While looking for inspiration on what to write for this month’s column I came across a YouTube presentation by Peter Lynch from almost 30 years ago. The wisdom imparted is as pertinent today as it was then, and in many ways reflects a number of the themes I have written about, but in no way would I mean to imply that I have been as successful as Mr. Lynch. The quotes and paraphrasing in this article are all attributed to him.
Peter Lynch isn’t a household name such as Warren Buffett, but he holds significant renown within investor circles. During his 13 years (1977-90) managing the Fidelity Magellan Mutual Fund, he achieved 29.2 per cent annual returns, almost doubling the 15.8 annual gains of the S&P 500. It was a good time to be in stocks and predates when I seriously started my own stock investing journey. A $10,000 investment at the start of his tenure would have become $280,000 by the end. He has authored numerous books.
Despite his extraordinary success managing the fund, many investors in the fund were known to have lost money, as they chased performance after years of big gains and sold during inevitable times of weakness. “With stock investing the stomach is a more important organ than the brain.”
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Here is his list of his 10 most dangerous things people say (or think):
1
“It’s gone down so much already it can’t possibly go lower.” I addressed this common fallacy in my most recent article with data outlining median drawdowns of individual stocks, and how it is normal for a stock to experience a decline of 50 to 95 per cent. Some go to zero.
2
“It’s gone so high, how can it go higher?” While there is a limit on how low a stock can go (zero), there is no upside limit, as the current Magnificent Seven (Mag 7) demonstrate.
3
“Eventually they always come back.” The data in my last column showed that after a sell-off, approximately half of stocks never make their previous high.
4
“It’s three bucks, how much can I lose?” You can lose 100 per cent of whatever you invest. Question: If Investor A buys 200 shares of a $50 stock ($10,000), and the stock drops to $3, when Investor B buys 6,000 shares ($18,000) and the stock goes to zero, who loses the most money? The share price has nothing to do with how much you can gain or lose in totality.
5
“It’s always darkest before the dawn.” That is normally true, but it’s important to understand that it’s also “always darkest before it gets pitch black.”
6
“The business can’t possibly get worse.” As with share prices, business can always get better and can always get worse. Who would have thought oil could go to minus $30 — but it did during COVID.
7
“When it gets back to what I paid, I’ll sell.” I will admit having succumbed to this sentiment. It is always best to defer to current financials and business prospects. Mistakes happen in this business as in all businesses.
8
“I don’t have to worry; I own conservative stocks.” While generally true, specifically it can be very wrong, as the recent 50 per cent losses in Bell Canada and Telus illustrate.
9
“Look at all the money I lost NOT buying…” Opportunity cost is always present, but as illustrated a couple of columns ago, I have done very well while missing most of the Mag 7. Regret is one of the emotions we need to constantly fight.
10
“I missed [insert hot stock name here — Nvidia, for example], I’ll catch the next one.” Stocks promoted as “the next [insert same stock name here]” are often duds. Finding the next one is akin to the proverbial needle in a haystack. Avoid longshots, at least until they prove to be viable companies.
11 (bonus)
“The stock has gone up, I must have been right” or “the stock has gone down, I must have been wrong.” Short-term stock movement is random. Only after a couple-year period will you know whether the purchase decision was right or wrong. It is important to distinguish luck from skill.
It is fair to say that most investors will think or say these things frequently. They all have some logic to them, but as history has demonstrated, they can be dangerous thoughts.
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