Read Beating the Street Online
Authors: Peter Lynch
Beating the Street (2 page)
FIVE
: M
AGELLAN
: T
HE
M
IDDLE
Y
EARS
SEVEN
: A
RT
, S
CIENCE, AND
L
EGWORK
EIGHT
: S
HOPPING FOR
S
TOCKS
: T
HE
R
ETAIL
S
ECTOR
ELEVEN
: B
LOSSOMS IN THE
D
ESERT
: G
REAT
C
OMPANIES IN
L
OUSY
I
NDUSTRIES
THIRTEEN
: A C
LOSER
L
OOK AT THE
S&L
S
FOURTEEN
: M
ASTER
L
IMITED
P
ARTNERSHIPS
: A D
EAL WITH A
Y
IELD
FIFTEEN
: T
HE
C
YCLICALS
: W
HAT
G
OES
A
ROUND
C
OMES
A
ROUND
SIXTEEN
: N
UKES IN
D
ISTRESS
: CMS E
NERGY
SEVENTEEN
: U
NCLE
S
AM'S
G
ARAGE
S
ALE:
A
LLIED
C
APITAL
II
NINETEEN
: T
REASURE IN THE
B
ACKYARD
: T
HE
C
OLONIAL
G
ROUP OF
M
UTUAL
F
UNDS
TWENTY
: T
HE
R
ESTAURANT
S
TOCKS
: P
UTTING
Y
OUR
M
ONEY
W
HERE
Y
OUR
M
OUTH
I
S
TWENTY-ONE
: T
HE
S
IX
-M
ONTH
C
HECKUP
I turned off my Quotron at the Fidelity Magellan Fund on May 31, 1990. This was exactly 13 years from the day I took the job. Jimmy Carter was president back then, and he admitted to having lust in his heart. I had lust in my heart as wellâlust for stocks. In the end, I figure I'd purchased more than 15,000 of them for investors in Magellanâand many more than once. No wonder I'd gotten a reputation for never having met a share I didn't like.
My departure was sudden, but it wasn't something I dreamed up overnight. The task of keeping track of so many companies had begun to take its toll by mid-decade, as the Dow hit 2000 and I hit 43. As much as I enjoyed managing a portfolio the size of the GNP of Ecuador, I missed being home to watch the children grow up. They change fast. They almost had to introduce themselves to me every weekend. I was spending more time with Fannie Mae, Freddie Mac, and Sallie Mae than I spent with them.
When you start to confuse Freddie Mac, Sallie Mae, and Fannie Mae with members of your family, and you remember 2,000 stock symbols but forget the children's birthdays, there's a good chance you've become too wrapped up in your work.
In 1989, with the Great Correction of 1987 already behind us and the stock market sailing along smoothly, I was celebrating my 46th birthday with my wife, Carolyn, and my daughters, Mary, Annie, and Beth. In the middle of the party, I had a revelation. I remembered that my father had died when he was 46 years old. You start to feel mortal when you realize you've already outlived your parents. You start to recognize that you're only going to exist for a little while, whereas you're going to be dead for a long time. You start wishing you'd seen more school plays and ski meets and afternoon soccer games. You remind yourself that nobody on his deathbed ever said: “I wish I'd spent more time at the office.”
I tried to convince myself that my children required less of my attention than they had when they were younger. In my heart, I knew the reverse was true. During the Terrible Twos they rush around and bang into things, and parents have to patch them up, but patching up a toddler takes less time and effort than helping adolescents with Spanish homework or the math that we've forgotten, or driving them for the umpteenth time to the tennis court or the shopping mall, or reassuring them after they've taken the latest hard knocks from being teenagers.
On weekends, to have any hope of keeping up with teenagers and their thoughts, parents must listen to their music and make a perfunctory stab at remembering the names of rock groups, and accompany them to movies that otherwise no adult would ever want to see. I did all this, but infrequently. Saturdays, I was sitting at my desk facing a Himalaya of paperwork. On the rare occasions I took the kids to the movies or the pizza parlors, I looked for an investment angle. It was they who introduced me to Pizza Time Theater, a stock I wish I hadn't bought, and Chi-Chi's, a stock I wish I had.
By 1990, Mary, Annie, and Beth had reached the ages of 15, 11, and 7, respectively. Mary was away at boarding school and came home only on the odd weekend. In the fall she played in seven soccer games, and I'd gotten to see just one. That was also the year the Lynch family Christmas cards went out three months late. We kept scrapbooks of our children's accomplishments, stuffed with piles of memorabilia that hadn't yet been pasted in.
The nights I didn't stay late at the office, I could be found attending a meeting of one of a number of charitable and civic organizations on whose boards I'd volunteered to serve. Often, these organizations put me on their investment committees. Picking stocks for worthy causes was the best of all possible worlds, but the demands of my pro bono activities had continued to grow, right along with the demands of the Magellan Fund, and of course my daughters, whose homework assignments were getting more difficult, and who had to be driven to more and more lessons and activities every day.
