A Good Investing Quote from Peter Lynch: Stick With Companies That Are Getting Better
Posted on July 15, 2010
Here’s a good Peter Lynch anecdote from a recent Bloomberg article on banking stocks:
“David Ellison learned a simple lesson from legendary mutual-fund manager Peter Lynch as a young bank analyst at Fidelity Investments in the 1980s: If things at a company are getting better, you want to own its stock. “
This lesson is, of course, is the basis of the simple investment philosophy I espouse on this website: Buy a diversified portfolio of distressed stocks that show evidence of a turnaround and have legitimate growth prospects. (see this post for a bit of philosophical justification for this approach).
Even though many of the types of stocks you will buy under this approach, will fall in price (especially right after I buy them) or provide little gains, a few are bound to rebound enormously over time as the “company gets better”, and you are guaranteed to make money “in the long run”. Simply witness the performance of NAVI, VG, PWER and a few other stocks I’ve mentioned here over the years. The massive gains in these stocks have more than compensated for major losses in Britesmile, Corgi, and a few of my other truly bad investments. Of course, one never knows in advance which stocks will gain and which will fall.
The problem with any investment strategy, it seems, is not so much the theory, but in fighting the negative emotions, such as fear, that surround the prospects of loss, both temporary and permanent. They key is to use analysis to locate potential investment winners, and then practice diversification to quell the fear of loss, and provide you with the financial staying power to allow random fate to eventually dole out it occasional reward.
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Thanks. The quote is a great reminder of Lynch’s approach. Should it be qualified somewhat: “If things at a company are getting better [than expected]”? In other words, improvement relative to whatever expectations are embedded in current valuation, rather than simply improvement in absolute terms?
On another topic: any additional thoughts on MAIL at this time?
I agree, “better than expected”, which is why it is important to only look at distressed stocks. At the same time, it’s quite difficult to know what is actually “expected.” When analyzing expectations, I often find myself getting caught in an infinite loop. For example, are expectations now for a double dip, or for a slow recovery? Hard to say. And are expectations what other people think or what you or I as individuals expect? More and more I find myself leaning towards my expectations, since its nearly impossible to try to figure out the “average” thinking of an irrational crowd.
As for MAIL: It was once a great gamble… but its future is quite uncertain now, with the Google issue still up in the air. I’m following it and will probably get involved again, once there is some more clarity as to the company’s other monetization efforts.
Appreciate your reply. Perhaps the challenge of estimating the degree to which given expectations are “priced in” by the market is not worth pursuing–if only to steer clear a Keynesian beauty contest.
Will look forward to your MAIL analysis as developments warrant. Have also looked for reference at InfoSpace, which has acknowledged similar uncertainty regarding change in Google policy.