Fidelity Investments conducted a study on their Magellan fund from 1977-1990, during Peter Lynch’s tenure.2 His average annual return during this period was 29%. This is a remarkable return over the 13 year period. He was easily one of the best performing fund managers for his asset class. It should be noted that this was not a secret. Fidelity’s Magellan fund became one of the largest mutual funds due to its success under Peter Lynch, so it is clear that investors were aware of its performance. Whether the investors in the fund were chasing performance or investing due to his expertise is unclear. What is clear is that investors learned that Peter Lynch was investing in a method that worked.

Given all that, you would expect that the investors in his fund made substantial returns over that period. 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. So if investors can learn enough to find good investments, why do they consistently perform poorly with their investments?

I have a few theories on this.  The most obvious one is that investors act emotionally.  They jump in and out of investments based on their short term results.  Investments go down, they get scared and sell at the bottom. The reverse is just as likely.  They see headlines about the market going up and get greedy and want to jump on the train. They buy at the top.

Michael Torrence

mtorrence@alphawealthfunds.com

Registered Investment Advisor

Alpha Wealth Funds

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