Peter Lynch: How To Invest With Stocks At High Prices

peter lynch was one of the smartest investors that the world has ever seen he got a return of 29.2 percent while being an investment manager of the magellan fund making it the best performing mutual fund in the world in this video i'm going to show you a clip of peter lynch talking about high stock market prices and what to do jill is highly regarded as one of wall street's legendary money managers he ran fidelity's magellan fund from 77 to 90. at the end of his 13-year helm it was up over 2700 percent and had become the world's largest mutual fund he remains on the board of trustees at the fidelity group and is vice chairman of fidelity management and research his new cd-rom is called the stock shop with peter lynch and its strategies to invest in the stock market with confidence all the profits for this go to charity i think he joins me now to talk about the remarkable record volume day on wall street and other matters of investing and i am very pleased to have him back at this table welcome back hey charlie good to see you they're smart of me smart of me to schedule you on a day like this three months ago i said when you want lynch to come in i said let's get him on tuesday something's going to happen in the market that week and so here we are glad to be here explain to me what's going on well we had a huge run i mean the market was 4 000 just you know two and a half years ago yeah and it ran up to 8 300 in august and you know like any big rally sometimes it backs off i mean it's healthy in fact i mean i'd rather gone down a thousand points then gone to twelve thousand if you look at japan japan went from five thousand to fifteen thousand on their dow it was fairly priced at fifteen thousand on earnings and everything else then it went to forty thousand and that caused seven years of inflated real estate people overspending and basically they've been a recession for five or six years because their market went up too high i mean the market goes up too high i mean if the market goes too high you're discounting earnings seven eight ten years out because everything is overpriced yeah and that doesn't help anything the market since world war ii has sold between 10 times earnings and 20 times earnings if you look at the dow jones or the s p fund if you add up all the companies and take the earnings you say there's a relationship and it follows mcdonald's earnings have been terrific the last 30 years and the stock's been direct there's a direct relationship so the earnings of the s p 500 have been between this range of 10 and 20. we were just about to go over the 20 which is the high end of the pe range there wasn't a lot of pe of 20 is too is is it the top of how high it should ever be right it's been over there only a few times ever over 20 and that's when usually inflation's about zero in the early 60s when inflation was about zero we're a little bit over 20. now we have a very low inflation rate so if you usually have subtracted inflation from 20 you've had the p of the market that's been a pretty good ratio when inflation was 12 percent you remember in the early 80s with eight or nine p in the market so dr lynch says all of this has been good for us well it's like i'm telling you it would not have been helpful it's like a burger i never thought i'd ever wish for the market to not go up dramatically but let's just let's argue the mark went to 16 000 tomorrow yeah basically there's earnings behind companies okay but i'm not arguing that i know that's true and they're very crazy and stock market price ought to be dictated by earnings and earnings performance and future earnings potential that's right that's right i got that even i got that right now let's just take this for me sure uh was the decline yesterday in a sense it led off some of this overvaluation the market was even overvalued at where it was right and by letting it off right then we got back to what was reasonable yeah i would say fairly priced maybe for the larger companies they're now okay there might be some small companies we've had 3 000 companies come public the last four years that's to a business day some of those companies have gone down dramatically and that sort of a research zone that average people in the stock shop that's we can find some people know a lot about this ten thousand public companies a lot of them are very attractive no one's following them and there's lots of people following ibm but that's what you've got following companies that nobody else followed right i'd like to go to see companies with unions or companies in trouble or companies that no one likes hotels that have nice beds well yeah and you have to work a lot of them you look pantyhose your whiteboard that's the story okay you've got pure one imports my wife found that one too but but you have to look at 20 to find one it's just you know go to the mall and find the stock i mean you have to say my god this sounds like it's good then you have to do some steps you have to do an organized method people are careful when they buy a toaster careful they're careful they do they do some research but they don't do it with stock they call it the broker they see somebody at lunch and they said man i got this hot stock and you run right out and you spend five thousand dollars small investors yeah well even more they put an option in international data whack they don't even own international data they have a 90-day but bill said it was good and they make a lot of money right and it's and it's like a casino yeah so it's like a casino you get the same results as if there's more paperwork but just stay with me in terms of people who are bedazzled by what's happened right if you look at yesterday and you look at today nothing has happened in the fundamentals of economics of any company right right but their stock may have gone down well 10 yesterday and up five today one modest point though i mean every time you get you have to get a memories that gets very cold in the winter in some parts of the country you get a memory that winter's coming something did really happen in southeast asia i mean those are different things those are economies because of what happened in this market i think so that was the reminder saying by the way you know profits can go down i mean there's a downside but why was that the cause i mean did did what's happening in southeast asia affect the earnings potential of all these companies you're talking about it did because they can't sell their products in a