Charlie Rose: We begin with Peter Lynch.
Time Magazine has called him America's number 1 money manager
during the 13 years, he headed the Fidelity of Magellan Fund.
It was a top rank general equity mutual fund.
His new book, Beating the Street, offers advice in picking stocks
and maximizing profits.
He's here to talk to us about a lot of things including his own dramatic decision,
what? 4 or 5 years. Peter, welcome to the broadcast.
Charlie Rose: You wrote a book called One Up on Wall Street.
I think that's one of the bestselling books ever about Wall Street if I'm right.
Correct me, you can correct me. Why then did you write another book?
Peter Lynch: Okay. First, I was very lucky. I wrote it with John Rothchild.
He made a big difference.
I think the reason I wrote is I try to explain to people there are great advantages,
the edges they have, and that they should get involved in stocks.
They should do it on the right basis.
Charlie Rose: This is on the first book?
Peter Lynch: Right. Obviously, I didn't make a great impression
because the percent of people's assets
involved in stocks has gone down.
In 1960, people had 40% of their financial assets, including their house,
in stocks and mutual funds.
In '80, that was down to 25%. It's now down to 17%.
Charlie Rose: Why do you think that is?
Peter Lynch: I think people in the decade of the 80s was the best the decade,
the century for stocks.
I think people managed to lose money in the 80s doing it themselves
because their methods were so flawed.
I really feel though, I want the people to understand.
I don't want anybody to buy a stock. I'm saying,
"If you're going to buy stock, you should do certain things.
If you're not willing to do these things, you should leave your money in the bank."
Charlie Rose: Your philosophy is simple. I'm remembering this from the previous book.
I think we're now talking about the previous book.
Your philosophy was if you find something that you identify with
-- I remember there was a story your wife and her hoes.
Your wife (crosstalk).
Your wife said these are the greatest things I've ever seen.
When your wife said that, you knew that this was a product that was better.
You used to stay at La Quinta Motel.
The service was better, whatever was better.
Peter Lynch: The price was good.
Charlie Rose: The price was good too, and you said,
"This is a place that I can determine.
I, Peter Lynch, can tell that this is a good product."
Right? If these people made a good product,
then their earnings are going to go up therefore
the stocks are going go up.
That's the kind of decision-making process you want to go through.
Do I have it?
Peter Lynch: You got it exactly right.
I don't think people understand there's 100% correlation
with what happens to a company's earnings
over several years and what happens to the stock.
If a company -- McDonald has done very well as a company,
the stock has done very well.
People worry about too much money supply,
what's happening in the price of oil,
who is the president,
who is being nominated in the Supreme Court, the ozone layer.
There's nothing to do. McDonald's earnings go up the next 10 years,
the stock would go up.
Charlie Rose: They would say to you, Peter is that, as you know,
and why I'm telling you this? It's fun to tell you this.
They're telling you that these other things influence
the amount of earnings of a particular company.
If we're in a recession,
people are not going to spend as much money on going to the movies or whatever they do.
Therefore, you got to pay attention to these other things
because they impact on earnings.
Peter Lynch: They are very important,
but you have no idea of knowing what they're going to do.
Alan Greenspan, the head of Federal Reserve,
he cannot predict interest rates, even the first day.
Charlie Rose: He can influence them, but he can't predict them
Peter Lynch: He cannot predict what long-term interest rates
are going to be 1 year from now, 2 years from now, 3 years.
He's even surprised how low they are now.
How am I supposed to predict interest rates?
How am I supposed to predict the economy?
You certainly remember the recession of '82.
1982, we got 20% prime rate, 14% unemployment, 12% inflation.
I don't remember anybody telling me in 1980 or '81 that was going to happen.
Also, we had the worst recession since the depression.
I didn't read about it in the paper.
It's crazy to think about these things.
Charlie Rose: Here's a quote from you, "I own Dunkin Donuts.
When you own Dunkin Donuts, you don't have to worry about career and employees.
You don't have to worry about M2 or M3s."
These are money supply figures, aren't they?
Peter Lynch: Right. Yeah.
Charlie Rose: What's happening to the money supply? This is the way you make money.
