Peter Lynch | Charlie Rose | 1993

we begin with peter lynch time magazine has called him america's number one money manager during the 13 years he headed the fidelity magellan fund it was a top-ranked general equity mutual fund his new book beating the street offers advice on picking stocks and maximizing profits and he's here to talk to us about a lot of things including his own dramatic decision uh what four or five years ago peter welcome to the broadcast four or five years ago you just said and i've been managing all this money i'm going to do i'm going to quit yep that's right and what and you went to do what well actually i want to spend more time my wife and my children right and it was an interesting situation because i love my job i adored my job and i liked outside activities and when i was young you know i didn't wasn't involved in charity work until i was 30. yeah no activities younger children you just read them a book and good night moon and they fall asleep and it's all over when they get older this there's more time involved so i enjoyed the family i was i was leaving for work at six in the morning i was getting home at seven o'clock at night six days a week this was in boston yeah traveling 14 days a month it was just too much so i said you know i i said that's it i can't take it and fortunately i'd made enough money to say i could give up the jobs i didn't have to give up the family or the outside activities and so what happened then so you did what with your well i cut back from about a 80 a 90 hour a week to a 40 or 50 hour week and i in the morning i make breakfasts and lunches for the kids and i do the spelling words and the spanish words and carolyn does the math and the science and i uh see carol in the morning and off i go to a place you have to go to my opinion you have to go somewhere to do something if you stay at home you want to be answering the telephone or watching cartoons so yeah it's like falling asleep taking a nap so she does the hard work and i go i go finally gave me an office i have a secretary and i spend majority of the time working on charity things like inner city schools inner city libraries inner city housing you know helping people manage their money or no not at all just i'm some of the charities i'm on the investment committee of some of the museum of fine arts i'm involved in national hospital boston college but united way but all the extra things i added to were real hands-on actually being involved in charitable activities you wrote a book called one up on wall street and i think that's one of the best-selling books ever about wall street if i'm not correct and you can correct me and say so why then did you write another okay okay first of all i was very lucky i wrote it with john rothschild he was made he made a big difference so he but i think the reason i wrote it was the firs i tried to explain to people their great advantages their edges they have and that they should get involved in stocks right and they should do it on the right basis on the first book right yeah and obviously i didn't make a great impression because the percent of people's assets involved in stocks has gone down in 1960 people had 40 percent of their financial assets including their house in stocks and mutual funds and 80 that was down to 25 it's now down to 17 and why do you think that is well i think people in the decade of the 80s was the best decade this century for stocks i think people managed to lose money in the 80s doing it themselves because their methods were so flawed so i i really feel as though i wanted people to understand i don't want anybody to buy a stock i'm saying if you're going to buy a stock you should do certain things right if you're not willing to do these things you should leave your money in the bank your philosophy is simple and i'm remembering this from the previous book i think we're now talking about the previous book correct your philosophy was if you find something that you identify with i remember that was the story of your wife and her hose your wife oh you got it legs your wife said these are the greatest things i've ever seen right and when your wife said that you knew that this was a product that was better right you used to stay at la quinta motel right the service was better whatever was better the price is good and the price was good too and you said this is a place that i can determine i peter lynch can tell that this is a good product right if these people making a good product then their earnings are going to go up therefore the stock's going to go up right and that's the kind of decision-making process you ought to go through right do i have it you've got it exactly right well i do i don't think people understand there's a hundred percent correlation with what happens to a company's earnings over several years and what happens to the stock if the company mcdonald's has done very well as a company right the stock has done very well people worry about too much money supply what's happening the price of oil who's the president who's being nominated for the supreme court it's the ozone layer it has nothing to do mcdonald's earnings go up the next 10 years the stock will go but what they will say to you peter is that as you know and why am i telling you this but it's fun to tell you this they're telling you that these other things influence the amount of earnings of a particular company if we're in a recession people are not going to spend as much money on going to the movies or whatever they do right and and therefore you've got to pay attention to these other things because they impact on earth they are very important but you have no idea of knowing what they're going to do alan greenspan is the head of the federal reserve right he cannot predict interest rates yes he'd be the first to influence somebody can't predict them he cannot predict what long-term insurance rates are going to be one year from now two years from now three years he's even surprised how low they are now right so how am i supposed to predict