The Wizard of Wall Street.
We have all heard about Mr. Buffett and the magic he has created in the markets. But there is one investor who even Mr. Buffett admires. The name is Peter Lynch. Peter Lynch is a legendary fund manager who compounded money at 29.30% at Fidelity Magellan Fund between 1977 and 1990. Today, Peter Lynch is 79 and still runs his family office. Mr. Lynch is the epitome of a rational, humorous, and logical person. No matter what your educational background is, you just can't get bored while listening to Mr. Lynch. Here are some of the valuable lessons he has shared through his speeches, books, and interviews.
What Mr. Lynch means over here is to invest in companies that do not require a lot of brain power to run. Don't get me wrong, but he is talking about companies that are too easy to understand and run yet have the economic moat to stay competitive in the market. Take, for example, a company like Coca-Cola. The brand has associated itself with happiness and has been in business for more than 100 years. Now, selling Coca-Cola or investing in Coca-Cola is much easier than investing in a company like Microsoft. What Lynch is saying is that the top-level authority will keep changing, but what matters most is the underlying business.
E.g., A brand like Microsoft requires a person who has an IQ of at least 80 to run it. You can't ask a fool to run Microsoft. Whereas when it comes to Coke, no manager can damage the company because the business is straightforward. During the 2000s, Coca-Cola was run by Luke Visconti, who is considered to be one of the worst managers to have run Coca-Cola. He made some acquisitions that were unnecessary and faced some lawsuits, yet the brand survived. Coca-Cola is a business that can run on autopilot. Very few businesses have this quality.
2. "KNOW WHAT YOU OWN AND KNOW WHY YOU OWN IT".
By knowing what you own, Lynch is asking us to be thorough with the business. You should know what the company does. What are the business economics? What are the factors affecting the sector in which the company operates? How does the company manage its operations? What is the competitive advantage the company has? etc. Lynch states that one should write down the reasons before buying a company. One should be able to answer this question even when someone wakes you up at midnight. He has openly said that if you can't explain what the business does to a 10-year-old in 10 minutes, you don't understand the business.
3. "WHEN YOU SELL IN DESPERATION, YOU ALWAYS SELL CHEAP".
Panic selling plays tricks with our brains. It's like a bank run. That's why when people start selling in anticipation of a crisis, the effect compounds and spreads like a virus. During these times of desperation, one needs to be patient and rational enough to rigorously wait for the opportunity to step in. Markets are there to serve us, not to instruct us. Having no emotional control is risky when you are dealing in the markets. It is contagious.
4. "SELLING YOUR WINNERS AND HOLDING YOUR LOSERS IS LIKE CUTTING THE FLOWERS AND WATERING THE WEEDS".
Peter Lynch focuses on buying and holding great companies, come what may. Selling companies with great economic moats and a proven track record for buying some hot stock in the industry is like cutting the flowers and watering the weeds. If you happen to find a great business run by great managers, the selling time is never. (Considering the reasons why you bought the company are still intact.)
5. "BE SUSPICIOUS OF COMPANIES WITH GROWTH RATES OF 50 TO 100% A YEAR".
No matter which industry a company operates in, sustaining a 50–100% growth rate year-on-year is like the PM CARE fund. It looks good on paper but does not exist in reality. Usually, companies that experience a 50% growth rate fall into two categories:
1. Exceptionally great companies like IEX, Amazon, Alibaba, etc., and
2. Sectors experiencing a bubble, usually the frenzy stocks
It's not possible for any company to sustain that kind of growth rate, and hence, when you find a company that is growing its operations at 50% per year or is projecting its operations to grow at 50%, simply ignore the company.
