4-05 Meet Peter Lynch

chapter4-6a[ts]Peter Lynch[tm]Past portfolio manager of Fidelity Magellan, which became the largest mutual fund in the 1990s.[te], another globally respected investment genius, also embodies a solid – not exotic – investing strategy. After graduating from Boston College (1965), Lynch was hired as an intern at the company that came to be forever linked with his name, Fidelity Investments. This was mostly because he caddied for Fidelity’s president at a local country club. So began his meteoric financial career.

Among his many accolades, Lynch is noted for an important and simple theory: Invest in what you know. In one of his books, he talks about Saturday as his day with his daughters. Every Saturday, his daughters said “Daddy, take us to The Gap (GPS) so we can buy some clothes.” Reluctantly, he went for several Saturdays in a row, gave his daughters $100 and sat out in the mall waiting for them. After a few weekends of this routine, his eyes lit up! He started noticing all of the teenage children dragging their parents to the store. He sat outside for an hour and counted the number of people going thru the cash register lines and estimating the average ticket price to come up with a rough estimate of sales. Suddenly, he started liking The Gap and he had his staff research the company the next Monday. Soon it was in his portfolio and it soon become one of his best buys ever, returning over 25,000% from the mid-1980s to its peak in 1999 (that run was from $0.20 to $50.00!).

This is an excellent starting strategy, and possibly enduring strategy for all investors. Instead of spending valuable time becoming an expert on complex investing strategies, expand your “local knowledge” and use your personal industry expertise to purchase securities of companies and industries you know personally.

Think about stating your goal as building a portfolio of “non-losers” as opposed to a group of “winners.” A strategy of finding “non-losers” combined with investing in companies and securities you know often leads to locating under-valued stocks and true bargains that maximize your investment dollars.

You may also find one or more “ten-baggers,” a world-famous Lynch-ism. In baseball, “bags” are a popular term for the “bases.” Finding a ten-bagger (hitting two home runs and a double) means you’ve found a stock that returns ten times your original purchase price. Even finding a group of two- or four-baggers should make your portfolio and bank account quite happy!!!

[mark]You don’t have to find the next Gap stock or stand in lines at the new restaurants to look for your next 10-bagger! Look for the negative side of things too. Are you getting lousy service at your favorite restaurant? Are you shopping at a store and you look up and notice you are the only one there? Does the tough economy mean that you are not stopping at Starbucks (SBUX) twice a day? Is nobody buying Crocs (CROX) plastic shoes anymore? Don’t forget that you can short these stocks that your experience tells you are losers![endmark]

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