interest rates how am i supposed to predict the economy you certainly remember the recession of 82 yes 1982 with a 20 prime rate 14 unemployment 12 percent inflation i don't remember anybody telling me in 1980 or 81 that was going to happen all of a sudden we had the worst recession since the depression i didn't read about in the paper so it's crazy to think about these things here's a quote from you i own dunkin donuts when you own dunkin donuts you don't have to worry about korean imports you don't have to worry about m2 or m3 these are money supply figures and what's happening to the money supply this is the way you make money if you don't understand what the company does you should not be in it if you could predict the stock market you could predict the economy you could predict interest rates if you go buy the wrong stocks you're going to lose half your money anyway right i'm saying people have natural advantages yeah let's say what you do for a living is you're involved in the restaurant industry right you supply paper products you supply kitchen equipment you help build restaurants right you saw mcdonald's you saw chi chi you saw chili's you saw cracker barrel you saw dunkin donuts kentucky fried chicken taco bell there's all these test stories these were 40 40 fold you made 40 or 50 times your money you don't need to make that kind of money many times your life right no that's all you had to do was follow the restaurant industry people are in industries they're in the publishing industry they're in the chemical industry the paper why don't they just stay within industry you only need a few stocks a decade how many good stocks you need a lifetime instead of people they're in the restaurant industry they're buying biotechnology stocks the people in the campus the people in the chemical industry are buying oil stocks it's absolutely absurd people don't understand their natural advantages and they don't use them so that's that's bad number one but worse number two is they don't if you don't think you're a good ice skater or if you're convinced you're not a good cellist you're not going to try it but people are buying stocks anyway they're not discouraged they just think it's a gamble yeah so therefore they go forward and they they bet on one stock for a week and a half and it goes up and they make two dollars on it then they sell it and they buy something else when three years is over all they've done is generate a lot of commissions they've probably lost money that's a mistake so your advice is what if you don't understand a company if you can't explain it to a ten-year-old in two minutes or less yes don't own it because when it goes down let's say the stock goes down too you don't understand what's going on what do you do do you buy more do you do you do you flip a coin chances are your broker doesn't either you they he or she certainly doesn't know about it i mean who knows what advances all these things are at auto back planes and mega flops who knows what all this so buy what you know buy in your industry buy what you know buy local businesses so suppose you you don't have an industry i mean you know you don't really what you buy com local companies right comes your own industry 10 years after walmart went public ten years have walked out ten years after went public it's a 25 year old company now right you could have bought the stock and made 50 times your money on it 50 times this is if you bought it 10 years after it was public already it already gone up fivefold so you could have made 250 fold but i'm saying let's say you were in a town they came into it and they said boy these prices are great they're doing terrific i like the bargains and you checked it out you spent a little bit of work on it yeah i mean people are very careful they when they buy a dishwasher they do some research they'll put ten thousand dollars in some stock they're here on a bus so if you did a little bit of research you'd say walmart's only only ten percent of the country they're not even saturated there why can't they go to the rest of the country so is this this is more of the same is this it's more of the same plus i show examples it's it's a touch more detail this actually shows me in an action right i picked 21 stocks early in 1992. some work some don't i follow those companies some of the companies the fundamentals deteriorate some they improve i watch those companies go through the year i also explain the retailing industry i try and make it very simple and i talk about a wonderful example it's a seventh grade class yeah the teacher of that read my book and my first book that you were talking about you you and i did a show on that in washington you remember that show this is a long time ago she read the book and i said if you made it through fifth grade math you can do it in the stock market she says okay she started teaching it in seventh grade seventh grade class these kids had to study companies they had to look at their balance sheets to see if they're solvent and they pick stocks these stocks were up 69 over two years when the market was up only 20. and they picked stocks like limited they picked the gap they picked walt they understood these companies they also picked ibm i lost money on that too i mean everybody makes mistakes but it did yeah but i'm saying this is this was this was the school saint agnes school in arlington mass but in addition in the decade of the 80s there's 8 000 investment clubs these are amateurs sort of average people just investing these investment clubs 62 percent of them of these clubs beat the market in the decade of the 80s only 25 percent of professionals beat the market let me go back to one other subject you after you're coming back to fidelity aren't you just i'm not going to do something when i finish this book i've been working about one or two days a week the last year and a half on this book right now i'm done with the book i'm going to go back to maybe one day a week working with the younger analysts just listening to them talking to them