Peter Lynch Interview - One Up on Wall Street, Beating the Street & Investment Philosophy

Lynch explains decision to quit managing Magellan Fund after 13 years: 'I was working 80-90 hours a week, and I said enough is enough. My wife and I have three children. I cut back to about 40-50 hours a week.' Focus shifted to family: 'I wanted to spend more time with my wife and kids because they're growing up.' Decision came when realizing what he was missing: 'They were getting older and I was missing it.' Wanted to teach investing to public through writing instead.

Core Lynch philosophy: 'If you find something that you identify with... if your wife said these are the greatest things I've ever seen... this is a product that was better.' L'eggs example: Wife saw pantyhose at supermarket, great product, stock went up dramatically. La Quinta motel: 'We stayed at this motel called La Quinta about five years ago, the rooms were nice and big, it was very clean, the service was good. I said wow this is terrific, looked at the stock - stock went from two to sixty.' Argument: 'You have the edge on people like me. You could identify a company that's doing something very well.' Average person has advantage over Wall Street in noticing good businesses.

Lynch's fundamental thesis: 'There's a hundred percent correlation with what happens to a company's earnings over several years and what happens to the stock. If the company McDonald's has done very well as a company, the stock has done very well.' Investors waste time: 'People worry about too much money supply, what's happening the price of oil, who's the president, who's being nominated for the supreme court, the ozone layer - it has nothing to do. McDonald's earnings go up the next 10 years the stock will go up.' On macro forecasting impossibility: 'Alan Greenspan is the head of the federal reserve. He cannot predict interest rates. He'd be the first to influence - somebody can't predict them. He cannot predict what long-term interest rates are going to be one year from now.' 1982 recession lesson: 'With a 20% prime rate, 14% unemployment, 12% inflation - I don't remember anybody telling me in 1980 or 81 that was going to happen. All of a sudden we had the worst recession since the depression.' Conclusion: 'So it's crazy to think about these things.'

Famous Dunkin Donuts quote: 'When you own Dunkin Donuts you don't have to worry about Korean imports, you don't have to worry about M2 or M3 (money supply figures).' Philosophy: 'This is the way you make money. If you don't understand what the company does you should not be in it.' Natural advantages concept: 'People have natural advantages. Let's say what you do for a living is you're involved in the restaurant industry - you supply paper products, you supply kitchen equipment, you help build restaurants.' Opportunity: 'You saw McDonald's, you saw Chi Chi, you saw Chili's, you saw Cracker Barrel, you saw Dunkin Donuts, Kentucky Fried Chicken, Taco Bell - these were 40 or 50 fold. You made 40 or 50 times your money.' Simple strategy: 'You don't need to make that kind of money many times in your life. All you had to do was follow the restaurant industry.' Problem: 'Instead people in the restaurant industry they're buying biotechnology stocks. The people in the chemical industry are buying oil stocks. It's absolutely absurd. People don't understand their natural advantages and they don't use them.'

Lynch's famous test: 'If you can't explain it to a ten-year-old in two minutes or less, don't own it. Because when it goes down to, let's say the stock goes down, you don't understand what's going on. What do you do? Do you buy more? Do you flip a coin? Chances are your broker doesn't either.' Walmart example: '10 years after Walmart went public - it's a 25 year old company now - you could have bought the stock and made 50 times your money. If you bought it 10 years after it was public, it already gone up fivefold, so you could have made 250 fold.' Local advantage: 'Let's say you were in a town they came into and they said boy these prices are great, they're doing terrific. I like the bargains and you checked it out, you spent a little bit of work on it.' Research comparison: 'People are very careful when they buy a dishwasher - they do some research. They'll put ten thousand dollars in some stock they heard on a bus.' Analysis: 'You'd say Walmart's only 10 percent of the country, they're not even saturated there. Why can't they go to the rest of the country?'

Beating the Street book content: 'I picked 21 stocks early in 1992. Some work some don't. I follow those companies. Some of the companies the fundamentals deteriorate, some they improve.' Seventh grade example: 'The teacher read my book. I said if you made it through fifth grade math you can do it in the stock market. She says okay, she started teaching it in seventh grade.' Results: 'These kids had to study companies, they had to look at their balance sheets to see if they're solvent, and they pick stocks. These stocks were up 69% over two years when the market was up only 20%.' Stocks picked: 'They picked Limited, they picked the Gap, they picked Walmart. They understood these companies. They also picked IBM - I lost money on that too.' Investment clubs data: 'In the decade of the 80s there's 8,000 investment clubs - these are amateurs, sort of average people just investing. 62% of these clubs beat the market in the decade of the 80s. Only 25% of professionals beat the market.'

