When the time comes that you’re ready to put the most profitable style of investing into action and start making some money, stop and ask yourself “so what style works best”? Can’t think of an easy answer? Good, because there isn’t one. No one style is inherently better or more profitable than the other. The success of your investment situations is derived from your ability to maximize the effectiveness of each style, not picking the style that seems to be in favor at the moment.
In many ways you won’t find two polar opposites of talent than Peter Lynch and Warren Buffett. Buffett invests in a concentrated way, often saying things like the odds of your tenth best idea being as good as your first is low. Or you should treat investing as if you had a punch card and you could only put so many holes in it and when you used it up, it was gone. Lynch invested in hundreds of stocks and liked to visit the physical locations and kick the tires. Buffett is famous for staying home in Omaha. But when I go over many of these items on Lynch’s checklist, it seems like vintage Buffett. Dull, uninteresting, people have to keep buying it, the company is buying back shares are all things Buffett could have written. Their returns throughout a comparable period of time were also similar. From 1977 until 1990, the Magellan fund averaged a 29.2% return. During the same period, Buffett’s investing vehicle, Berkshire Hathaway averaged 20.06%. Two different investors but similar results produced by two different plans with much in common.
The most striking thing about both investors and their approach to the game of investing is that it keeps changing and is far more complex than meets the eye. The Magellan Fund has never been as strong and consistent a performer after Peter Lynch left the helm. There are many postulates as to why this is the case. We are going to introduce a new one. Few believe Berkshire will be the same after Buffett. In fact those trying to imitate Buffett’s style now have paled in comparison. Of the many characteristics that these two investors share, one vital temperament that the market has failed to appreciate is that both investors constantly changed, they evolved and their styles of investing encompassed many and broad asset classes. Buffett has bought everything from blue chip consumer stocks to junk bonds to even writing massive amounts of index puts. Peter Lynch bought it all: slow growers, fast growers, stalwarts, cyclical, asset plays and turnarounds. Even though he owned hundreds of stocks in the Magellan fund, he maintained a plan.
Next week we will delve deeper into Peter Lynch’s philosophy, a doctrine of which may be applied to nearly any strategy you may choose to trade with.
An excerpt of “The Investment Survival Guide”