Lessons the Hard Way, the Loser’s Logic


Peter Lynch is considered one of the greatest fund managers ever. Lynch managed the Fidelity Magellan fund from May of 1977 through May of 1990.  Lynch captained Magellan to an annualized return of 29.06% compared to just 15.52% for the S&P 500.


He also offered up a number of suggestions that should benefit investors of all types. Most of these have been repeated numerous times before, so I’ll quickly summarize:

·       Keep it simple: “Never invest in any idea you can’t illustrate with a crayon.”

·       Hold on during rough markets: “The key to making money in stocks is not to get scared out of them.”

·       Don’t try to time your investments, buy them on a regular schedule month after month (dollar cost average).

·       Have conviction in the long-run and ignore doomsday predictions about the world coming to an end.

Fidelity Investments conducted a study on their Magellan fund from 1977-1990, during Peter Lynch’s tenure.  Investors flocked to Fidelity’s Magellan fund and it became one of the largest mutual funds because of Peter Lynch’s performance as manager. One would think, based on both performance and the size of the fund that investors believed that Peter Lynch had a method that worked.

Wouldn’t it have been great to have been an investor with Lynch and made the substantial returns other investors made during his tenure with the fund. However, what Fidelity Investments found in their study was shocking. The average investor in the fund actually lost money. You read that correctly… The average investor lost money in the Fidelity Magellan fund under Peter Lynch’s tenure during a period of time when the fund returned around 29% annually. If investors can learn enough to find good investments, why do they consistently perform poorly with their investments?

It comes down to psychology. Individuals, more often than we will admit, make emotion-based judgement decisions. It is part of who we are as human beings. Unfortunately making emotional decisions can be a detriment in the investing world. Individual investors who let their emotions guide them have a much harder time investing than people who have found ways to master their emotional decision-making. Most investors don’t realize that their emotions are the problem.

The standard disclaimer in the investment industry is “Past performance is not indicative of future performance.” This is a true statement and should be considered with any investment.  However, for our Neanderthal brains, it should be re phrased slightly “Past performance is indicative to future performance, if you are an emotion based investor.” Fear might have saved us from getting eaten by a tiger in prehistoric times, it has proven time and time again to be detrimental to our investing performance.

We try and remind ourselves and our clients regularly that challenging markets are an opportunity. The chart of the Magellan fund isn’t a perfect chart. There was lots of volatility and long periods where the fund was flat or even down. The only real constant fact was that if you stuck with Lynch you made a shockingly high return.