Legendary Investor’s Q&A; Merely Restated the Obvious

Did Peter Lynch help cause Tuesday’s stock selloff?

Rumor had it that the legendary investor, who steered the Fidelity Magellan stock fund to spectacular gains in the ‘80s, warned Tuesday of a sharp market correction.

Truth is, Lynch didn’t do much more than restate what he himself admits is the obvious. In an electronic question-and-answer session with small investors over the nationwide Prodigy on-line computer network, Lynch responded to a batch of nervous investors’ queries with this:

“My answer is yes, there will be a drop. In the 92 years of this century, we have seen 50 declines of 10% or more in the stock market. That’s about once every two years. Of those 50 declines, 15 were more than 25%. So that means a 25% drop about every six years. A 25% drop today would be nearly 1,000 points (on the Dow industrials). We’re due. That’s the nature of the market. It is volatile.”

He continued: “If you have a short horizon (which he defined as one or two years), get your money out. On the other hand, if every time the market dropped 10% you add to your holdings, you will come out way ahead. But most people don’t have the stomach for it. They think they are long-term buyers until the bad news hits in a market slump. That’s the time to shop for bargains. . . . If you are not ready to ride it out, sell now.”

Lynch, who retired from Magellan in 1990, got 2,000 questions from Prodigy subscribers. He answered about 50. In a postscript to his questioners, Lynch said he was troubled by the number of investors who are “worried about lots of external forces” on the market. You’re smarter to simply focus on your stocks and ignore the background noise, he said.

In classic Lynch style, he advised investors to be bullish on America and to buy high-quality stocks and hold them long-term. He specifically mentioned Chrysler (which he has liked for some time) and said he would “hold on to IBM” for a recovery.

Lynch’s final tip: “Don’t take tips from me or anyone else. Follow your nose.”