Magellan's Middle Years: When Peter Lynch Hit His Stride
Book: Beating the Street by Peter Lynch with John Rothchild | ISBN: 978-0-671-75915-5
Peter Lynch’s day started at 6:05 AM in the backseat of a friend’s Saab. His buddy Jeff Moore drove while his wife Bobbie held X-rays up to a small light in the front seat. Lynch sat in the back with his own light, reading annual reports. The X-rays never got mixed up with the financial reports.
By 6:45, Lynch was at his desk. Fidelity was a place where you could have gotten up a basketball game with analysts on weekends. They didn’t play basketball though. They worked.
The Not-So-Solo Act
The popular image of Lynch is one guy picking stocks by himself. That’s not how it worked. From 1981 forward, he always had talented assistants doing the same thing he did. Rich Fentin, Danny Frank, George Noble, Will Danoff, Jeff Vinik. These people learned from Lynch’s mistakes and went on to run successful funds themselves.
But the real advantage was Fidelity’s culture. At most firms, analysts recommend stocks, managers pick from those recommendations, and if things go wrong the manager blames the analyst. The analyst learns to play it safe and recommend IBM.
Fidelity did it differently. Fund managers did their own research and were held accountable. Analysts did parallel research, but managers could take or leave the advice. Twice as much investigating happened as anywhere else. Danny Frank discovered Fannie Mae. George Vanderheiden led Lynch to Owens-Corning. The more researchers snooping around, the better.
The 90-Second Pitch (That Was Really 60)
Lynch organized weekly meetings where analysts and fund managers presented their best ideas. He presided over these with a small kitchen timer, set at three minutes. At least, that’s what he told everyone.
In reality, he kept shortening the timer. He got it down to a minute and a half. Nobody noticed because they were too excited about their favorite stocks. And that was fine with Lynch. If you can’t explain why you’d invest in a company in simple language that a fifth grader could understand, and quickly enough that the fifth grader won’t get bored, you probably don’t know the story well enough.
These meetings had no put-downs. No criticism. Wall Street tends to be combative, but Lynch believed hostile reception kills confidence. If everyone in the room ridiculed the idea that Chrysler was a bargain at $5, your brain would remember that. A year later when the stock hit $10, that memory would nudge you to sell, and you’d miss the ride to $35.
Learning Patience
By 1981, Lynch had become a more patient investor. The fund’s turnover rate dropped from 300% to 110%. His biggest positions stayed put for months instead of weeks.
He was also getting smarter about where the real money was. Restaurant chains and retailers could keep up 20% growth rates for 10 to 15 years by expanding across the country. The Rule of 72 shows why that matters: divide 72 by your annual return percentage, and that’s how many years it takes to double your money. At 20% growth, earnings double in 3.5 years and quadruple in 7.
And retailers were less risky than tech companies. A computer company can lose half its value overnight when a rival unveils a better product. But a chain of donut shops in New England won’t lose business when somebody opens a donut franchise in Ohio. It takes a decade for competition to arrive, and you can see it coming.
The Chrysler Bet
In early 1982, with double-digit interest rates and people buying gold and shotguns, Lynch stumbled onto Chrysler while researching Ford.
Chrysler was at $2 a share. Wall Street expected bankruptcy. But the balance sheet showed over $1 billion in cash plus government loan guarantees. Not dying anytime soon.
He visited headquarters in June. A three-hour visit stretched to seven hours, plus two hours with Lee Iacocca. He saw the new cars and heard about a secret project codenamed T-115, which became the Chrysler minivan (three million copies sold in nine years).
By July, 5% of Magellan was in Chrysler, the SEC maximum. Most colleagues told him he was crazy.
Wall Street Week and the Money Rush
In October 1982, Lynch appeared on Louis Rukeyser’s “Wall Street Week.” Rukeyser leaned over before the cameras rolled: “Don’t worry, you’ll do fine, only about eight million people are watching you.”
Lynch recommended Chrysler. When asked about technology, he confessed he “never really understood how electricity works.” That got a laugh.
The appearance changed everything. The fund went from $100 million to $450 million by year end. By April 1983, Magellan hit $1 billion. A newsletter writer said it was too big to succeed. Lynch ignored him.
Peter’s Principle #8: “When yields on long-term government bonds exceed the dividend yield of the S&P 500 by 6 percent or more, sell your stocks and buy bonds.” In early 1982, Treasuries paid 13-14%. Lynch bought them, not out of fear, but because the yields beat what stocks normally return. He stayed invested in stocks too, trusting rates would come down. He was right.
Previous: Managing Magellan: The Early Years | Next: Magellan’s Later Years