought was overpriced, I just went on to the next thing. I couldn't short it, so there is an advantage to be able to short.

But I found that long only both with these hedge funds you get under mutual funds and they'll have to also live up under the rules that mutual funds live under.

And do you think they will be successful? I mean, well, I found the longer obviously attracting some—certain hedge funds that have been on the long side have done the best.

I mean, they might have a little bit by being short, but being right on the long side because obviously, if you're right, you can make. And that's, I would say when I remove John, I might have been right six times out of ten.

But if I'm right, I make a double or triple, occasionally it offsets the times you lose 30 or 40 percent. In fact, you'd be right a third of the time as long as you have a lot of good results.

So that's when you're short, you can only make 90. When you're long, you make tenfold or fivefold, so I think long is the way to be—optimistic, optimistic, yeah. Well, careful and optimistic.

That's a Red Sox sound, yes enough, because it's like the old man who's the person who said, you know, I'm very optimistic. And then, well, why do you have that crime? He said, I'm not certain about my optimism.

That's good. And so tomorrow when you look at the market today? The good time for... yeah, I think that's just to be there.

I mean, obviously, we've seen new highs, right? I think the market is fairly priced on what's happening right now. You have to say to yourself in five years from now, ten years from now, corporate profits have grown about seven or eight percent a year.

That means they double, but including dividends, but every ten years quadruple. Every twenty go up eightfold, every 40. You know, I think that's the kind of numbers you're interested. That's been... a ten-year bond today is a little over two percent, so I think the stock market's the best place to be for the next 10, 20, 30 years. The next two years? No, I've never known what the next two years are going to bring.

What do you want to accomplish in the next year of your life? Well, I really like to work with my wife and still find take some more vacation time.

Yeah, and so what do you do on vacation? Well, we like to see something new. This year, we went to Turkey and went to... fascinating, that's one of the world's great cities now. And then went to Santorini at the end of it, and it was great sailing trips. That was it.

And two of our daughters and their husbands, it was a great trip. So I'd like like to see, you know, I've been to Russia, I've never been to St. Petersburg.

You know, oh, you got to go! I've been there. I've been to Israel. I love Israel. I'd love to go to Jordan.

I mean, there's a place I'd like to go to see. Ain't that great? I mean, there's so many places you haven't seen. I mean, well, you just think about it, how many places do I have that I haven't seen?

I may have... this year, I get to North Dakota, so I've been all 50 states now. Yeah, I went on a research, I go to Fargo actually, you know. I went to Minot, and parts I actually looked at hydraulic fracturing.

So I'm... you're looking at hydraulic fracturing to see if it works? I mean, does this process really work? It does. It does really work.

It'll change America's energy future—remarkable, yeah. It's one of the great sort of... oh, what a breakthrough. My goodness! Imagine producing all this gas and gas at two dollars in MCF where people in Europe are ten times that price.

How did you decide it worked? Well, I really could see this process. Well, first of all, you talk to somebody. So, while counting as you know, usually drill four wells, you're lucky you hit on one out of four, right?

These are all either A plus or B plus wells. You don't ever hit a... an F. Yeah, so it's a question: what cost can you do it at? And you own the land, so it's, you know... and the costs are still going down. They're doing it faster, quicker, less sand, less water; they're just doing a better job.

Are there environmentally threatened threats coming out of it? Well, you know, as you know, they're usually about 11,000 feet in the water table is around 2000 feet, so if you make the steak, it goes down, it doesn't work exactly.

So they can make mistakes?

Then it's great to see you. Okay, pleasure always, enjoy seeing Peter Lynch.