This week’s note will begin by reiterating our bullish theme on the Natural Gas market. We hav...
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Lowell: An Interview with Peter Lynch
02/06/2004 12:00 am EST
Jim Lowell, a leading authority on Fidelity funds, recently spoke with the legendary Peter Lynch about the benefits of long-term investing in actively managed funds. Here are some highlights from the interview, as well as some of Lowell's favorite Fidelity funds.
LOWELL: Thank you for taking time to speak with me Peter. With so many issues facing mutual find investors today, from known scandals to bull and bear market memories, I think now's the perfect time to talk about the long-term benefits of investing in actively managed mutual funds. To that end, I'd like to begin with your definition of an investor - as opposed to a market timer or speculator.
"Take K-Mart - once a great firm that lost their way and went bankrupt. If you put $20,000 into K-Mart 20 years ago, you'd have $0 today. But guess what? If you put $10,000 into Wal-Mart 20 years ago and $10,000 into KMart, you'd have $0 on your K-Mart, but you'd have made over $400,000 on Wal-Mart. So you'd be happy on the two investments. The good companies more than offset the ones that go out of business.
LOWELL: 20 years is a reasonable investment horizon - but for many people, 20 weeks seems like the limit on their patience.
LYNCH: I don't know what the next 12 months are going to do, but it'd be pretty hard to think that stocks are not going to be higher in ten years. Certainly 20 years from now companies' profits will be higher, and that's why their stocks go higher. And that's the essence of investing. You have to understand that there's a reason that if you'd owned McDonald's bonds over the last 40 years or 30 years at maturity, they say 'thank you very much and here's your money back', and they pay you the interest rate. But if you're a shareholder, you share in the success of the company.
LOWELL: Sharing in the success of a known company is one thing, but sharing in the success of an unknown company is another.
LYNCH: People laughed when Starbucks came public, and it's up 30-to-40-fold. So I think you can make more on a stock than you can lose. I can lose 100% in a stock - and I've done it a few times. But, I've been right, like I did in Stop & Shop, or Taco Bell, or Chrysler, or Fannie Mae. You can make ten-to-20 times your money. That's why you own stocks; the upside is very big and, over time, corporate profits have grown, per share, 7% or 8% a year. You've got a 1% or 2% dividend return, just historically. So you made 10% on stocks. And the average person today can buy a ten-year bond, they're going to make 3%. If they put the money in a money market fund, they're going to make 1%.
"So I've always said that you can flip a coin in terms of what the market's going to do over the next 12 months, but it's very predictable over ten years, over 20 years. When you think of all the bad things that happened in the last 100 years, the worst ten-year market in the stock market was 1928 to 1938, when we had a depression. And from '28 to '38, you lost about a little less than 1% a year in the stock market. So I'm more of a historian than I am a predictor.LOWELL: Is predicting the future as foolhardy as gambling on the present?
LYNCH: The average person buys stocks based on hot tips - that basically turns stocks into poker 'chips' - based on what they've heard from people on a bus, or they hear a story, or they just say this sounds good. This is gambling. You don't have to be right in this business more than five, six, seven times out of ten. If the times you're right, you get double and triple and the times you're wrong, you lose 50%, you win - big."
Meanwhile, Peter Lynch credits the success of Fidelity to the skills and resources of its research team. Indeed, Lowell agrees, and assesses his favorite Fidelity funds based on the abilities of the various managers. Here's his overview of some of Fidelity's best managers and their respective funds:
"Capital Appreciation (FDCAX): Harry Lange is cut from the go-anywhere cloth ofFidelity's best and legendary stock pickers, and Capital Appreciation has an excellent record under his control since 1996. Cap App delivered the best return of all the large-cap growth funds (up 51.7% in '03). Currently skewed toward large-cap growth, I'd expect some more emphasis on mid-cap value in 2004.
Contrafund (FCNTX): Will Danoff's contrarian moves make him a perfect counterbalance to Capital Appreciation, above. While he lost by a thin reed to the S&P 500 in '03, I like his emphasis on industrials and materials in '04.
Dividend Growth (FDGFX ): Charles Mangum is a manager with a consistent long-term record with lower risk. While his 2003 return is disappointing, largely due to his overweighting in healthcare and underweighting in technology, I'd bet that what proved to be a toxic combination last year provides a healthy dose of stable returns in 2004.
Growth Company (FDGRX): A blend of large-cap growth, with a few value picks, makes this fund hard to pan in any market. Wymer remains biased toward growthy technology names, making this fund a suitable counterweight to a growth & income fund.
Value Discovery (FVDFX): In '03, manager Scott Offen managed to outperform the S&P 500 with smart buys in the bargain basements of tech, financials, industrials, and materials. The key to understanding this fund in '04 is to know this: 'value' is defined as 'undervalued by the marketplace' - but Offen's marketplace is hardly restricted to value stocks.
Structured Mid Cap Value (FSMVX): The name states the benchmark - good hunting grounds in '03, and better in '04 from where I stand. The fund represents an enhanced 'index' of fidelity managers' best mid-cap value ideas - one example of too many chefs not spoiling the broth.
Value (FDVLX): Richard Fentin's adherence to mid-cap value, and his stock picking amongstindustrials and energy stocks in '03, ought to help him continue to produce solid gains in 2004 ."
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