And now let's go over and meet tonight's special guest, Peter Lynch.
Peter, welcome. Hello. Great.
Happy to have you in my apartment. Fantastic.
Peter Lynch is an authentic Hall of Fame investor.
Under his management from May 1977 and May 1990, the Fidelity
Magellan Fund was the best performing mutual fund in the world.
Since then, he has stayed active as a writer, teacher and philanthropist
while also serving as vice chairman of Fidelity Management and Research.
Peter, many viewers want to know whether this market is totally different,
whether your old view that people should find,
buy and hold good stocks is no longer applicable.
What do you think?
I think the same rules applied 50 years
ago, applied five years ago, apply 20 years from now.
First of all, you have to know what you own.
But it's a Pfunder stock.
And you have to have a reason for it
and you ought to be able
explain to an 11 year old and two minutes or less why you own it,
and this sucker is going up is not a good reason.
I've tried that one. It's not it doesn't work.
Speak to the question of trust, which Audy just expressed
considerable concern about it. I did at the opening.
What do you think it's going to take to repair it?
Time, I think this is really terrible this week.
When you mention about WorldCom
and Andersen, I mean, these are real problems, but you just have to have faith.
I mean, we've had this before.
I think it's going to take time. You know, this is very serious.
What do you think the antidote is to make sure we get rid of these abuses?
I think, you know, people will be punished for it.
I think they'll be surveillance, I think.
Board of directors is going to be more careful, this what's happened.
If you've had an incredible economic boom while easy money around
people push the envelope, it's sad that's a — you can't legislate integrity.
What would you say to investors now who say, Peter,
everything I own is going down,
it's been going down now for a couple of years.
People keep saying we're at a bottom.
Should I get out and go into CDs
or go bars and an opium or whatever?
Well, basically, you look now you have three choices.
I think if you're investor,
you can put your money in money market fund and get one seven,
one five, one six, and it's taxed at a 40 percent rate,
bring it by a 10 year treasury and get four seven,
that's taxed at 40 percent rate, or you can have some equities.
And I think stocks over
the next 10 years will do a lot better than four seven or one seven.
So I would have some of my money now.
It's up to the person to decide how much they want
to have the stock market for some people ten percent is aggressive, for some people
fifty percent is the right mindset, it's a personal decision.
And you can't go by these rules
that if you're twenty five, you should be a hundred percent.
And if you're forty five, you should be 50 percent.
If you're 60, you should be zero.
And guess burping a lot and know what the rules are.
And people at 60 about that.
I hate those rules. I think they're pathetic.
Why are you confident that stocks will be a lot higher in 10 years?
Well, they're not lottery tickets.
I mean, when you own a stock, it's a share of a company.
And I think companies are going
make a lot more money in ten years, a lot more money in 20 years.
And that's that's why they go up.
That's the only reason some companies don't do well.
Xerox is make a lot less money than they did 30 years ago.
It's a lot less,
but a lot more companies are earning a lot more money than they were.
And that's why stocks go up.
Corporate profits gone up fortyfold since world war 2 stock markets up, fortyfold.
It's 25 years since you started running Magellan.
You had been director of research for Fidelity.
You had been with them since, I guess, '69.
What are the most conspicuous mistakes you've seen investors make?
Well, I think not looking at the balance sheet and this mistake I've made.
If you look at, you know, if you look at a person's balance sheet,
you look to see what the assets, they own their houses, they own a house,
they own a car, with debt, they have an — take that away.
That's what your net worth is. You should do that at a company.
And I've seen, I've seen investors look at companies.
I mean, let's say looking at two companies are very depressed,
three to four dollars a share.
The one companies, and they're each losing a couple a million dollars a quarter.
One company is one hundred million in cash and no debt,
and one company has no cash and a hundred million of debt,
they're about to blow taps on the second company.
So you and you could do this if you got through eighth grade math,
you can get anywhere near 8 and 8 equals 16. You can do this.
Look at a company's financial position.
It's impossible to go bankrupt, if you don't have any debt.
I mean, you get the Irving
Thalberg Lifetime Achievement Award, I think, for bad management.
I mean, how could you do that.
When you were actively managing money, you presumably were under
the same pressures as other fund managers to show performance results.
Did that incline you to sell too quickly sometimes?