If you don't understand what the company does, you should not be in it.
If you could predict the stock market, you could predict the economy,
you could predict interest rate. If you go buy the wrong stocks,
you're going to lose half your money anyway.
Peter Lynch: Right. I'm saying people have natural advantages.
Let's say what you do for a living is you're involved in the restaurant industry.
You supply paper products. You supply kitchen equipment,
you help build the restaurants.
You saw McDonald's, you saw Chi-Chi's, you saw Chili's,
you saw Cracker Barrel, you saw Dunkin Donuts, Kentucky Fried Chicken,
Taco Bell.
Charlie Rose: These are all success stories.
Peter Lynch: These were 40 fold. They make 40, 50 times your money.
You don't need to make that kind of money many times you like,
right?
Charlie Rose: No.
Peter Lynch: That's all you had to do, was follow the restaurant industry.
People are in industries. They're in publishing industry,
they're in the chemical industry, the paper.
Why don't just stay with that industry?
You only need a few stocks a decade.
How many good stocks you need in a lifetime?
Instead people, they're in the restaurant industry,
they're buying bio-technologies stocks.
The people in the chemical industry know nothing about biotech.
The people in the chemical industry are buying oil stocks.
It's absolutely absurd.
People don't understand their national advantages.
They don't use them.
That's bad number 1.
The worse number 2
is if you don't think you're a good ice skater,
or if you're convinced you're not a good cellist,
you're not going out and try it,
but people are buying stocks anyway.
They're not discouraged. They just think it's a gamble.
Therefore they go forward, and they bet on 1 stock for a week and a half.
It goes up and they make $2 on it. Then they sell it, they buy something else.
When 3 years is over, all they've done is generate a lot of commission.
They've probably lost money. That's a mistake.
Charlie Rose: Your advice is what?
Peter Lynch: If you don't understand a company,
if you can't explain it to a 10-year-old in 2 minutes or less,
don't own it.
Because when it goes down -- Let's say the stock goes down 2 points.
Charlie Rose: You won't understand what's going on.
Peter Lynch: What do you do? Do you buy more? Do you flip a coin?
Charlie Rose: The chances are broker doesn't either?
Peter Lynch: He or she certainly doesn't know about it.
Who knows what advance -- All these things are on auto
(inaudible) and megaflops. Who knows ---?
Charlie Rose: So, buy what you know.
Peter Lynch: In your industry, buy what you know, buy local companies.
Charlie Rose: Suppose you don't have an industry, you don't really --
Peter Lynch: You buy local companies,
companies your own industry.
10 years after Wal-Mart went public,
10 years at Wal-Mart, 10 years after it went public, the 25-year-old company,
you could've bought the stock and made 50 times your money on it.
50 times.
Charlie Rose: If you bought it 10 years after-
Peter Lynch: After it was public already.
It already gone 5 fold, so you could've made 250 fold.
What I'm saying -- Let's say you're in town, they came into it,
they said, "Well these prices are great. They're doing terrific.
I like the bargains." You checked it out. You spent a little bit of work on it.
People, they're careful. When they buy a dishwasher, they do some research.
They'll put $10,000 in stock they hear on a bus.
If you did a little bit of research, you'll say,
"Wal-Mart is only 10% of the country. They're not even saturated there.
Why can't they go to the rest of the country?'
Charlie Rose: This is more of the same, is this what it is?
Peter Lynch: This is more of the same, plus I show examples.
It's a touch more detail. It actually shows me in action.
I picked 21 stocks early in 1992.
Some work, some don't. I follow those companies.
Some of the companies, the fundamentals deteriorate,
some of them improve.
I watch those companies go through the year.
I also explain the retail industry. I try to make it very simple.
I talk about a wonderful example.
There's a 7th grade class.
The teacher that read my book, and my first book that you were talking about.
You and I did a show on this, you're watching. You remember? Charlie,
this is a long time ago.
She read the book and I said,
"If you made it for 5th grade math,
you can do it in the stock market."
She says okay. She starts teaching it in 7th-grade class.
These kids had to study companies.
They would look at the balance sheets to see if they're solving.
