When Seventh Graders Beat Wall Street: The St. Agnes Miracle

Book: Beating the Street by Peter Lynch with John Rothchild | ISBN: 978-0-671-75915-5

A group of seventh graders at St. Agnes School in Arlington, Massachusetts, picked a portfolio of 14 stocks. Over two years, their picks gained 70 percent. The S&P 500 gained 26 percent in the same period. Those kids outperformed 99 percent of all equity mutual funds.

No Quotrons. No Wharton MBAs. No Burberry raincoats. Just kids buying what they knew.

How the Kids Picked Stocks

Their teacher, Joan Morrissey, split her social studies class into teams of four each year, gave each team a theoretical $250,000, and let them compete to see who could grow it the most.

The teams had names like Rags to Riches, Wall Street Women, Stocks R Us, and the Lynch Mob. But here’s the rule that mattered: before any stock went into the portfolio, the student had to explain exactly what the company does. If you couldn’t tell the class what products it makes or what service it provides, you couldn’t buy it.

That one rule is more sophisticated than what many professional money managers follow.

The kids picked Nike because they wore the sneakers. Disney because every kid can explain Disney. PepsiCo because they knew it four different ways through Pepsi-Cola, Pizza Hut, Kentucky Fried Chicken, and Frito-Lay. The Gap because that’s where they bought clothes. Topps because they were all trading baseball cards. L.A. Gear for the sneakers. Wal-Mart after seeing Sam Walton on a video. NYNEX and Mobil for the dividends. Food Lion because 88 citizens of Salisbury, North Carolina invested $1,000 when it went public in 1957, and each became a millionaire.

The only dud was IBM. But Lynch forgives them for that one. Professional adults had been making the same mistake with IBM for 20 years.

Peter’s Principle #3: Never invest in any idea you can’t illustrate with a crayon.

The Pentech Tip Lynch Ignored

Here’s a great detail. The St. Agnes kids discovered a company called Pentech International, which made colored pens and markers. Ms. Morrissey had introduced a Pentech pen to the class, the kind with a marker on one end and a highlighter on the other. The kids loved it. They investigated the company, found it had no long-term debt, and decided the product was going to be popular everywhere.

They sent Lynch a Pentech pen and told him to look into the company. The stock was at $5 at the time. Lynch ignored the tip. The stock nearly doubled to $9.50.

Seventh graders gave him a stock tip, and he didn’t listen. Lynch admits this with the kind of honesty you don’t see often in finance books.

The Winning Team’s Picks

The winning foursome in 1990, made up of Andrew Castiglioni, Greg Bialach, Paul Knisell, and Matt Keating, made their picks with simple logic:

• Disney: “Every kid can explain this one.”
• Kellogg: “They liked the product.”
• Topps: “Who doesn’t trade baseball cards?”
• McDonald’s: “People have to eat.”
• Wal-Mart: “A remarkable growth spurt.”
• National Pizza and Tyco Toys turned into four-baggers.
• Bank of New England: “How low could it go?” (This one was a loser. Lynch owned it too and lost money, so no judgment.)

Andrew Castiglioni found National Pizza by scanning the NASDAQ list and then actually researched the company. That second step, doing the homework, is what most adult investors skip.

The St. Agnes Chorus

After Lynch visited the school, the kids recorded a cassette tape with their investing maxims. The entire seventh grade recited these in unison. Lynch says we should all memorize them and repeat them in the shower:

• A good company usually increases its dividend every year.
• You can lose money in a very short time but it takes a long time to make money.
• The stock market isn’t a gamble, as long as you pick good companies and not just because of the stock price.
• You have to research the company before you put your money into it.
• When you invest, you should always diversify.
• Out of every five stocks you pick, one will be very great, one will be really bad, and three will be OK.
• Never fall in love with a stock. Always have an open mind.
• Just because a stock goes down doesn’t mean it can’t go lower.
• You should not buy a stock because it’s cheap but because you know a lot about it.

These rules came from 12-year-olds. And they’re better than the advice most Wall Street analysts give on TV.

10,000 Investment Clubs Proved the Same Thing

It wasn’t just kids. The NAIC, which represented 10,000 investment clubs across the country, showed the same pattern. Over the 1980s, the majority of NAIC clubs outperformed the S&P 500 and three-quarters of all equity mutual funds. In 1992, 69 percent beat the S&P 500 again.

Their secret? They invested on a regular schedule. They researched companies before buying. Nobody could just announce a hot tip. You had to present your homework to the group, and your recommendations affected your friends’ money. That keeps you honest.

Lynch also shares some numbers from Fidelity’s technical department that show the power of consistent investing. If you put $1,000 in the S&P 500 in January 1940 and left it for 52 years, you’d have $333,793. If you added $1,000 every January, your $52,000 investment would be worth $3,554,227. And if you had the courage to add another $1,000 every time the market dropped 10 percent or more, your $83,000 total investment would be worth $6,295,000.

The NAIC calls their portfolio philosophy the Rule of Five. Pick five growth companies. Expect one to do way better than you imagined. Expect one to disappoint. The other three will be fine. Since you can’t predict which is which, own at least five so the winners cover the losers.

Simple. Boring. And it works.

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