Born: Affiliations:

Newton, Massachusetts, in 1944.

Fidelity Investments, Inc. Fidelity Management & Research Company

Most Famous For:

Peter Lynch managed the Fidelity Magellan Fund from 1977 to 1990, during which time the fund\'s assets grew from $20 million to $14 billion. More importantly, Lynch reportedly beat the S&P 500 Index benchmark in 11 of those 13 years, achieving an annual average return of 29%. He is also famous for several books including, "One Up On Wall Street" (1989) and "Beating The Street" (1993), which are widely considered to be mandatory reading for any investor.

Personal Profile Lynch graduated from Boston College in 1965 with a degree in finance. He served two years in the military before attending and graduating from the Wharton School at the University of Pennsylvania with a Master of Business Administration in 1968. He went to work for Fidelity Investments as an investment analyst, eventually becoming the firm's director of research, a position he held from 1974 to 1977. Lynch was named manager of the little known Magellan Fund in 1977 and achieved historic portfolio results in the ensuing years until his retirement in 1990. In 2007, Peter Lynch was serving as vice-chairman of Fidelity's investment adviser, Fidelity Management & Research Co. Since his retirement, he has been an active participant in a variety of philanthropic endeavors.

Investment Style Often described as a "chameleon," Peter Lynch adapted to whatever investment style worked at the time. It is said that his work schedule, the equivalent of what we would call today "24/7," did not have a beginning and an end. He talked to company executives, investment managers, industry experts and analysts around the clock. Apart from this punishing work ethic, Lynch did consistently apply a set of eight fundamental principles to his stock selection process. According to an article by Kaushal Majmudar, a CFA at The Ridgewood Group, Lynch shares his checklist with the audience at an investment conference in New York in 2005:

Know what you own. It's futile to predict the economy and interest rates. You have plenty of time to identify and recognize exceptional companies. Avoid long shots. Good management is very important - buy good businesses. Be flexible and humble, and learn from mistakes. Before you make a purchase, you should be able to explain why you're buying. There's always something to worry about.

In picking stocks (good companies), Peter Lynch stuck to what he knew and/or could easily understand. That was a core position for him. He also dedicated himself to a level of due diligence and stock research that left few stones unturned. He shut out market noise and concentrated on a company's fundamentals, using a bottom-up approach. He only invested for the long run and paid little attention to short-term market fluctuations. (For related reading, see Pick Stocks Like Peter Lynch.) The Lynch Philosophy Once his stellar track record running the Magellan Fund gained the widespread attention that usually follows great performance, Peter wrote several books outlining his philosophy on investing. They are great reads, but his core thesis can be summed up with three main tenets: only buy what you understand, always do your homework and invest for the long run. 1. Only Buy What You Understand According to Lynch, our greatest stock research tools are our eyes, ears and common sense. Lynch was proud of the fact that many of his great stock ideas were discovered while walking through the grocery store or chatting casually with friends and family. We all have the ability to do first-hand analysis when we are watching TV, reading the newspaper, or listening to the radio. When we're driving down the street or traveling on vacation we can also be sniffing out new investment ideas. After all, consumers represent two-thirds of the gross domestic product of the United States. In other words, most of the stock market is in the business of serving you, the individual consumer - if something attracts

you as a consumer, it should also pique your interest as an investment. 2. Always Do Your Homework First-hand observations and anecdotal evidence are a great start, but all great ideas need to be followed up with smart research. Don't be confused by Peter Lynch's homespun simplicity when it comes to doing diligent research rigorous research was a cornerstone of his success. When following up on the initial spark of a great idea, Lynch highlights several fundamental values that he expected to be met for any stock worth buying:

Percentage of Sales: If there is a product or service that initially attracts you to the company, make sure that it comprises a high enough percentage of sales to be meaningful; a great product that only makes up 5% of sales isn't going to have more than a marginal impact on a company's bottom line. PEG Ratio: This ratio of valuation to earnings growth rate should be looked at to see how much expectation is built into the stock. You want to seek out companies with strong earnings growth and reasonable valuations - a strong grower with a PEG ratio of two or more has that earnings growth already built into the stock price, leaving little room for error. Favor companies with a strong cash position and below-average debt-to-equity ratios. Strong cash flows and prudent management of assets give the company options in all types of market environments.

3. Invest for the Long Run Lynch has said that "absent a lot of surprises, stocks are relatively predictable over 10-20 years. As to whether they're going to be higher or lower in two or three years, you might as well flip a coin to decide." It may seem surprising to hear such words from a Wall Street legend, but it serves to highlight how fully he believed in his philosophies. He kept up his knowledge of the companies he owned, and as long as the story hadn't changed, he didn't sell. Lynch did not try to market time or predict the direction of the overall economy. In fact, Lynch once conducted a study to determine whether market timing was an effective strategy. According to the results of the study, if an investor had invested $1,000 a year on the absolute high day of the year for 30 years from 1965-1995, that investor would have earned a compounded return of 10.6% for the 30-year period. If another investor also invests $1,000 a year every year for the same period on the lowest day of the year, this investor would earn an 11.7% compounded return over the 30-year period. Therefore, after 30 years of the worst possible market timing, the first investor only trailed in his returns by 1.1% per year! As a result, Lynch believes that trying to predict the short-term fluctuations of the market just isn't worth the

effort. If the company is strong, it will earn more and the stock will appreciate in value. By keeping it simple, Lynch allowed his focus to go to the most important task finding great companies. Lynch coined the term "tenbagger" to describe a stock that goes up in value tenfold, or 1000%. These are the stocks that he was looking for when running the Magellan fund. Rule No.1 to finding a tenbagger is not selling the stock when it has gone up 40% or even 100%. Many fund managers these days look to trim or sell their winning stocks while adding to their losing positions. Peter Lynch felt that this amounted to "pulling the flowers and watering the weeds". Publications