i'm not telling them to buy zero zero lifestyle not totally i'm not going to run another fund 13 years there's plenty of running a fund i'm just going to work with younger analysts let them ask questions i'll ask them questions it's going to be a lot of fun now do you still follow do you manage any money for anybody other than yourself no no i manage money with other people for some charities right but no i don't manage anybody's accounts you're not doing some mutual funds no that's nothing i'm oliver cold turkey all right cold turkey did you get cold turkey are you happy you did this i'm obviously delighted it's good and you like your new life oh it's fabulous let's talk about the clinton economic plan what do you think of it well i think his theories are excellent you know we clearly which theories are excellent well he claims that we're going to do more investing and less spending right and that statement you can't argue with less consumption more savings you absolutely have to invest more in education you have to invest more in companies you have to invest less than just spending money i mean today people are encouraged to spend you spend money let's say you put an addition on your house you spend money on that that you can get a tax deduction because because the interest on it's tax deductible if you invest if you take your money and put it in the bank you're taxed at a very high rate they have this incredibly unfair term it's called unearned income when you every time i do all the income taxes and i fill out the number for what you made the money you put in the bank it's crazy unearned income what a it's an insulting term anyway if you if you buy a stock and you make money on it you pay a 28 tax on it yeah guess what the capital gains rate is in japan uh capital gains rate in japan is ten percent zero zero right i mean we're not encouraging people to save we're not encouraging people investing so you encourage people to speak in favor of the elimination of the capital gains tax that bush reducing it or eliminating it and i'm glad that clinton didn't raise it i mean he raised other taxes this fairness thing i understand and what about this tax to rich business you you buy that i think fairness it's a debate what's fair i think i certainly think raising taxes is appropriate if it's at the same time you cut the spending it's a lot easier to raise taxes than cut spending if we can cut spending and get government's share of the gross national product reduced it'll be fair but our country works very well it's working extremely well i mean you just want it to get spin out of control you don't buy into the stimulus package though don't buy into that at all you believe that we don't need to go out and create jobs charlie we we've had eight recessions since world war ii we've got out of every one of them this is number nine there's nothing unique about the system we'll get out of this one in the decade of the 80s the 1980s we had 18 million jobs in the united states yeah but as soon as you say that as you know people are saying yeah peter but look what we did when ronald reagan came to the white house the deficit was what 70 billion dollars 65 70 billion dollars and now it's approaching 350 billion dollars and the amount of money that we have to spend to pay off the interest on that debt is saddling us and i agree with you don't tell me how many jobs we could not but you can always create jobs if you're willing to no no the government didn't create that right the 500 largest companies in the 80s eliminated three million jobs eliminated three million and we added 18 million these 2.2 million businesses started 2.2 million businesses started in the 80s now some of them didn't make it right but if an average they have 10 employees today that's 22 million jobs what the only thing that creates wealth the only thing that creates taxes to pay for all these wonderful things is jobs there is something magic about jobs and jobs come from companies start that's what i should say small companies creating jobs create all the jobs right so that's what i'm talking this is not voodoo economics this is the real thing you have to encourage people to take some risk to put their money out and go start a business it's a risky proposition and you do that by what kind of government policies other than a zero capital gains or a ten percent capital gains lower interest what's the capital gains that now twenty twenty eight twenty plus it's the highest capital gains rate we've ever had in the history of this country right it's never been this high okay i mean it's terrible how high the capital gains rate is that's not encouraging people invest what you want you want to have lower sale you want to have lower interest rates lower paperwork people start a business now they have this much paperwork to fill out that's regulation they go crazy that's crazy you got to cut that out yeah well okay but that means something i mean without those kind of regulations then people would be creating dumping into the rivers and and not protecting them but these are regulations not protecting the health of their employees i mean look what happened down in my home state of north carolina because of you know the fire they had down there i mean people say if you don't have some kind of government regulation and companies aren't doing their job to protect their workers then this is not the kind of society some of these regulations relate to the size of your paper clips i mean exactly i mean some of this paperwork is mind-blowing sometimes you can do it with one piece of paper one that's right that would be a good policy i think clinton really wants to make it work yeah the capitalist system works obviously you want to protect the consumer and business people carry to extreme when the oil monopoly and the steel monopoly that's wrong too i mean i think trust should be broken up there is a role for government ibm what happened to them ibm had a wonderful business they used to go to companies like fidelity chase manhattan they used to come