They pick stocks. These stocks were up 69% over 2 years,
when the market was up only 20.
They pick stocks like Limited.
They pick the Gap. They picked -- They understood these companies.
They also pick IBM. I lost money on that too. Everybody makes mistakes.
Charlie Rose: I did, yeah.
Peter Lynch: I'm saying this was a school scene,
and this is a school of knowledge of math. But in addition, in the decade of the '80s,
there's 8,000 investment clubs.
These are amateurs, average people just investing.
This investment club, 62% of them, of these clubs, beat the market.
In the decade of the '80s, only 25% of professionals beat the market.
Charlie Rose: Let me go back to one other subject.
You're coming back to Fidelity, aren't you?
Aren't you going to do something-?
Peter Lynch: When I finish this book.
I've been working about 1 or 2 days a week, the last year and a half, on this book.
Now I'm done on the book. I'm going to go back to maybe 1 day a week,
working with the younger analyst, just listening to them,
talking to them. I'm not telling them to buy.
Charlie Rose: You're (crosstalk) your old lifestyle.
Peter Lynch: I'm not going to run another fund.
13 years is plenty for running a fund.
I'm just going to work with young analyst.
Let them ask questions. I'll ask them questions.
It's going to be a lot of fun.
Charlie Rose: Do you manage any money for anybody other than yourself?
Peter Lynch: No, I don't manage. I manage money
with other people for some charities.
No. I don't manage anybody's account.
Charlie Rose: You're not doing some mutual funds and pension funds, university fund.
Peter Lynch: No, zero, nothing. I'm out.
Charlie Rose: Are you happy you did this?
Peter Lynch: Delighted.
Charlie Rose: You like your new life?
Peter Lynch: It's fabulous.
Charlie Rose: Let's talk about the Clinton economic plan.
What do you think of it?
Peter Lynch: Well I think his theories are excellent.
We clearly-
Charlie Rose: Which theories are excellent?
Peter Lynch: He claims that we're going to do more investing and less spending.
That statement, you can't argue with.
Charlie Rose: Less consumption, more saving.
Peter Lynch: You absolutely have to invest more in education.
You have to investment more in companies.
You have to invest less and just spending money.
Today, people are encouraged to spend.
You spend money.
Let's say you put an addition on your house, you spend money on that.
You can get a tax deduction.
If you invest, if you take your money and put it in the bank,
you're taxed at a very high rate.
They have this incredibly unfair term. It's called unearned income.
Every time I do income taxes, and I fill out the number for what you made,
the money from the bank (inaudible) unearned income.
It's an insulting term. Anyway, if you buy a stock
and you make money on it, you pay a 28% tax on it.
Guess what the capital gains rate is in Japan.
Charlie Rose: Capital gains rate in Japan is 10%.
Peter Lynch: Zero.
Charlie Rose: Zero, right.
Peter Lynch: We're not encouraging people to save.
We're not encouraging people to invest.
We're encouraging people to spend.
Charlie Rose: You favor the elimination of the capital gains tax, that Bush
Peter Lynch: Reducing it or eliminating.
I'm glad that Clinton didn't raise it.
He raised all the taxes. This fairness thing I understand.
Charlie Rose: What about this tax the rich business, you buy that?
Peter Lynch: I think fairness, it's a debate what's fair.
I certainly think raising taxes is appropriate if it's,
at the same time, we cut the spending.
It's a lot easier to raise taxes than cut spending.
If we can cut spending and get government share of the gross national product reduced,
it will be fair. Our country works very well.
It's working extremely well.
You just don't want it to spin out of control.
Charlie Rose: You don't buy into the stimulus package.
Peter Lynch: Don't buying that at all.
Charlie Rose: You believe that we don't need to go out and create jobs.
Peter Lynch: Charlie, we've had 8 recessions since World War 2.
We've got out of every one of them. This is number 9.
There's nothing unique about this system.
We'll get out of this one. In the decade of the '80s,
the 1980s, we had 18 million jobs in the United States.
Charlie Rose: As soon as you say that, as you know, people are saying,
"Yeah Peter, but look what we did when Ronald Reagan came for the White House,
the deficit was what? $70 billion 65, $70 billion.
