Simple Advice From an Accomplished Stock-Picker
Of all the reactions to President Clinton’s economic message last week the most downbeat and skeptical was that of the stock market.
Thousands of investors, pension and mutual funds as well as individuals, panicked early in the week, sent stock prices tumbling and then bought and sold anxiously after hearing the President’s speech Wednesday night. It was as if the experts couldn’t make up their minds about the outlook for the economy.
And that probably leaves you and most people in a quandary--if the experts are confused, what should you think?
The deceptively simple answer: Don’t think about the economy or even the whole stock market, advises Peter Lynch, the renowned stock-picker and semi-retired fund manager of Fidelity Investments. If you pay attention to economic forecasts, all you get are the “latest reasons humankind is doomed--global warming, global cooling, the cost of health care, the budget deficit,” says Lynch.
Yet, through it all customers buy jeans at the Gap, and food in the supermarkets. “There is no economy, only whether sneakers are selling at the mall,” he says, and there is no stock market either, only individual stocks and mutual funds.
Lynch, 48, who stepped away from managing the $22-billion Magellan Fund in 1990--having achieved gains of 18% a year--has a new book, “Beating the Street,” a follow-up to his 1989 book “One Up on Wall Street.”
The message of both is the same: Individual or amateur investors have a place in the stock market and, in fact, must be in it if they want to earn a nest egg for retirement.
Lynch notes with chagrin that ordinary Americans have more of their money in other investments, even though stocks have provided the highest returns over six decades--9.9% per year, or roughly 6% after inflation.
To be sure, the overwhelming investment for most Americans is their home. But in the disinflationary ‘90s, when you can’t count on appreciation in home prices, stocks may well be the premier wealth-building investments.
Which stocks to choose? Look around, says Lynch, opportunity is all around you. These days he means that literally, in California. “I think California is going to turn in ‘93,” says Lynch, who lives in Boston. “It reminds me of Massachusetts a couple of years ago, the same grim psychology.” Massachusetts isn’t booming today, but its economy is out of the doldrums; California faces a rocky year, but probably ’94 will be better, he says.
But the time to invest is now, before better news becomes obvious. And for investments, as he has done throughout the country, Lynch chooses savings and loans.
Just why tells you a lot about investment thinking. Lynch reasons that though the S&L; industry has gone through problems and bankruptcies, its basic product--the home mortgage--has grown consistently with home ownership and house appreciation. Therefore, it remains a growing business and surviving S&Ls; deserve a look. Investing “is not complicated,” says Lynch, who has an M.B.A. from the Wharton School. “All it takes is simple logic and fourth grade arithmetic.”
Among California S&Ls;, Lynch likes Coast Savings Financial and H.F. Ahmanson, the holding company for Home Savings. For Lynch, the important indicator about Coast, which has returned to profitability after massive losses, is that non-performing loans have declined for seven quarters in a row. He believes it could earn $2.50 a share next year--so he’s buying the stock at a current price of about $14 a share.
As to Ahmanson, Lynch notices that Home Savings has been selling more real estate--meaning Home is selling properties it repossessed from defaulted mortgages. That hardly seems a factor to recommend it, but Lynch understands differently. “It takes two years for lenders even to get title to property so they can sell it,” he explains. So the fact that Home Savings is selling more property means the company is better able to get control of its problems. Lynch sees Ahmanson earning perhaps $3 a share next year--so he is investing this year, when the stock is roughly $19 a share.
The moral of his complex analysis is that you must do homework to be an investor--”and checking prices with a newspaper and a calculator is not homework,” says Lynch. “Read the annual report, keep abreast of the business news.”
Buying a mutual fund is hiring somebody to do the homework--also spreading your investment and risk across a variety of stocks. Lynch’s book has pointers for choosing a fund: Divide your money among three or four types--funds specializing in growth stocks or small companies or companies paying generous dividends. That way you’ll always have money in a profitable sector.
“And when you add money, put it into the sector that has lagged the market for several years,” he writes.
As for his own investing these days, Lynch believes the U.S. economy is in recovery to stay. So he’s investing in companies that rise and fall with economic cycles--chemicals, papers, automobiles. Typically he holds cyclical companies for two to four years. But stocks from which he hopes to really profit--prices rising three, four, ten-fold--he keeps for five years or more. “I’ve always made my big gains in the third or fourth year,” Lynch says.
Patience is a virtue--in investing, or thinking about California and the U.S. economy. That’s something stock market experts might have remembered last week.
