Peter Lynch was the fund manager of the Magellan Fund from the house of Fidelity, between 1977 and 1990. During this time, the fund returned 29.2% CAGR and was among the best performing mutual fund. He is definitely among the many greats of investing!

Lynch has written 3 books on investing: One Up On Wall Street, Beating The Street and Learn To Earn. His books are well written and easy to read and many an investor has said that “One Up…” was the book that inspired him/her to take up investing. In fact, one of my friends has Peter Lynch as his profile image, just in case you didn’t know who his hero was.

Peter Lynch’s style of investing was to buy small and cheap companies that were doing interesting things and under followed by analysts. When those companies did something wonderful, Wall Street would take notice and drive the price up manifold when Lynch would sell them, making multiple times his investment.

I have read One Up and Beating The Street. Below are some observations from those readings:

Observation 1: Lynch was more of a buy-sell kind of investor

Warren Buffett calls himself a business picker. That is, he likes to buy businesses that are easy to understand, cheap and run by good people. So these businesses can either throw a lot of cash that he can then use to buy other businesses (like See’s Candies) or these businesses can reinvest profits back into the business to become even bigger in the future (like Burlington National). Buffett says that he almost never sells such businesses; he buys them for keeps.

Peter Lynch on the other hand calls himself a stock picker. That is, he likes to pick stocks whose prices are going to go up. And when they do, he sells them for a big profit. You need to understand this aspect well, because it explains why he buys so many companies and why he sells many of them and why he needs to work so hard to find new stocks to replace the ones he has sold.

Lynch advocated going in and out of stocks of the same company depending on the price. He advocates this for even exceptional companies (what he calls Stalwarts).

With the stalwarts you have to consider taking profits more readily than you would with a Shoney’s, or a Service Corporation International. Stalwarts are stocks that I generally buy for a 30 to 50 percent gain, then sell and repeat the process with similar issues that haven’t yet appreciated.

-From One Up…by Peter Lynch

Observation 2: Lynch loved cheap and fast growing companies

Lynch loved cheap companies. And he loved fast growing companies. But what he liked the most was cheap and fast growing companies. That way, if he bought the stock cheap and if it’s earnings went up fast, other people in Wall Street would then get in and drive the prices higher at which point Lynch would sell the shares.

And that simple recipe was his secret to being One Up on Wall Street and Beating The Street.

Observation 3: Buy companies that you are familiar with

So what kind of companies did Lynch buy? Lynch advocated researching and buying companies whose products you already used like Dunkin Donuts, Ford, Chrysler etc. If it’s a coffee shop (that is also listed), he would look for lines at the counter and whether the parking lot was full or empty and what do customers says about the coffee. He would then look at the numbers and then visit the management and ask questions. He would probably call them up again the next quarter and ask more questions and so on.

Observation 4: Lynch had over 1,400 stocks in his portfolio

They say that your portfolio should be like a museum and not like a dumping ground. But Lynch didn’t get that memo.

In 1983, when Lynch had just 900 stocks, 700 of them accounted for less than 10%. Or just 200 accounted for the top 90%. Any stock that he liked he would buy with the idea of researching on them further. A few years later that number had swelled to 1,400! 1,400!

Here’s another fact: he says that he bought over 15,000 companies over his career at Magellan and some of them more than once. He jokingly refers himself as the guy who never came across a stock he didn’t like. Now, you know why he calls himself a stock picker!

There is a funny anecdote. And then there is a funny anecdote about the funny anecdote.

The funny anecdote is Peter Lynch was once interested in the company “The Body Shop” and it fit all his criteria and he wanted to buy shares of it only to realize it that he already owned it in his portfolio! LOL!

The funny anecdote about that funny anecdote is- I knew I had read this funny anecdote in his book somewhere but I couldn’t pinpoint the company name. So I searched the e-book for key words like “bought”, “already bought” and so on. Yet, I couldn’t find it and not finding it was frustrating me. It’s one thing to say “I think Lynch wanted to buy a stock only to realize that he had already bought it“. It’s another to say with authority “Lynch wanted to buy “The Body Shop” only to realize that he had already bought it“. It’s like, I am a lawyer and I need clinching evidence for my case, else I am letting a serial stock picker get away. LOL!

