From the outset, one of our goals at Cobas Asset Management has been to help the wider community to develop by spreading our philosophy and expertise in savings and investment. So Cobas Asset Management has struck a deal with Deusto, the publishing house, and Instituto Juan de Mariana, an economic research body, to help fund the publication in Spanish of books widely regarded in the investment community as classics but so far available only in English. The first title, Peter Lynch’s “Beating the Street”, is already in bookstores as “Batiendo a Wall Street”.
Our book series’ inaugural title is Peter Lynch’s second book, which he wrote after retiring from active fund management at the age of 50. He wanted to spend more time with his family, and this was incompatible with the dedication required to manage the Fidelity Magellan fund. Here, he ranges further afield than in his famous first book: he addresses investment funds and his own experience, and provides analytical commentary on some of his key trades, always in his inimitable and informal style, spiced up by anecdote and supported with examples.
In this book, he continues the educational venture that began with “One Up on Wall Street” (Deusto, 2015), which is already well-known to value investors and enriches an understanding of the second book.
The first chapter encourages non-professionals to invest, referencing the fact that 61% of American investment clubs have beaten the index. The key driver here is not so much stock-picking as systematic investment: if you had invested $1,000 on the first of January every year since 1940 ($52,000 in total), by 1992 you would have capital worth $3,554,227. And, if you had invested a further $1,000 every time the market fell 10%, your $83,000 would have become $6,295,000. Clearly, then, it’s a good idea to invest, if you can keep your emotions out of it.
Chapter 2 comments on the way in which everything negative that surrounds us – especially in the economy – attracts outsize attention. The fact is, however, that global economic growth has been extraordinary for decades, and will continue to be so. Markets will accordingly perform reasonably well, and we can benefit from the outcome.
This is true even despite endless upsets: Lynch reminds us that in the seventy years leading up to the publication of his book there have been 40 falls deeper than 10%, and 13 falls deeper than 33%. Further falls have occurred in the 25 years since the book was published.
In chapter 3, Lynch helps us find the most suitable fund. He argues that stocks are better than bonds, and suggests that we invest in equity funds as far as possible. He provides pointers and tips for navigating the complicated adventure of finding the ideal fund. The task is so complex that there is never a definitive answer.
In the following three chapters Lynch tells us about his time as a manager at the Magellan Fund. For its first four years, the fund was not actively marketed by Fidelity, and this set Lynch free to do his best work. He highlights that the independence he enjoyed is very rare at major financial institutions, where mistakes are never forgiven.
He says he has never regarded himself as an investor in growth companies, although he always had a penchant for restaurants and retailers who were growing up everywhere around the country. He invested in all sorts of stocks, and did so with entire conviction: in fact, at one point he owned up to 25% of all the equity in one specific industry.
He also explains that the large number of companies listed in the portfolio – more than 1,000 at some times – was misleading, because a far smaller number of firms accounted for 70% of concentration.
In the second part of the book, he combs through the process of analysis for his 21 recommendations for the prestigious roundtable of Barron’s weekly in 1992.
The procedure is standard: a personal visit to the business, and then an exhaustive examination of financial statements and any other documentation that might prove useful.
He tells us about classic businesses like Walmart and Toll Bros, but also makes especially interesting comments in his two chapters devoted to S&L (Savings and Loans, equivalent to Spanish savings banks) and MLPs (Master Limited Partnerships, the precursors of Spanish real estate investment firms). His review of cyclical companies – focusing on their ability to survive the trough of the cycle – is an essay of timeless value.
Lynch wraps up the book with twenty recommendations that summarise his philosophy and will no doubt prove a trustworthy guide for those who follow them. Rereading this book 25 years later has been a wonderful exercise for me. It has prompted me to reflect on aspects of the investment process, and may help me in future decision-making. When you read it, I hope you will find the same thing.