Now it's approaching $350 billion. An amount of money that we have to spend
to pay off the interest on that debt
is saddling us and destroying us and destroying what we pick.
Peter Lynch: You're right. I agree. You're right. I agree with that.
Charlie Rose: Don't tell me how many jobs we've created in 1980s.
We can always create jobs if you're willing to-
Peter Lynch: No. The government didn't create that.
The 500 largest companies in the '80s eliminated 3 million jobs,
eliminated 3 million. We added 18 million.
These 2.2 million businesses started, 2.2 million business started in the '80s.
Some of them didn't make it. At an average, they have 10 employees today,
that's 22 million jobs.
The only thing that creates wealth, the only things that creates taxes
to pay for all these wonderful things is jobs.
There is something magic about jobs. Jobs come from company starters.
Charlie Rose: That's what I was going to, small companies create jobs, right?
Peter Lynch: Small -- Create all the jobs.
That's what I'm -- This is not voodoo economics.
This is the real thing. You have to encourage people to take some risk,
to put their money out and go start a business.
It's a risky proposition.
Charlie Rose: You do that by what kind of government policies other than
a zero capital gains or 10% capital gains?
Peter Lynch: Lower interest.
Charlie Rose: What's the capital gains? 20 --
Peter Lynch: 28% plus. It's the highest capital gains rate
we've ever had in the history of this country.
It has never been this high.
It's terrible how high the capital gains rate is.
That's not encouraging people to invest.
What you want? You want to have lower (inaudible),
you want to have lower interest rates, lower paper work.
People started business now, they have this much paper work to fill out on forms.
Charlie Rose: Regulation they go crazy.
Peter Lynch: That's crazy, you got to cut out that out.
Charlie Rose: Okay. A lot (crosstalk) those kind of regulations
and people would be dumping into the rivers and not protecting the environment-
Peter Lynch: No, but these are regulations in what size-
Charlie Rose: -and not protecting the health of their employees.
Look what happened down in my home state of North Carolina
because of the fire they had down there.
People say, "If you don't have something like government regulation
and companies aren't doing their job to protect their workers,
then this is not the kind of society they want.
Peter Lynch: Some of these regulations relate to the size of the paper clips.
There's a lot of waste. Some of these paper works is mind boggling.
Charlie Rose: Sometimes you could do with one piece of paper.
Peter Lynch: One, that's it.
Charlie Rose: Okay.
Peter Lynch: That would be a good poli--.
I think Clinton really wants to make it work.
The capital system works.
Obviously, you want to protect the consumer,
and the business people carry to extreme
when the oil monopoly and the steel monopoly.
That's wrong too. I think trust should be broken up.
There is a role for government.
Charlie Rose: IBM, what happened to them?
Peter Lynch: IBM had a wonderful business.
They use to go to companies like Fidelity, Chase Manhattan.
These are companies who explain to these people how they use computers.
They didn't know how to use computers.
They went to companies and went in with very talented experienced people.
Charlie Rose: IBM.
Peter Lynch: IBM, and explained to people how to use computers.
Today, all these companies like Johnson and Johnson, Bristol-Myers.
They have people in the company already that knows computers backwards and forwards,
the same IBM People Walk In With These Solutions,
they don't need all those people
Charlie Rose: So, All these companies took IBM's business away from them?
Peter Lynch: No, no. They do internally.
They have experts internally now that are trained in,
it's called now management information systems.
They have all these fancy acronyms.
They have skilled people. All they want now is software and a cheap box.
They don't need all these. IBM was dealing in a system that was
very effective for 3 or 4 decades.
Now the technology has moved to the chip.
The technology has moved to the software.
It's not the box, it's not the storage device.
Charlie Rose: What should IBM do?
What should this board of directors of the IBM,
which is looking for a new chief executive officer, what should they be looking for?
People are saying ought to just -- Mort Myerson,
the number 2 guy to Ross Perot down there said maybe they ought to dismember the thing
or maybe they ought to create all kinds of little entrepreneurial
companies from within, break it up.
Peter Lynch: They have incredible technology,
they are very skilled, they have a lot of determination.
