INVESTMENT GURU

Twenty-five years ago investment rock star Peter Lynch stepped away from Magellen, the huge Fidelity mutual fund he put on the investments map. Lynch wrote a best selling investment book in his day that is still worth a read for market students and popularized terms like four-bagger and backing up the truck.

What he now says he didn't do is recommend what has long been attributed to him as a simplification of his investment philosophy, investing in "what you know." Now 71 he still follows the market, but notes the market is different today if for no other reason than ETFs weren't around back then, a fact he comments on below.

Contrary to today, Lynch was one of the guys of his era (and there were others) who proved individual money managers could and did beat the market averages regularly or, in Wall Street parlance, add alpha. Lynch was also known for his attention to fundamental research.

Here are some excerpts from a recent WSJ piece.wsj.com/articles/peter-lynch-25-years-later-its-not-just-invest-in-what-you-know.

Use your specialized knowledge to home in on stocks you can analyze, study them and then decide if they’re worth owning. The best way to invest is to look at companies competing in the field where you work. Someone with deep restaurant-industry experience would have predicted the success of Panera Bread Co. and Chipotle Mexican Grill Inc., he says: “If you’re in the steel industry and it ever turns around, you’ll see it before I do.” 

Speaking of restaurants which have an average life span of about five years, Lynch once warned about those eateries that depend on liquor sales for a good portion of their revenue, saying the food better be good because liquor tastes the same everywhere.

The market is different than in 1990. One of the biggest changes: exchange-traded funds. Mr. Lynch credits their rise with a distrust of mutual-fund managers, which he says is unwarranted. “People accept that active managers can’t beat the market and it’s just not true,” he says. (A Fidelity spokesman says about three-quarters of its 49 equity funds managed by the same portfolio manager for at least five years were beating their benchmark over the manager’s tenure as of Sept. 30.) Mr. Lynch’s advice for small investors: Picking individual stocks is hard even for the professionals. So “if you can’t understand the balance sheet, you probably shouldn’t own it.”