Lynch: Old-fashioned Legwork Is Key to Good Investing

AT a time when millions of individual investors have fled the stock market for alternative investments such as bonds, Peter Lynch remains a true believer in equities.

For good reason: As chief investment manager of Fidelity Investments' Magellan Fund for 13 years, Mr. Lynch watched Magellan become the most successful equity fund in the United States, reaching $13 billion in assets and 1 million shareholders. Working extremely long hours - and thinking stocks around the clock - Lynch established a track record for investment performance that will probably not soon be broken.

Since retiring from Magellan in 1990, Lynch has become a media superstar. His 1990 bestseller, "One Up On Wall Street," is generally considered one of the best books on picking stocks. Now, Lynch has produced another excellent book.

"Beating the Street" may not be quite as useful as his earlier work, but it is just as much fun to read. Lynch is not only a good stock-picker; he's a born polemicist (for stocks), although part of the credit belongs to his co-author, John Rothchild, who also collaborated on "One Up." Mr. Rothchild is a financial writer.

The Lynch approach to investing is best summed up as "doing your homework" - and putting your money in common stocks "for the long haul."

A word about the latter point: "Gentlemen who prefer bonds don't know what they're missing," writes Lynch, in one of the many maxims that pepper his book. He's correct.

As Lynch notes, 90 percent of all investment dollars in the US are parked in the bond market, certificates of deposit, and money market accounts. Yet, over time, equities outperform these alternatives. The reason why is obvious: The US has consistently been an expanding economy. As US companies expand, the value of their equities expand.

The problem is that stock markets tend to have dips along the way. As Lynch notes, stock markets tend to undergo corrections every few years - he counts "40 scary declines of 10 percent or more" in the past 70 years. That explains why so many investors, particularly older people, seek the relative steadiness of bonds or bank CDs.

Market declines also largely explain the phenomenal popularity of mutual funds, where individuals pool their investment assets and leave the management to professionals.

As Lynch notes, there are more mutual funds than companies listed on the New York Stock Exchange and the American Stock Exchange.

Mutual funds don't take away the element of risk; but they help level the playing field for small investors. Lynch has an excellent chapter on selecting funds. He likes a mix of growth funds, value funds, and blue-chip funds.

But Lynch wants the investor to know that with old-fashioned legwork he or she can also pick promising stocks and put together a successful portfolio.

Lynch believes in solid investigative work: visiting the company, or its stores; talking to workers; reading balance sheets. Alas, most people don't have the time or contacts to discover tomorrow's Microsoft. Thus, for most Americans, a mutual fund, or company profit-sharing plan, may make more sense than hand-picking their own portfolio.

"Beating the Street" is held together with what Lynch calls "Peter's Principles," - humorous guides to life and investing. Principle No. 1 involves finding the proper balance in life: "When the operas outnumber the football games three to zero, you know there is something wrong with your life."

My personal favorite is No. 3: "Never invest in any idea you can't illustrate with a crayon."

Lynch has now written two genuine classics. But in reading authoritative how-to-do-it investment guides, one shouldn't forget that while one can "beat the street," many sophisticated investors have also been humbled by the street. For someone with limited resources, that's worth remembering.