“You need 3-4 Good Companies to Invest in Over Ten Years”

I came across this interview with Peter Lynch, the legendary former manager of Fidelity’s Magellan fund. Here’s an excerpt:

Against that, there’s the argument that less than 15% of investment managers beat the index, and the rest lag behind it.
“At Fidelity, we had countless funds that beat the indices over periods of tens of years. In the past ten years, the market has been difficult, but I believe that in the next ten years, active fund managers will produce a better return than index funds and ETFs.”
As for other veteran investment managers in the US market, for Lynch too the latest crisis was the worst he had experienced in his years in the industry. Despite the severity of the crisis, Lynch believes that it was only an exceptional, random event, and that, in the long run, the markets will get back on track.
Asked to share his lessons from the crisis with us, Lynch pauses for a moment’s thought, and responds, “I’ll tell you the same thing I would have said 10 or 20 years ago as well. To predict the market’s direction in any given year is a completely random act. You can’t know what the markets will do in a period of six or twelve months.
“On the other hand, you do know that, over the past 40-50 years, company profits grew at good rates, and in my view they will continue that way in the coming years too. I estimate that corporate profits will double themselves every ten years. If you add to that the dividends that the companies distribute, you get an excellent return,” adds Lynch. “You have to believe that, in general, companies in the US will continue to grow. Naturally, along the way some of them will disappear and some new ones will join.
“When you participate in company profits, the most important point is whether you believe that they will be higher in another ten or twenty years or not,” Lynch insists. “If not, then perhaps it would be better for you not to be exposed to them, not in an ETF, not in an index fund, and not in a managed fund. When you look at the alternatives for investment, the choice for investors today is between a money market fund, that produces a zero return, Treasury bonds, that yield 3.8%, or some exposure to the stock market that, over time, yields double that on average.”
After leaving Magellan 20 years ago, Lynch reduced the scope of his activity in the markets. In the two decades since then, great changes have taken place in the financial industry and in the markets, one of the most prominent being the technological developments that now enable investors all over the world to be exposed to a far larger amount of information, and in real time. Lynch himself sees no difference between 20 years ago and today in the way investors need to approach the markets.
“In the course of my work at Magellan, I bought small companies that grew over the years. This is a strategy that worked, and still works today,” he says. “I bought companies whose performance was weak and that turned their businesses around. This method still works today. If you invest in companies whose assets are worth more than their market cap, you have found a great investment opportunity.”

Posted by on February 24th, 2010 at 9:54 am


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