Meanwhile, I was seeing Sallie Mae in my dreams, and my wife, Carolyn, and I had our most romantic encounters as we met coming in and out of the driveway. At my annual medical checkup, I confessed to the doctor that the only exercise I got was flossing my teeth. I was aware that I hadn't read a book in the last 18 months. In two years, I'd seen three operas,
The Flying Dutchman, La Bohème
,
and
Faust
, but not a single football game. This leads me to Peter's Principle #1:
When the operas outnumber the football games three to zero, you know there is something wrong with your life.
By mid-1990, it finally dawned on me that the job had to go. I remembered that my fund's namesake, Ferdinand Magellan, also retired early to a remote island in the Pacific, although what happened to him afterward (torn to shreds by angry natives) was enough to give me pause. Hoping to avoid a similar fate at the hands of angry shareholders, I met with Ned Johnson, my boss at Fidelity, along with Gary Burkhead, the director of operations, to discuss a smooth exit.
Our powwow was straightforward and amicable. Ned Johnson suggested I stay on as a group leader for all the Fidelity equity funds. He offered to give me a smaller fund to operate, one, say, with $100 million in assets as opposed to the $12 billion with which I'd had to cope. But even with a couple of digits knocked off, it seemed to me that a new fund would require the same amount of work as the old one, and I'd be back to spending Saturdays at the office. I declined Ned's gracious invitation.
Unbeknownst to most people, I'd also been running a $1 billion employees' pension fund for several major corporations, including Kodak, Ford, and Eaton, with Kodak having the largest stake. This pension fund had a better record than Magellan because I was able to invest the money without as many restrictions. For instance, a pension fund was allowed to put more than 5 percent of its assets into a single stock, whereas a mutual fund could not.
The people at Kodak, Ford, and Eaton wanted me to continue to manage their pension money whether I left Magellan or not, but I declined their gracious invitation as well. From outside Fidelity, I'd gotten numerous offers to start a Lynch Fund, the closed-end variety listed on the New York Stock Exchange. The would-be promoters said they could sell billions of dollars' worth of Lynch Fund shares on a quick “road show” to a few cities.
The attraction of a closed-end fund, from the manager's point of view, is that the fund will never lose its customer base, no matter how badly the manager performs. That's because closed-end funds
are traded on the stock exchanges, just like Merck or Polaroid or any other stock. For every seller of a closed-end fund there has to be a buyer, so the number of shares always stays the same.
This isn't true of an open-ended fund such as Magellan. In an open-ended fund, when a shareholder wants to get out, the fund must pay that person the value of his or her shares in cash, and the size of the fund is reduced by that amount. An unpopular open-ended fund can shrink very fast as its customers flee to other competing funds or to the money markets. This is why the manager of an open-ended fund doesn't sleep as soundly as the manager of the closed-end kind.
A $2 billion Lynch Fund listed on the NYSE would have continued to be a $2 billion enterprise forever (unless I made a series of horrendous investment boo-boos and lost the money that way). I would have continued to receive the 75 basis points ($15 million) as my annual fee, year in and year out.
It was a tempting proposition, monetarily. I could have hired a bunch of assistants to pick stocks, reduced my office hours to a leisurely minimum, played golf, spent more time with my wife and my children plus gotten to see the Red Sox, the Celtics, and
La Bohème.
Whether I beat the market or lagged the market, I'd still have collected the same hefty paycheck.
There were only two problems with this arrangement. The first was that my tolerance for lagging the market is far exceeded by a desire to outperform it. The second was that I've always believed fund managers should pick their own stocks. Once again, I'd be back where I started, stuck in the office of the Lynch Fund on Saturdays, lost in the piles of annual reports, a man with a thicker bankroll but just as time poor as ever.
I've always been skeptical of millionaires who congratulate themselves for walking away from a chance to enrich themselves further. Turning one's back on a fat future paycheck is a luxury that few people can afford. But if you're lucky enough to have been rewarded in life to the degree that I have, there comes a point at which you have to decide whether to become a slave to your net worth by devoting the rest of your life to increasing it or to let what you've accumulated begin to serve you.
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 stoppingâfor what's the point of going any further?âbut 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.
The publication of this paperback edition gives me a chance to respond to the feedback I got from the hardcover edition, both from the press and from callers on late-night radio call-in shows.
There are points I thought that I made quite forcefully in the hardcover edition but that the reviewers have never mentioned. There are other points that caught the reviewers' fancy that I never intended to make at all. This is why I'm delighted to have this new preface, where I can correct what I think are three important misconceptions.
At the top of my list is the one that puts Lynch on a pedestal as the Babe Ruth of Investing, talking down to the Little Leaguers and giving them the false hope that they can perform like Big League professionals. The Babe Ruth comparison, although flattering, is wrong on two counts. First, I've struck out or grounded out far too often to be compared to the Sultan of Swat. Second, I don't think the Little Leaguers, a.k.a. small investors or average investors or the general public, should even try to imitate the Big League professionals.