Finally after a week, I serendipitously searched with the keyword “purchased” and I found the funny anecdote! Below is the exact text from the book:

Back at the office, I looked up the Body Shop on my master printout of stocks that Magellan owned on the day of my departure—a printout that was twice as long as my hometown telephone directory. There, to my chagrin, I saw that I’d bought shares in this company in 1989 and somehow had forgotten the fact. The Body Shop was one of the many “tune in later” stocks that I’d purchased in order to keep track of future developments, which in this case I’d obviously neglected to do. Before I’d seen it in the mall, you could have told me the Body Shop was an auto repair franchise and I would have believed it. A certain amount of amnesia is bound to set in when you’re trying to follow 1,400 companies.

-From Beating The Street by Peter Lynch

Observation 5: The dog that didn’t bark

All of the above observations were what he mentioned. Now, below are a few things that Lynch does not mention. And I bring this up because 30 years have passed since Lynch retired. And the new thinking is that investing does not have to be a series of buy and sell decisions. It could be more about infrequent buy and sell decisions; about buying companies that can reinvest profits and grow to become something very, very big. Like Amazon, Wal Mart, Asian Paints, Nestle and so on. Things that I think Lynch missed:

1. Making Time and Compound Interest work for you
   • Looking for businesses that can put profits back into the business and earn even more profits out in future.
   • The non-linearity of earnings that can happen with compound interest
2. Looking for businesses that have a special moat, which makes them unique and gives them longevity. In fact Lynch seems to have overlooked the idea of longevity, of individuals as well as businesses.
3. Thinking of investing in businesses that will last for many years or decades and can therefore compound for much longer.

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From the above observations, hopefully you get an idea of how Peter Lynch operated. He worked like crazy- reading annual reports, visiting plants and offices, talking to managements, noticing shopping lines and parking lots even on vacations. He didn’t read books, didn’t watch football games or operas. He worked Saturdays and sometimes Sundays too.

He had 1,400+ stocks in his portfolio and he was constantly buying and selling. He needed new stocks to replace the stocks he sold. Clearly, he worked very hard for his portfolio and his portfolio worked hard too returning 29.2% CAGR for those 13 years.

But all this churning took a toll on him and he quit in 1990 because he wanted to spend more time with his wife and kids. He says in the preface of Beating The Street:

There’s a Tolstoy story that involves an ambitious farmer. A genie of some sort offers him all the land that he can encircle on foot in a day. After running at full speed for several hours, he acquires several square miles of valuable property, more soil than he could till in a lifetime, more than enough to make him and his family rich for generations. The poor fellow is drenched with sweat and gasping for breath. He thinks about stopping—for what’s the point of going any further?—but he can’t help himself. He races ahead to maximize his opportunity, until finally he drops dead of exhaustion. This was the ending I hoped to avoid.

-Beating The Street

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Well, if you want to be a world beating mutual fund, you have to be obsessively passionate. You look at the world of greats and all of them were obsessive about their craft. So that is the only way to an outsized returns. Only way?

This is what I believed too. Until I started thinking of the importance of longevity – my own longevity as well as the longevity of the businesses I am invested

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Now, let’s go across the world and meet Sushil Agarwal. He is the founder of Aavas Financiers.

Agarwal is extremely hard working. At ICICI Bank he quickly rose to become the Head of Risk. Then, he founded Aavas; or I should say architected Aavas as the company he would have liked to work for. For example, their systems shut down at 7 PM and even if you wanted to send an email, you can’t. Even if it’s the month end or quarter end or year end. Yet, Aavas is among the first to file it’s earnings. People meet their monthly targets 25% each week unlike other companies where 75% of the targets are met in the last week. People that join Aavas from other NBFCs report a drop in stress.

They add 20% more branches every year. They do 20% more business every year. In addition to going home to on time, Agarwal even makes time to watch a movie on Sundays and if he misses it, then it’s two movies the following Sunday. He exercises every morning and takes good care of himself.

