Legendary investor Peter Lynch makes investing so simple: Just find good companies which will likely have bigger profits in 10 years than they do now, and which any idiot can manage. Then wait.
Lynch seems neutral on general market direction, and is focused on simply finding good businesses.
Choice excerpts from interview
Following the changes that have occurred in the markets and the “lost decade”, has it become necessary to adjust the criteria for choosing stocks for investment?
Lynch: “The significance of the lost decade is very simple. Companies earn more than they did ten years ago, and they are traded at lower prices than they were then. There’s an investment opportunity here. There are companies on the market with good balance sheets and wonderful reputations, that make better profits today than ten years ago, and will continue to grow. This is an extraordinary period for investment.”
Are price earnings ratios and growth rates as relevant now as in the past?
Lynch “When you look at big companies, you see that their growth slows down eventually, because they’re too big to grow at high rates over time. On the other hand, small and medium size companies, which are generally considered riskier, grow faster over time. Therefore, there are opportunities in every kind of company. But I achieved my success thanks to a focus on companies of a small and medium order of size. I try to buy big companies only when they are at a turning point, after their position has improved following a crisis. That’s how it is in the vehicle industry, airlines, and other industries.”
Is that what you look for today companies that were hard hit by the crisis and can change direction?
Lynch “Exactly. The vehicle industry is a battered industry following the crisis, but people still continue to drive cars. The only difference is that the cars are getting older, and in the end they will have to be replaced with new ones. Something similar can be seen in the housing market. And these are just two of the biggest industries in the US, that fell to a vey low level. It’s hard to believe that they will soon get back to where they were before the crisis, but they will clearly strengthen to some extent.”
How do you identify those companies that will succeed in making the turnaround and won’t crash along the way
“That’s what is called homework. You have to do your homework.”
And what do you examine when you do that homework? The management that can turn things round?
“I look for industries that I believe will make the change, not managements that will lead the change. I’ve said in the past, that I prefer to be invested in companies that any idiot can manage, because in the end, that is what will happen. When I buy Toys “R” Us, I act on the assumption that the next decade will be very straightforward for the company, no matter who manages it. They have a simple formula, they have practically no competition, so the next decade will be easy for them.
“The second way of making money is to go for companies with poor performance now, but that have a strong balance sheet, and are likely to recover as their industry recovers. Then, all that’s left is to wait for the situation to improve. That is what’s called cyclic change.”