Beating the Street

By Peter Lynch with John Rothchild

“When Magellan was launched, I was a student at Boston College, caddying golf games on weekends. This was during the great fund boom, when everybody wanted to buy funds. The fund mania even reached my own mother, a widow of limited resources. A schoolteacher who was moonlighting as a part-time fund salesman convinced her to buy Fidelity Capital. She liked the fact that “a Chinese guy” was running it, because she believed in the brilliant Oriental mind. The Chinese guy was Gerry Tsai; he, along with Ned Johnson at Fidelity Trend, were fund managers sui generis in that era.

My mother never would have known that a Chinese guy was running the Fidelity Capital Fund if the salesman hadn’t told her. A flotilla of fund floggers traveled the countryside, many of them part-timers, making house calls along with the vacuum cleaner, insurance, burial plot, and encyclopedia salesmen. My mother agreed to a plan in which she would invest $200 a month, forever, to secure us a prosperous future. This was money she did not have, but Fidelity Capital outperformed the S&P, as it tripled in the 1950s and doubled again during the first six years of the 1960s.”

One Up on Wall Street

By Peter Lynch with John Rothchild

“In the first stage of an upward market—one that has been down awhile and that nobody expects to rise again—people aren’t talking about stocks. In fact, if they lumber up to ask me what I do for a living, and I answer, “I manage an equity mutual fund,” they nod politely and wander away. If they don’t wander away, then they quickly change the subject to the Celtics game, the upcoming elections, or the weather. Soon they are talking to a nearby dentist about plaque. When ten people would rather talk to a dentist about plaque than to the manager of an equity mutual fund about stocks, it’s likely that the market is about to turn up.

In stage two, after I’ve confessed what I do for a living, the new acquaintances linger a bit longer—perhaps long enough to tell me how risky the stock market is—before they move over to talk to the dentist. The cocktail party talk is still more about plaque than about stocks. The market’s up 15 percent from stage one, but few are paying attention.

In stage three, with the market up 30 percent from stage one, a crowd of interested parties ignores the dentist and circles around me all evening. A succession of enthusiastic individuals takes me aside to ask what stocks they should buy. Even the dentist is asking me what stocks he should buy. Everybody at the party has put money into one issue or another, and they’re all discussing what’s happened.

In stage four, once again they’re crowded around me—but this time it’s to tell me what stocks I should buy. Even the dentist has three or four tips, and in the next few days I look up his recommendations in the newspaper and they’ve all gone up. When the neighbors tell me what to buy and then I wish I had taken their advice, it’s a sure sign that the market has reached a top and is due for a tumble.”