6. A TYPICAL BIG WINNER IN LYNCH'S PORTFOLIO TOOK 3 TO 10 YEARS TO PLAY OUT. PATIENCE IS THE KEY.
The stock market is a mechanism that transfers wealth from the impatient to the patient. Apart from rationality, patience is a key behavioural trait that pays huge dividends in the markets. Holding a company for 10 or 20 years sounds unachievable, but trust me, that's where the big money is. Mr. Buffett has been holding on to Coca-Cola for more than 45 years. Mr. Charlie Munger has been holding on to the Daily Journal for more than 25 years. Late Mr. Rakesh Jhunjhunwala has been holding on to Titan for 25 years. Look how wealthy they are. Coca-Cola alone pays $800 million in dividends every year to Berkshire Hathaway.
7. "IF YOU FIND A STOCK WITH LITTLE OR NO INSTITUTIONAL OWNERSHIP, YOU'VE FOUND YOURSELF A POTENTIAL WINNER. FIND A COMPANY THAT NO ANALYST HAS EVER TRACKED.
A fact about the US markets is that there are more analysts and mutual funds than listed companies. Hence, the probability of being able to buy a high-quality business at a reasonable valuation rarely emerges. Institutions manage billions of dollars, and for them to manipulate or operate a stock is a piece of cake. Hence, go for companies that have lower, or better yet, no, institutional holdings. Also, some companies with higher institutional holdings than the promoters showcase that the promoters have no interest in the business. And if the promoters have no interest in the business, why should we be the ones to own the stock?
8. "FIND SOMETHING YOU ENJOY DOING AND GIVE IT EVERYTHING YOU'VE GOT, AND THE MONEY WILL TAKE CARE OF ITSELF".
Lynch was 13 years old when he found out about his love for the markets. He urges young people to follow their passions. Lynch emphasizes doing things that they love rather than loving things that they do, and the money will take care of itself. Most of our adult lives are spent working. Make sure you invest those years in something meaningful. Something that you love.
9. "SO YOU HAVE FLOPS. MAYBE YOU'RE RIGHT 4-5 TIMES OUT OF 10. BUT IF YOUR WINNERS GO UP 4X OR 10X OR 20X, IT MAKES FOR THE ONES WHERE YOU LOST 0%, 75% OR EVEN 100%".
Let's say that an investor makes 10 investments during his lifetime. Out of those 10 investments, four of them completely eroded his capital. But, let's say, the remaining 5–6 companies do exceptionally well, and out of those 5–6 companies, one goes 500X or 1000X. When things like these happen in auction-driven markets, one can't help but get rich. Eventually, all we need is one stock or one company that has the potential to deliver 500X or 1000X returns. Here's an example to prove the analogy: Late. Mr. Rakesh Jhunjhunwala started buying Titan when it was trading at Rs. 60 per share. Today, Titan hovers around Rs 2800 per share. That's a hell of a lot of compounding.
He was a voracious trader as well and has faced some severe losses. I remember watching an interview of his in which he mentioned that he suffered a loss of Rs 150 crore. Yes. That's Rs 150 crore. When Mr. Jhunjhunwala was buying Titan, it comprised 4% of his then-net worth. Today, Titan contributes more than 50% of his net worth. The conclusion: even if you face some severe losses because you miss an opportunity to buy a company, in the end, you only need one exceptionally well-managed company to make you rich. Study any investor you know, and you will find this one thing common among them: May it be Mr. Warren Buffett and his Coca-Cola investment, or Mr. Vijay Kedia and his Tejas Networks investment, or Mr. RK Damani and his Avenue Supermart investment. The list goes on.
Years and years of experience have proven that markets are the best instruments to grow your wealth. Just be patient and rational, and you are good to go. Emotions have no value in markets. One with a low emotional quotient will be crushed. Charlie Munger has said, "A lot of people with high IQs are terrible investors because they’ve got terrible temperaments. And that is why we say that having a certain kind of temperament is more important than having a brain. You need to keep raw, irrational emotion under control. You need patience, discipline, and the ability to take losses and adversity without going crazy. You need the ability to not be driven crazy by extreme success or failure."
I would highly recommend you read all 3 books written by Mr. Lynch. You won't regret.
1. Learn to earn
2. Beating the streets
3. One up on wall street.
Happy Investing.
Comments
Post a Comment