small way no because those economies been growing double-digit and all of a sudden now they're gonna because of bank problems because they're over financed they're under leverage i mean they're gonna have they're gonna have to draw on their belts those parts and then people said whoa maybe that'll become it'll happen china is now the fourth largest economy in the world maybe china can go into recession this sort of woke people it was like a wake-up call saying whoa maybe there's a chance or anything going on i mean this is not a big deal for the united states when mexico went down much more important but it sort of said people was it much more important well mexico to mexico mexico much more from the united states than thailand is or the philippines i mean their economy is very important to us they're a big consumer very important they're a neighbor a lot of people there that's a very important when that went down that effect of latin america was more important so the recession of 1990 but it sort of reminded people they'd say wait a second there is a downside we have we've had nine recessions since world war ii we'll have other ones tell me what took place overnight between yesterday at the close of market and today at the beginning mark what were the guys that you used to work with saying to each other at fidelity and what were the people you know saying for example ibm made a decision to buy back their stock right and that presented some kind of push on the market and their stock went up six points well one thing you're trying to do is all these public companies out there here's the company i really like the fundamentals are terrific their earnings are doing well the competitors are doing poorly i think this company's doing terrific and all of a sudden the stock might have gone from 40 to 30 because of this decline that would say wow here's a chance to buy it so you're trying to say some companies might have been overpriced at 60 and all they did was go to 50 and say big deal so you're trying to find companies you liked anyway right now you liked them and now they've had a haircut that's what you would do you not not just like the one from overpriced the fairly priced something was fairly placed at the start of this exercise and then had a very you know a five for four sale you know if you had been managing the magellan fund this morning you would have been buying like crazy i would've been researching like crazy i've been saying which companies are the same story is there anything really happen this is a non-event for them they're still doing well even if we have a recession there's nothing to do with them and that's the kind of kinds i'm trying to buy but let's say if a company just think of this as being you say to yourself i think this guy is going to earn something in the future if it's already discounting that if it's selling at a huge multiple you say it's already it has to work and then it's only going to stay even so you have to say yourself if i'm right how much am i going to make if i'm wrong how much i'm going to lose that's the risk reward ratio in stock shop we talk about if i'm right i hope i'm going to double trip my money if i'm wrong may i lose 30 40 percent that's a favorable ratio you say if i'm right the stock's not going to go up it's already discounting terrific things if discounting terrific things are already in the stock i don't know okay so this morning you get up and you go in and you look at at those companies that fit that you know something about you have to have an edge i mean let's say the cement industry goes from crummy to semi-crummy to fairly good the stocks are going north you're going to make money that's the industry you know when if you know the publishing industry you're you some people have you have an edge you work i mean one of your last 30 years you worked in the restaurant years you would have seen taco bell you would have seen some barrels you would have seen pizza hut you've seen chili's you've seen these companies doing very well you should have bought those instead of trying to buy bio technology stuff you know nothing about i mean i know nothing about local area networking a lot of people are buying this cisco they're buying the equipment saying we're going to root together all these peripherals and put together the servers but but that's not a bad buy because they own a huge percentage of their market you know but that was they're saying only a few people had that went to my god if it works for us other people try it then colleges will try it high schools will try it they'll go overseas they knew they were early in the ball game and they should be buying that company instead of out buying something they don't know anything about some oil drilling company i mean people have this tendency to always buy something they don't all you need is a few charlie all you need is a few good stocks this is your song this has been your song for a long time but only buy what you know but people wake up in the morning and say there's 5 000 companies out there which one should i buy the average person ought to be able to follow four or five companies they would be able to lecture on them they understand the companies and this forces you this tool says to you right down the story but you keep saying this the stock shop is what what is it this is a cd-rom that you plug into your cd-rom and play through your pc and you come up with what well also it's a data stream you can update information on five or six thousand companies right like that you can get 10 years of financial data 10 years of income statements 10 years of inventory so you can get updates and all these companies that's what you get on a bloomberg terminal no but it's only right now and you know it doesn't pick 50 data points it doesn't go over five years this one the companies you want to look at i'll give you all the information out of this it costs 69 6.95 cents a month in addition and it's you get the free trust you get a free trial we got a great deal and you can also buy it you get it from fidelity for special programs but this is something this will help you update it so you can say this company i want to look at i want to see what are the cash looks like and if you don't understand what cash is if you understand what debt is i always said let's say you're looking at companies that are doing poorly they're not doing very well why don't you buy the one that has 300 million dollars in cash instead of the one that's almost bankrupt i mean a lot of companies are