Climb Aboard the Peter Lynch Bandwagon

September 16, 2008
Ed Rabinowitz

Physician's Money Digest, June15 2003, Volume 10, Issue 11

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During the 1980s, Peter Lynch managedFidelity Magellan, shaping it into thelargest mutual fund of the time. During his13-year tenure as its fund manager,Fidelity Magellan produced a near 30%annual rate of return for its investors.Today, Lynch is a vice chairman at Fidelityand has not run a fund since 1990. Still, asnoted in a recent interview in magazine,he has very specific feelings aboutthe market today and where it's headed.Physician-investors would be wise to listento his financial advice.

CYCLICAL MARKET

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Lynch says he looks at the stock markettoday and experiences flashbacks to 1990.By the fall of that year, the stock markethad dropped nearly 20%. "America wasconsidered washed up in 1990," Lynchtells magazine. "It was a very similarenvironment in many ways to whatwe've had in the past year."

What followed 1990, of course, wasthe start of a decade-long bull marketthat investors rode as though it wouldnever end. It did, of course. But Lynchpoints out that since 1945, the US economyhas experienced 10 recessions—counting the present one—and emergedfrom the previous 9 even stronger thanbefore. There's no guarantee the samething will happen this time, but as Lynchasks rhetorically, is that the type of trackrecord you want to bet against by stayingout of the market?

Lynch points out that the market runsin cycles. There are recessions where themarket declines, and there are timeswhen it surges. But that's something, hesays, that has to be accepted as part ofwhat the market is. "If you go toMinnesota in January, you should knowit's going to be cold. You don't panicwhen the thermometer falls belowzero." And that means investors shouldnot panic now.

But Lynch isn't just talking; he's acting.According to the article, he increased thepercentage of his Fidelity holdings thatare in stocks and growth stocks throughout2002. His purchases even includedInternet stocks. Why? Because he believesthat when the market is in decline, if youpurchase funds wisely, at some point inthe future you will be rewarded. He sayshe's not a market timer, but after 3straight years of declines, Lynch is preppingfor a rebound.

OPTIMISTIC INVESTOR

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When it comes to investing, there areno signs or announcements that a stockhas hit bottom. That, Lynch says, is whyyou have to stay invested. "Some peoplewait until they see a bottom and then theybuy," he says in the interview. "Butmy system for over 30 years has been this:When stocks are attractive, you buy them.Sure, they can go lower. I've bought stocksat $12 that went to $2, but then they laterwent to $30. You just don't know whenyou can find the bottom."

While Lynch is optimistic, many investorshave turned pessimistic. As evidence,he notes that a bond fund, PimcoTotal Return, is now the world's largestmutual fund. He's concerned that investorsare running scared and turning to bondfunds. What they may not be aware of,Lynch points out, is that if interest rates goback up, bonds are going to go down. Andif that happens, investors will lose money.Lynch is concerned that too many investorsare not aware of that fact.

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The market, Lynch says, has its periodsof craziness, but that doesn't meaninvestors should shun stocks. The reasonstocks go up is that companies go fromdoing poorly to doing well, or small companiesgrow into larger ones. And nomatter what condition the market is in,those are the types of companies investorsshould be looking for. "Peoplecan easily point to Enron and the other10 examples of companies that justpushed the envelope too far," Lynch concludesin the interview, "butthere are 9000 public companies outthere."