Can a single page of a book change your investment life? We believe it can. Periodically, we highlight some of the Great Pages that have had a great impact on our investment philosophy. Today, we cheat ever so slightly, taking a bit of a second page from Peter Lynch’s classic One Up on Wall Street. But trust us, it’s worth it to see Lynch compare stock market machinations to Mayan mythology.
“Buy what you know” — the great Peter Lynch said investors could succeed by taking that approach. But in a column for Seeking Alpha, Validea CEO John Reese says not to forget the warning Lynch issued in discussing buy-what-you-know.
Every other issue of The Validea Hot List newsletter examines in detail one of John Reese’s computerized Guru Strategies. This latest issue looks at the Peter Lynch-inspired strategy, which has averaged annual returns of 10.0% since its July 2003 inception vs. 6.0% for the S&P 500. Below is an excerpt from the newsletter, along with several top-scoring stock ideas from the Lynch-based investment strategy.
Taken from the March 28, 2014 issue of The Validea Hot List
Guru Spotlight: Peter Lynch
Choosing the greatest fund manager of all-time is a tough task. John Templeton, Benjamin Graham, John Neff — a number of investors have put up the types of long-term track records that make it difficult to pick just one who was “The Greatest”.
In his latest column for Amazon.com’s Money & Markets blog, Validea CEO John Reese looks at how investors can use the wisdom of mutual fund legend Peter Lynch to beat the market.
“Lynch is known for his ‘buy-what-you-know’ advice — 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,” Reese writes. “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.”
Reese looks at how Lynch used the PEG ratio and several other variables to choose stocks. He also talks about how critical discipline was to Lynch, and talks about his Lynch-inspired Guru Strategy. A 10-stock portfolio picked using the model is up 8.9% since its July 15, 2003 inception vs. 5.1% for the S&P 500.
In his latest column for Forbes.com, Validea CEO John Reese says that, despite the pounding Apple’s shares have taken in recent months, investors shouldn’t give up on the tech titan.
“Slowing sales growth, two straight quarters of declining earnings, and questions about the company’s post-Steve Jobs leadership have all sent investors heading for the hills, thinking that Apple’s best days are behind it,” Reese writes. “I think they’re probably right — and I’m still bullish on Apple.”
Reese says that, while it would be nearly impossible for Apple to duplicate the run it’s had over the past decade, that shouldn’t be a surprise. “The next company that posts phenomenal growth with a pristine balance sheet and never has a hiccup or slowdown will be the first,” he says. “Frankly, that’s just not how things work. Good companies go through short-term problems. Sometimes, they get so big that they just can’t keep growing at the same pace — Warren Buffett has told Berkshire Hathaway shareholders not to expect the same kind of returns from Berkshire going forward, simply because of its sheer size.”
Reese says that Apple may be transitioning from a fast-growing firm to what mutual fund grade Peter Lynch called a stalwart — a big, moderate growth firm with attractively valued shares. Lynch said that many fast growers end up making such a transition. “Because investors tend to be so myopic, they often don’t acknowledge that natural transition,” Reese says. “They see slowing or declining growth as a sign that a company is headed for doom, and they sell shares in what may still be very good businesses — even if they are attractively priced. I think that’s what’s going on with Apple right now.”
Reese uses his Guru Strategies, each of which is based on the approach of a different investing great, to analyze Apple, as well as four other firms that have made the transition from fast-growing dynamo to steady stalwart. To read the full article, click here.
Warren Buffett and Peter Lynch are two of history’s most successful investors. And in a Number Cruncher column for Canada’s Globe and Mail, John Heinzl says combining their strategies has led to some big returns.
Using data from Validea Canada, Globe and Mail last year set up a portfolio of stocks that met both Validea’s Lynch-inspired investment model’s criteria and its Buffett-based model’s criteria. “From the portfolio’s inception date on Jan. 18, 2012, through March 20, 2013, eight of the nine stocks rose, with several producing substantial double-digit gains,” Heinzl writes. “As was the case in our last update in January, convenience store operator Alimentation Couche-Tard led the pack, up 75.8 per cent, followed by quick-service restaurant franchisor MTY Food Group, ahead by 65.5 per cent. Over all, the portfolio posted an advance of 23.6 per cent, excluding dividends. That trounced the S&P/TSX composite index, which rose 4 per cent over the same period, also excluding dividends.”
Globe and Mail recently performed the screen again, Heinzl says. This time it found just three stocks that pass both the Lynch- and Buffett-inspired models. Among them: Home Capital Group. To see the others, click here.