Investor's Business Daily
Peter Lynch Caught Rising Stocks
Friday June 13, 6:35 pm ET
Trang Ho


Peter Lynch showed he was a money whiz with the first mutual fund he ran.

As manager of Fidelity's Magellan Fund, (NASDAQ:FMAGX - News) he turned the fund into the world's largest with $14 billion in assets and more than 1,000 holdings.

During his tenure from 1977 to 1990, a $1,000 investment reaped $28,000.

His closest competitor returned $15,000 on a $1,000 investment.

Magellan earned an average annual return of 29.3% -- nearly double the 15.2% average return of other funds in its class. It never had a losing year, despite experiencing nine corrections of more than 10% -- each deeper than the market's.

Lynch, born in 1944, started working as a golf caddy at age 11, a year after his father died. He traded golf tips for stock tips while caddying for Fidelity Investments' president and other bigwigs at the Brae Burn Country Club in his hometown, Newton, Mass.

After hearing them mention stocks, he would look up the tickers in the newspaper.

"Gee," he thought as he saw them rise, "this makes a lot of sense."

This was during the post-World War II economic boom that fueled the bull market from 1949 to 1966, so plenty of stocks were on the rise.

Lynch caught on fast, finding success with investments starting at age 20. In college, he studied the air freight industry. That led him to invest $1,000 in Flying Tiger, an air cargo transporter -- and it multiplied by 10. That made him confident in his money future.

"You need to have an attitude that you'll win in the end," he told IBD in a 1998 interview.

Profits from his 10-bagger helped pay for business school at the University of Pennsylvania, where he earned his MBA in 1968.

He started at Fidelity as an intern while in grad school in 1966. He scaled the ranks to an analyst position, covering paper, chemical and publishing companies.

He served two years in the Army in Korea, then returned to Fidelity in 1969 as an analyst, covering textiles, metals, mining and chemicals.

He was on the march. In 1974 he was promoted to director of research. Three years later, he hit the jackpot: manager of Magellan and its $22 million in assets.

Lynch took big risks on stocks that so-called Wall Street experts shunned.

During the 1982 recession, auto sales were crashing and analysts expected Chrysler to go bankrupt. Upon examining the balance sheets and speaking with the chairman of the country's No. 3 carmaker, Lynch concluded the negative sentiment was exaggerated. Plus, he liked its new cars and figured people soon would have to buy them.

So he piled into Chrysler stock, which traded at $2 a share. He had so much conviction, he put 5% of the fund's assets -- the most allowed -- into the stock. It was Magellan's top holding for most of the year.

Chrysler shares doubled in eight months. It vaulted 50 times over in five years and raked in more than $100 million in profits for Magellan.

Sam Subramanian, founder of AlphaProfit Investments, lauds Lynch for his moves.

"Teeing off Lynch's philosophy of taking high conviction bets, most Fidelity funds have a healthy concentration of assets in their top 10 holdings," said Subramanian, whose firm owns Fidelity funds and buys them for clients. "Fidelity is quite successful with its growth-at-a-reasonable price approach to investing that Lynch mastered."

Lynch wrote three books -- "One up on Wall Street," "Beating the Street" and "Learn to Earn" -- and donated their proceeds to charity.

In "Beating the Street," he says he never had an overall strategy while managing the Magellan fund. He bought stocks based on firsthand looks at firms' products or services.

He visited restaurants, toured headquarters, walked through stores and spoke with 400 to 500 company executives a year. When he didn't work late, he volunteered on investment committees of charities and community organizations.

"Lynch was quite remarkable in using the time he spent with his family driving or shopping to uncover great stock picks, or 10-baggers, as he called them," Subramanian told IBD. "Such prowess helped him get on board with Taco Bell and Pier 1 (NYSE:PIR - News) Imports before periods of strong growth."

Lynch contends investors can find ideas by just walking through a mall -- and spotting trends long before Wall Street notices them.

He also advises people to ignore analysts and economic forecasts.

Among his mantras: Never invest in any idea you cannot illustrate with a crayon. He's into holding stocks for the long run and selling when a company's fundamentals deteriorate.

"Everyone has the brainpower to make money in stocks," he wrote in "Beating the Street." "Not everyone has the stomach. If you are susceptible to selling everything in a panic, you ought to avoid stocks and stock mutual funds altogether."

While running Magellan, he saw corrections as chances to snatch up bargains. While most would flee for safety in cash, he remained calm over periods when the fund lost 10% to 30% of its value.

"Often, there is no correlation between the success of a company's operations and the success of its stock over a few months or even a few years," he wrote. "In the long term, there is a 100% correlation between the success of the company and the success of its stock."

Lynch resigned in 1990 after 13 years as the fund's manager.

"When I was 10 years old, my father died. He was 46," Lynch said in his retirement announcement. "Now I'm 46, and this is very much on my mind."

He expressed regret at having spent more time with stocks than with his three daughters.

Still, he remained active as part-time vice chairman of Fidelity Management & Research, an arm of Boston-based Fidelity Investments, and is a member of the board of trustees of Fidelity Funds.

Lynch, 64, also spends time giving away money. He founded the Lynch Foundation, which had $74 million in assets in 2003, to support educational, religious and medical causes.

He donated $1 million to the Catholic Schools Foundation and more than $10 million to Boston College.