Right now unfortunately, it's sad, they have too many employees,
they have too many factories. They try to do it all themselves.
They're working the right direction.
There's nothing wrong with the direction they're going,
they were turning around.
If they're in a high process because technology is advancing all the time.
Charlie Rose: What was the genius of Bill Gates and Microsoft
which now has a higher net work than IBM, doesn't it?
Peter Lynch: There were a lot of bright people involved.
Oh my God, his net worth alone might be what IBM's profits.
Charlie Rose: You (inaudible) individually.
Peter Lynch: Yeah. His brilliance,
as a lot of brilliant people and a lot of luck.
IBM adopted MS-DOS as the operating system.
They rush the mark with the first computer,
they need an operating system and he had the only one.
If they waited a couple of years, they can use their own.
MS-DOS became the basic operating system of every computer,
whether it was a Compaq computer. The only computer system
that didn't use it was Apple. Apple had their own operating system.
Every computer that went out there all over the world
used MS-DOS. He used that to come along with Windows.
He was there. He was the gasoline on whatever car.
If you have the rights to all the gasoline,
you don't care whose cars were used.
Charlie Rose: Said another way, IBM was making
all of these razors and he was making all the razor blades.
Peter Lynch: You got it right. Absolutely.
There are other people making razors that uses his blades.
Charlie Rose: Exactly. He had the other razor blades around.
Peter Lynch: Obviously, he's a bright person.
Charlie Rose: And rich.
Charlie Rose: What do you think of Perot?
Peter Lynch: I think he's a well-meaning talented guy.
He's done a lot of good things in education.
Charlie Rose: Did you vote for him for president?
Peter Lynch: I did.
Charlie Rose: You did. Perot was your guy?
Peter Lynch: I sure did.
Charlie Rose: Why?
Peter Lynch: It was sort of a protest vote. I know in our state
-- In our state-
Charlie Rose: That's just-
Peter Lynch: I know in Massachusetts,
the democrat was going anyway.
I really fought his concepts of cutting down on the deficit and more investment.
Charlie Rose: Cutting down the deficit is a good idea.
Peter Lynch: It's absolutely a good idea. It's a perfect idea.
Charlie Rose: Give me 5 good stocks to watch, not to buy,
but just to watch,
5 ideas that you think are people are really on the right track and created a good business.
It's not touting stocks America, just want to know that Peter likes.
Peter Lynch: We have a company in Boston called Au Bon Pain.
It's a company that makes croissants and they make breads
and they have a state of the art bagel they're working on.
I can understand that company.
Charlie Rose: Me too.
Peter Lynch: They're only in about 20% of the country.
They're starting a roll.
Right now I think the price is fully priced.
I think now it's time to-
Charlie Rose: What's it selling for? What's fully priced?
Peter Lynch: I mean it's 25 times next year's earnings.
That's very high.
I think over a long period of time I'm hoping the market goes down
and the stock will go down and I'm going to back up the truck and buy a lot of shares.
I think now is the time to look at cyclical stocks.
I think the economy is going to get better around the world in '94.
It's already getting better in '93.
Charlie Rose: Even better in '94.
Peter Lynch: Better in '94, because right now it's slumping
in Germany and it's slumping in Japan.
I think now is the time to look at cyclical companies
in the paper industry, the aluminum industry, the steel.
They've cut the cost,
they have the lowest cost produces in the world.
When things get better, they're going to make a lot of money.
Charlie Rose: What about little small companies we should look at?
Peter Lynch: There's tens of thousands.
Charlie Rose: Name one.
Peter Lynch: Small company? I guess I'd say Au Bon Pain.
Another one would be Jay Baker is a relatively small company.
Charlie Rose: What do they do?
Peter Lynch: It's a retailer or Super Cuts.
They do haircuts. It's a small company.
Charlie Rose: Peter Lynch is back with a new book called Beating the Street.
It is always interesting to have him here.
One Up on Wall Street was one of the better bestsellers
ever to about Wall Street. It is very simple which most things are very simple.
When you understand them, you can understand what makes the world work.
I appreciate you being here.
Peter Lynch: Thanks, Charlie.