selling two or three dollars a share they might be losing 10 million no brainer but people don't do it well they don't do it because they don't know how to do the research you can look up the balance you say listen they get three million dollars in cash they're losing 10 million a quarter they'll be okay this other company's got no no cash 700 million dollars in debt they're about to blow taxes but you're telling every small investor in america anyway they ought to invest in a mutual fund aren't you i'm telling you you could do both you ought to you could be invested in mutual funds and occasionally you should be able to find a stock that's going to make a difference in your life if it's an industry you know something about industry or local company there's a lot of people that they sell the kind of motorings in texas they said my god i mean a lot of people have seen local companies so friendlies there's been companies come along locally the people made with st jude medical made a lot of money for people who was that motel you stayed in and then he went and bought a bunch of it yeah like kentucky was that lakita that's what it was right you stayed overnight there and i also got advice from somebody that was a competitor there's a holiday in guy saying this guy boy they're killing us they're tough you know so that way you get a lot of information don't throw it away all right before you go so what you buy this thing and is it going to charity or not well all my profits i mean hold nifflin is the person marketing this and they're they're keeping some problems you haven't made them a charitable and the company at the uh the company that's selling of the do you go to borders or you go to crop usa they're not their name everything i've done all my books and on this my wife and i are doing everything in the chair is this because you made a bunch of money and so therefore what you do now you want to be that's part of it but also even if i hadn't made a much money i'd like to see people do a better job these are people i mean your crusade is to influence the investing habits of america to have to do a better job if they're not ready to do it properly they shouldn't do it and used to be used to be able to retire and you get half your last year's salary you'd have a pension you could rely on that now you have to do it for yourself some people are presented there but they're let go by their early retirement they're given 500 000 and they say this is it this is your retirement lady you're going to take care of it now and some of you have lost all that money and options in the last three months so what you're saying to people today about the future of the market over the near term is what what's your feeling we can have to buy business we can take a coin out and flip it i have no idea what the next thousand points gonna do the next six thousand points can be up the next fourteen thousand points will be up the next twenty thousand points could be up but you don't know what the next thousand is gonna be down and it's futile to try and guess it corporate profits will be a lot higher 10 years from now it'll be a lot higher 20 years from now that's what you could rely on microsoft didn't exist 20 years ago staples didn't exist 20 years federal express didn't exist 20 years ago new companies will come along that's what's going to make it says 20 years ago that's what makes amgen has two one billion dollar drugs they didn't exist 20 years ago new companies have come along that's what makes this country work you got to keep your eyes open okay is the game over in asia no god no that you can't you know some of these countries have a 56 savings rate they have a high literacy rate the game's not over you know they're gonna they're gonna have to have they lost something yeah well they're gonna have to although some of their lending they get carried away there's two i mean they're gonna have to you know step back figure it out and go ahead it's certainly not over in asia no way so emerging markets is still a big deal right big deal what about all the criticism of derivatives and the impact they have had that's a little complicated for me all i know is i mean i don't know about you for you it's way over my head i've never bought an option in my life i never about your i time's on your side when you're in stock you know i don't know about putting you know three percent down and buying a future and a strap and a straddle that's way over my head can't do that it's that right that's something else all right so you're optimistic about the future of the american economy earnings potential for most well-run companies will do all right but people have to understand we've had nine recessions since world war two we'll have other research we're not in one now but we may have one in the future and don't get worried it will have one sometime it'll happen and no one will tell you when it's gonna happen it's the fundamentals tell you no you'll find out after the fact you'll all of a sudden you'll notice order's slowing prices get more competitive than earnings are down i mean usually you find that affect no one declare everybody's saying we're going to have recession for five years it just hasn't happened it's great to see you i hope you'll come back anytime peter excellent thank you thank you one of the first things that you'll notice in the interview is they talked about market pe ratios whenever the market gets to a p e ratio above 20 you need to be on your toes now that's exactly the market that we're currently in the s p 500 is well above that 20 mark now that means prices are high there's no doubt about it so the question is how do we invest in these conditions as lynch talked about an interview by good quality businesses that are outperforming their competition these are the ones that are going to survive a potential crash secondly check that their balance sheets are stable and preferably have a little bit of cash on them for tough times third you've got to understand the company that you own you know you wouldn't buy a local business in your town if you didn't understand it and it should be the exact same thing with a publicly traded stock lastly remember that good times only last so long so just make sure that you are prepared financially and emotionally for if a crash does happen because most people aren't prepared for one and if you are well you'll beat most investors

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Id: tad2l_wwnGM

Length: 14min 41sec (881 seconds)

Published: Sat Jan 09 2021