Lynch on Clinton's theory: 'His theories are excellent. He claims that we're going to do more investing and less spending. That statement you can't argue with. Less consumption more savings. You absolutely have to invest more in education, you have to invest more in companies.' Tax system criticism: 'You spend money, let's say you put an addition on your house, you can get a tax deduction because the interest on it's tax deductible. If you invest, if you take your money and put it in the bank, you're taxed at a very high rate.' Unearned income: 'They have this incredibly unfair term called unearned income. Every time I do income taxes and I fill out the number for what you made, the money you put in the bank - it's crazy, unearned income, what an insulting term.' Capital gains comparison: 'If you buy a stock and you make money on it you pay a 28% tax on it. Guess what the capital gains rate is in Japan? Zero. We're not encouraging people to save, we're not encouraging people to invest.' On fairness: 'I think fairness is a debate what's fair. I think raising taxes is appropriate if at the same time you cut the spending.'

Lynch on economic recovery: 'We've had eight recessions since World War II, we've got out of every one of them. This is number nine. There's nothing unique about the system, we'll get out of this one.' Job creation data: 'In the decade of the 80s we had 18 million jobs in the United States.' Small business driver: 'The 500 largest companies in the 80s eliminated three million jobs. And we added 18 million.' Source: '2.2 million businesses started in the 80s. Now some of them didn't make it, but if on average they have 10 employees today, that's 22 million jobs.' Core principle: 'The only thing that creates wealth, the only thing that creates taxes to pay for all these wonderful things, is jobs. There is something magic about jobs and jobs come from small companies creating jobs - they create all the jobs.' Policy prescription: 'You have to encourage people to take some risk, to put their money out and go start a business. It's a risky proposition.'

IBM's former advantage: 'IBM had a wonderful business. They used to go to companies like Fidelity, Chase Manhattan. They used to come and explain to these people how to use computers - they didn't know how to use computers. They went to companies with very talented experienced IBM people and explained to people how to use computers.' What changed: 'Today all these companies like Johnson & Johnson, American Home, Bristol Myers, they have people in the company already that know computers backwards and forwards. The same IBM people walk in with these solutions - they don't need all those people. All these companies took IBM's business away... they do internally. They have experts internally now that are trained - it's called management information systems.' New reality: 'They have skilled people. All they want now is software and a cheap box. They don't need all these IBM people.' Technology shift: 'IBM was dealing in a system that was very effective for three or four decades. Now the technology has moved to the chip, the technology has moved to the software. It's not the box, it's not the storage.' Gates advantage: 'IBM adopted MS-DOS as the operating system. They rushed to market with the first computer, they needed an operating system and he had the only one. If they'd wait a couple years they could use their own. So MS-DOS became the basic operating system of every computer.' Analogy: 'IBM was making all of these razors and he was making all the razor blades. Then there were other people making razors to use his blades.'

Au Bon Pain: 'We have a company in Boston called Au Bon Pain. It's a company that makes croissants and they make breads and they have a state-of-the-art bagel they're working on. I can understand that company.' Valuation view: 'They're only in about 20 percent of the country, they're starting to roll. I think the price is fully priced - it's 25 times next year's earnings, that's very high. But I think over a long period of time, I'm hoping the market goes down and the stock will go down and I'm going to back up the truck and buy a lot of shares.' Cyclicals thesis: 'I think now is the time to look at cyclical stocks. I think the economy is going to get better around the world in 94, already getting better in 93, even better in 94.' Rationale: 'Right now it's slumping in Germany and it's slumping in Japan. So I think now is the time to look at cyclical companies in the paper industry, the aluminum industry, the steel industry. They've cut the costs, they're the lowest cost producers in the world, and when things get better they're going to make a lot of money.' Other mentions: 'BJ Baker is relatively small - it's a retailer. Or Super Cuts - they do haircuts. It's a small company.'