Well, I think my greatest mistakes are,
you know, it's funny in a stock, I can lose 100 percent. I've done that.
And your great mistakes of selling a good company and it doubles
then it triples and quadruples because you make a lot of mistakes.
And so it's ones that go up ten fold, I call em the 10 baggers.
So some mistakes just saying, oh, my God, this stock is too high and I was wrong.
And you had to figure out what inning of my in this baseball game.
I sold Toys R US. Way too early.
It went up tenfold after I sold. I did the same thing at Home Depot.
Those are my two greatest mistakes ever made.
When should you sell?
Well, you ought to find out why you bought a stock.
If you're saying if the sical company and they're doing poorly
and they're doing awful, you wait till things are getting better.
They're doing terrific. And then you sell it.
But with growth company have to say
Wal-Mart's case, 10 years after they went public,
you could have bought the stock and made 500 times your money.
They're still only 15 percent of the United States.
And you can say, why can't they go to 17?
Why can't they go 19? Why can't go to 23?
So the next four decades, they're all around the country.
So you have to say to yourself in this stock,
I have a 10 year story, a 20 year story I'll be able to write that down
and follow that. That's what I do with the company.
And that's your decision. That's how you sell it. They have
a novel element for many investors today and the trust issue.
We also have security problems that we didn't traditionally have in America.
Have they changed the way you pick and believe in stocks? No.
You still buy a company and you buy company to grow.
And if it's a textile company or it's a electronics company,
a software company, you better understand what they do.
And if they do well, the stock will do well.
No matter what happens to market,
if the Dow Jones today was a thousand or 500,
you would made a lot of money in McDonald's,
you would made a lot of money in Johnson & Johnson,
you would made a lot of money in Gillette.
This company's earnings have gone up a lot the last 30 years.
And if the market was 50 thousand,
you would've lost money in Burlington Industries. I recommended that in 1969.
I think it's I think it's gone from thirty four to two with no stock splits.
His earnings been terrible.
Well, your modesty actually makes an important point,
which is people with the best batting averages in the world dump out of 1000.
I sometimes get angry mail, particularly here in bear market, saying
so-and-so recommended such and such and it went down well.
How often did you come up with a clinker?
Well, this this is a funny business.
You don't have to be right even five times out of 10.
If the times you're right,
you make a double and triple, it offsets all those times you lose 20 or 30 percent.
So when you buy a stock you ought to say to yourself,
how much can I lose and how much can I make?
And you ought to be able to make a lot.
Is it — stocks are risky.
I mean, look, look how much we lost in AT&T.
Look how much we lost in Xerox. These were quality companies.
You know, you could lose a lot in the stock.
So, you ought to say to yourself how much can I make?
So, I want to buy a stock, if I'm right, I'm going to make a double or triple.
So is your own confidence have to get shaken?
Every day I think the market's going to go up.
You know, I keep calling a lot in my company,
so I keep calling the company.
You once said to me that you spent all your time looking at companies,
analyzing them as businesses,
and you didn't spend a lot of time worrying about the economy.
Do you have a view on the economy now? Well, I look at the economy.
I look historically economy and I look at the future.
I mean, that's weather forecasting.
I look at I look at the economy backwards, see what's happening.
Economy looks very good to me right now.
The housing market looks terrific. I mean, the auto market looks good.
The consumer looks good. It's a lot of good elements to it.
And if this is we've had nine recessions since World War two,
and if average, usually about a two percent decline in the workforce.
You know, it's terrible.
There's about a million have people lost jobs in this decline,
but that would only be about a one percent decline in the workforce.
So so far, it's been a mild recession has been mild
and technology has been mild and telecom has been mild.
You know, if the company is making fiber optics,
but it's been up, it's been a normal recession.
And I would never bet against the American economy. It's powerful.
You were never a big fan of the technology group or are you now?
I've actually started looking I'm a little early on these things I start
looking at in January and February, and I've been researching the companies.
They're very complex because they're they're there.
If there's a thousand technology companies,
they're all a little bit different.
They're not like a bunch of banks that are very similar.
So you have to be careful.
I'm looking at companies that are so close to cash.
They're an industry leader and they're down 95 percent.
All our panelists are a little different too.
Let's turn it over to them, starting with — Let's
talk about a little different market.
First, we had a bubble here in Nasdaq had collapsed.