and explain to these people how to use computers yeah they didn't know how to use computers yeah they went to companies and it went in with very talented experienced people ibm ibm and explained to people how to use computers today all these companies like johnson johnson's american owned bristol myers they have people in the company already that know computers backwards and forwards the same ibm people walk in with these solutions they don't need all those people so all these companies took ibm's business away from no no they do internally they have experts internally now that are trained in it's called now management information systems they have all these fancy acronyms they have skilled people all they want now is software and a cheap box they don't need all these so ibm was dealing in a system that was very effective for three or four decades now the technology has moved to the chip the technology has moved to the software it's not the box it's not the storage so what should ibm do what should this board of directors of ibm which is looking for a new chief executive officer what should they be looking for well how many people are saying they ought to just mark the number two guy to ross perot down there said maybe they ought to dismember the thing or maybe they ought to create all kinds of little entrepreneurial companies from within break it up they'll eventually they have incredible technology they're very skilled they have a lot of determination right now unfortunately it's sad they have too many employees they have too many factories they try to do it all themselves they're they're they're working the right direction there's nothing wrong with the direction they're going they will turn it around if they're in a hard process because the technology is advancing all the time what was the genius of bill gates and microsoft which now has a higher net worth than ibm doesn't it well he there's a lot of bright people he's oh my god he his net worth alone might be more than ibm's profits individually yeah his brilliance is a lot of brilliant people and a lot of luck ibm adopted ms-dos as the operating system they rushed the market with the first computer they needed an operating system and he had the only one if they'd wait a couple years they could use their own so ms-dos became the basic operating system of every computer whether it was a compact computer the only computer system that didn't use it was apple apple had their own operating system so every computer that went out there all over the world needed ms-dos he uses use that to come along with windows so he was there he was like the gasoline when people whatever car if you had all if you had if you're the right to all the gasoline you don't care whose cars are said another way i mean ibm was making all of these razors and and he was making all the razor blades you got it right yeah absolutely and then there were other people making razors to use his blades exactly so he had all the razor blades around no obviously he's a bright person and rich yeah and eds eds you know ross perot what do you think i think he's a well-meaning talented guy he's done a lot of good things in education for president i did you did yeah perrault was your guy yep i sure didn't why well it was sort of a protest vote because i know in our state you know i mean in our state that's just yeah i know in massachusetts the democrat was going anyway and i really thought his concepts of cutting down on the deficit and more investment oh cutting down deaths is a good idea oh it's absolutely a good idea it's a terrific idea give me five good stocks to watch not to buy but just to watch five ideas that you think where people are really on the right track and created a good business well i think not touting stocks america i just want to know what peter likes okay well we have a company in boston called oba pan it's a company that makes croissants and they make breads and they have a state-of-the-art bagel they're working on i can understand that company me too they're only in about 20 percent of the country they're starting to roll right now it's i think you know the price is fully priced and i think now is the times selling for what's fully priced oh i mean it's 25 times next year's earnings i mean that's very high right but i think over a long period of time i'm hoping the market goes down and the stock will go down and i'm going to back up the truck and buy a lot of shares i think now is the time to look at cyclical stocks i think the economy is going to get better around the world in 94. it's already getting better in 93.99 and even better in 94. better in 94 because right now it's slumping in germany and it's slumping in japan right so i think now is the time to look at cyclical companies in the paper industry the aluminum industry the steel industry they've cut the costs they're the lowest cost producers in the world and when things get better they're going to make a lot of money what are these little small companies we should look at oh there's tens of thousands a small company well i i guess i'd say all about panzer art another one to be jay baker is a relatively small it's a retailer or super cuts they do haircuts it's a small company peter lynch is back with a new book called beating the street it is always interesting to have him here one up on wall street was one of the better best sellers uh ever to about wall street and it is very simple which most things are very simple uh and when you understand them you can understand uh what makes the world work i appreciate you being here

Channel: Investor Archive

Views: 39,589

Keywords: Investing, Stocks, Economy, Finance, Stock market, Business, Capital, Value, Tax, Debt, Insurance, Profit, Equity, Cash, Securities, Dividend, Bonds, Asset, Liability, Growth, Loan, Bank, Wealth, Obligation, Fund, Earnings, Currency, Portfolio, 401k, Interest, Retirment, Debit, Credit, Corporate, Enterprise, Analysis, Real estate, Inflation

Id: LluFn2uBQ0k

Length: 19min 37sec (1177 seconds)

Published: Wed Dec 02 2020