Agarwal maintains a work life balance because he wants to last at least 35 years. Why 35 years? That’s because if you compound at the rate of 20% for 35 years, you can become 1000 times larger. So they never go too fast or never too slow at business, because they want to last the distance.

And don’t mistake Aavas for some slow and boring company. In 2013, the first year of operations, Aavas had a revenue of 18 Crs. In 2023, they are likely to cross 1500 Crs! And they continue growing at a steady pace. All by working until 7 PM only!

This idea of “slow” but consistent is quite under appreciated. It flies in the face of conventional wisdom that you have to push yourself to the limit else it’s not worth it.

In the book Effortless by Greg McKeown, there is a chapter dedicated to this idea of slow growth and he calls is “Slow is Smooth and Smooth is Fast”. That is, you want to move slowly and consistently making sure that your speed is sustainable and in an efficient manner which allows you to continue doing it for a very long time and in the process outdistancing the faster but unsustainable competition. In that chapter, he quotes the example of Roald Amundsen and Robert Scott who were in a race to reach the South Pole:

From the very start of their journey, Amundsen had insisted that his party advance exactly fifteen miles each day—no more, and no less. The final leg would be no different. Rain or shine, Amundsen “would not allow the daily 15 miles to be exceeded.” While Scott allowed his team to rest only on the days “when it froze” and pushed his team to the point of “inhuman exertion” on the days “when it thawed,” Amundsen “insisted on plenty of rest” and kept a steady pace for the duration of the trip to the South Pole.

This one simple difference between their approaches can explain why Amundsen’s team made it to the top while Scott’s team perished. Setting a steady, consistent, sustainable pace was ultimately what allowed the party from Norway to reach their destination “without particular effort,” as Roland Hunford, the author of a fascinating book on this race to the South Pole, explains.

Without particular effort? They accomplished a feat that had eluded adventurers for millennia. Of course, not every day was easy. But even under the harshest of conditions, the goal was doable, thanks to that one simple rule: they would not exceed fifteen miles a day, no matter what.

On December 14, 1911, Amundsen led his team to become the first in recorded history to reach the South Pole. And then they safely made the sixteen-thousand-mile journey home. Meanwhile, Scott and his exhausted, demoralized team arrived at the pole only to find they were some thirty-four days too late. Their return journey was even more wretched; the team staggered on in total exhaustion, frostbite taking its ghastly toll until all five men froze to death. Some of them were so certain this would be their fate, they wrote notes they hoped their friends and families would one day read.

-From the book “Effortless” by Greg McKeown

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Compound Interest is wonderful because it is slow at the start and but becomes massive with passage of time. The equation has three variables:

• Principal – the original amount that you invest
• Rate of return – the return on the Principal for each year
• Time – The length of investment duration

Simple Interest is linear in nature. There is no magic here. If you double the Time, you get double the returns and if you halve the time, you get halve the returns.

Compound Interest on the other hand is exponential in nature. And the difference between Simple Interest and Compound Interest is because Time is the exponent in the latter. Time is where the magic happens. And therefore longevity gives you more time at the crease.

For example compound interest @ 15% for 20 years gives you a return of 16 times. If you could extend your waiting time by 25% or 5 more years, you would get a return of 32 times. Another 5 years, and your returns could be 64 times. If you double the time (32 years), you get 256 times the returns!

Therefore, of the three variables, we must focus on the Time. In fact, if you must, sacrifice some Rate of Interest for a longer time horizon.

• A 15% rate for 20 years is superior to a 20% rate for 15 years
• A 20% rate for 25 years is superior to a 25% rate for 20 years
• Try this: Interchange the rate of return with time and the bigger outcome will always be with the one with the longer time horizon

Peter Lynch was obsessive about the Rate of return and yet he lasted just 13 years; Sushil Agarwal wants to last 35 years. They are both maximizing for different variables. But the Math seems to suggest that maximizing longevity is not only more rewarding but also more enjoyable. After all, you get to live only once.

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-Cheers