"One Up On Wall Street" by Peter Lynch with John Rothchild (1989) "Beating The Street"Peter Lynch with John Rothchild (1993) "Learn To Earn"Peter Lynch with John Rothchild (1996)

Quotes "Go for a business that any idiot can run because sooner or later, any idiot is probably going to run it." "If you stay half-alert, you can pick the spectacular performers right from your place of business or out of the neighbourhood shopping mall, and long before Wall Street discovers them." "Investing without research is like playing stud poker and never looking at the cards." "Absent a lot of surprises, stocks are relatively predictable over twenty years. As to whether they're going to be higher or lower in two to three years, you might as well flip a coin to decide." "If you spend more than 13 minutes analyzing economic and market forecasts, you've wasted 10 minutes."

Reasons why we choose Peter Lynch as our investment guru:

Who is the greatest mutual fund manager of all-time? John Templeton? Benjamin Graham? John Neff? All of those investment gurus are no doubt legitimate choices. But the fund manager with the best long-term track record may well be the great Peter Lynch. During his tenure as the head of Fidelity Investments' Magellan Fund (19771990), Lynch produced a 29.2% average annual return -- nearly twice the 15.8% return that the S&P 500 posted during the same period. If you'd invested $10,000 in Magellan the day Lynch took the helm, you would have had $280,000 on the day he retired 13 years later. Every investors who entrusted him with their money, owe a special debt of gratitude to Lynch. Peter Lynch book One Up On Wall Street was a big part of what put almost every investor on the right track. Lynch didn't use complicated schemes or highbrow financial language in giving investment advice. He only focused on the basics, and his common sense approach and layman-friendly writing style teaching investor who reads his book.The wisdom of Lynch's approach so impressed us that we decided to try to choose him as our Guru Strategy in investing. Lynch is known for his "buy-what-you-know". The idea that average investors can get turned on to new stock ideas by looking out for companies whose products they have used and liked. But that part of his approach was only a starting point. What his strategy really focused on was fundamentals, and the most important fundamental he looked at was one whose use he pioneered: the P/E-to-Growth ratio.The "PEG", as it's known, divides a stock's price/earnings ratio by its historical growth rate. The theory behind this was relatively simple: The faster a company was growing, the more you should be willing to pay for its earnings. To Lynch, PEGs below 1.0 were signs of growth stocks selling on the cheap; PEGs below 0.5 really indicated that a growth stock was a bargain.To show how the PEG can be more useful than the P/E ratio, Lynch has cited Wal-Mart, America's largest retailer. He notes that Wal-Mart's P/E was rarely below 20 during its three-decade rise. Its growth rate, however was consistently in the 25 to 30% range, generating huge profits for shareholders despite the P/E ratio not being particularly low. From what we see, Lynch's favourite types of investments were what he termed "fast-growers", companies growing earnings at a rate of 20% to 50% per year. Lynch didn't want growth rates above 50%, because it was unlikely companies could sustain such high growth rates over the long term. But he also invested in "stalwarts" -- large, steady firms that have multi-billion-dollar sales and moderate growth rates (10% to 20%) and "slow-growers" (larger firms with single-digit growth). Stalwarts often offer protection in tough times, while slow-growers are desirable primarily for their high dividend yields. Lynch used the PEG to assess all of these types of stocks, but for stalwarts and slowgrowers he added dividend yield to the company's growth rate when determining the PEG.For fast-growers, stalwarts, and slow-growers alike, Lynch also looked at the inventory/sales ratio, which my Lynch-based model wants to be declining, and the debt/equity ratio, which should be below 80%. For financial companies, however, it uses the equity/assets ratio and return on assets rates rather than the debt/equity ratio, since

financials typically have to carry a lot of debt as a part of their business. The equity/assets ratio should be at least 5%, while the ROA should be at least 1%. The final part of the Lynch strategy includes two bonus categories. Which are free cash flow/price ratio and net cash/price ratio. Lynch loved it when a stock had a free cash flow/price ratio greater than 35%, or a net cash/price ratio over 30%. (He defined net cash as cash and marketable securities minus long-term debt). All the ratio that he used as a fundamental things to look at to buy shares definitely parallel with what we learned in FIN 548, Investment. According to John P.Reese, the founder and CEO of Validea.com, investing in a disciplined, unemotional way was key for Lynch. We also believe that discipline is the key to become a successful person in everything that we involve. He recognized that the stock market was unpredictable in the short term, even to the smartest investors. In fact, he once said in an interview with PBS that putting money into stocks and counting on having nice profits in a year or two is like "just like betting on red or black at the casino. What the market's going to do in one or two years, you don't know." Over the long-term, however, good stocks rise like no other investment vehicle, something Lynch recognized. His philosophy: Stick with your strategy and stay in the market for the long term and you'll realize those gains; jump in and out and there's a good chance that you'll miss out on a chunk of them. "The real key to making money in stocks," he once said, "is not to get scared out of them."