It went down about as much as the Japanese market did.
The economy is iffy.
Some people are comparing our situation now to Japan, God forbid, 10 years ago.
What do you think?
Well, I think that's a very interesting correlation.
I mean, the Japanese market — economy — has been incredibly weak.
They've had a 12 year recession.
But there you had a real problem with the banking system,
and you basically had, let's say, average building up
commercial building went from 50 million to five million.
A bank then made 110 percent loan against it, a five and 50 million dollar loan.
Then the building went back to 50,
and they're stuck with a foreign 50 million dollar loan.
And the government never cut taxes that actually raised taxes.
I mean, they did everything wrong and companies and cut costs.
So it just sort of sat there, hope things would get better.
We are our companies act fast.
They start cutting costs real quickly.
And our government is fortunately, this is rare in our history.
We went into this recession running a surplus first time ever.
The system is supposed to be in our country.
We should run surpluses in good times. And then the bad times, we run deficits.
Well, guess what? It's working, right?
They didn't have that in Japan. And Japan — wasted 12 years.
I don't think this has all just— looked me at all like Japan we're near.
We're starting to get better already.
Peter I'm here to ask you a question about sort of the typical investor mistakes.
And when you started in the business, I know the average investor held mutual
funds for, you know, 16, 17 years, and now it's down to less than two years.
Do you think that's one of the problems of time horizons gotten too short?
Well, I think also what — they have to say, what do I want?
Do I need the money in a year? Do I need the money in five years?
You're a terrible investor if you need the money in a year.
If you need for college to send your kids there, for a wedding,
you're not going to be a good investor.
Then you have to do some homework and say, I have 10 growth funds. That's silly.
You say, what do I want? I want two or three growth funds.
What's my mix I like and you want to say is aggressive, you know,
some people aggressive is 50 percent.
So I would say people and some people might want to have foreign funds.
It's like a menu in a restaurant.
They should look it over and decide what they like and then stay with it.
And if one group does well for two or three years,
the next bunch of money they had to maybe they should add to the group
that's underperforming over time,
different categories work out to be about the same.
So you get whipsawed if you're all in one area, does poorly for three years.
You said, get me out of that and you go into some other area
and that does badly for three years.
You could be in it forever and never make money.
Peter, does this
market remind you of any that you've been through before?
I would say 90. The 90 bear market is very similar in many ways.
I mean, I think Saddam Hussein takes over Kuwait
and we sent 500,000 troops to Saudi Arabia.
All the people are saying it's going to be Iraq's third largest army in the world.
To me, another Vietnam. We had a recession.
We had all these banks in trouble.
Right now, our banks are in terrific shape, which are major positive.
So that was a very scary environment. And we had defaults.
I mean, it was an ugly environment. Everyone is afraid.
So I think that was a very similar market.
And I think 81, 82 was ugly, too.
You know, 20 percent prime rate, double digit
inflation, double digit unemployment. So those are scary markets.
And then top it all off the 73, 74 market because you remember the nifty 50.
We had that. We had it in technology stocks.
So we had ninety five percent declines.
And, you know, we combine three markets into one special case, been very fast.
We have less than a minute left.
Those those who were
who are less sanguine about the economy than you've just expressed
often cite the recent declines in the dollar and the shift
from surplus to deficit as negatives.
You seem to indicate that they're positive.
Why? Well, I think I think the government running a deficit is terrific.
That's the way it should work.
I mean, when they were running a 200 billion dollar surplus, which they were,
they're taking 20 billion out of the economy.
Now the government is running a hundred billion dollar deficit.
It's pumping a hundred billion in. It's a cushion.
So you don't see a double dip recession coming?
I don't know. I can't break the future.
That's a healthy thing to have buffers in the economy.
We've had nine recessions since world war two. We've got out every one of them.
The system works.
If you could give
one sentence of advice to scare investors right now, what would it be?
I think you ought to see some kids,
you know, hire an eight year old, hire a six year old, just watch them.
They don't know Alan Greenspan is,
they don't know about the shape of the yield curve.
They're optimistic about the future.
We'll be fine for the next 30, 40 years.
Let's hope you're right, Peter.
Courage and persistence.
I've worked in the past that we do have to stop with.
Thanks to Peter Lynch and our panelists.