In the long run, stocks rise more than they fall

As Peter Lynch might say, you've got to hold 'em to profit when they go up

May 19, 2002|By KNIGHT RIDDER/TRIBUNE

If you are certain that the stock market is not to be trusted, with its accounting scandals and its everyday risks, then pull out before the next crash. If the Social Security system will fail soon and if inflation will reignite, if interest rates are set to skyrocket and upset everything, if higher gasoline prices persist, then stash that cash.

But, if you need a break from Enron and Andersen and the rest of today's economic fears, then read on. Because a few minutes with Peter Lynch, probably one of the best stock-pickers of our time, will help you rediscover the classic case for owning stocks.

Fears are real, but they're not the only or even the most important basis for investing. If stocks scare you, then the advice is plain and simple: "Put your money in the money market or buy government bonds," Lynch says. "If you are not confident in the stock market, then you should not be there."

Lynch was the portfolio manager of Fidelity Magellan Fund, the best-performing mutual fund in the world when he headed it from May 1977 to May 1990. Today, he's vice chairman of Fidelity Management & Research Co., the advisory arm of Fidelity Investments in Boston. He's also a familiar figure in Fidelity's advertisements. And he has written a couple of best-sellers.

Lynch seems unshaken by recent business scandals and the market's march to nowhere.

If you're focusing only on a few months, you're not on the same track Lynch is.

"Everybody says they're a long-term investor, but long-term investing is not one year," he said. "It's five years or 10 years or 20."

It's not as if these are the first business or accounting scandals we've encountered. "There's always fear," Lynch said.

And there are always down markets, too. You have to expect them. The rest of the time, stocks tend to go up. It sounds too simple, but what Lynch is saying is borne out by data such as that Ibbotson Associates published recently in its 2002 yearbook.

In 74 years of stock trading data, large growth stocks have shown a positive return 54 times, if you look at it in one-year holding periods. If you go to five-year holding periods (and they overlap), the number is 64 out of 70. If you go to 10-year overlapping holding periods, you get positive returns 63 out of 65 times. The numbers are a little less favorable in 15-year and 20-year periods.

Ibbotson also looked at small stocks, growth and value, and large value stocks. The worst case was a one-year holding period for small growth stocks, which showed a positive return 49 times out of 74. These aren't odds or predictors. They don't erase the two years of down markets we've just experienced. They don't make it any easier to pick good stocks. They don't guarantee a thing.

But they remind you that, as Lynch said, good companies grow, and their profits and stock prices tend to follow. You have to select well. It takes research, study, work and enough diversification so that your mistakes won't kill your portfolio.

Lynch said he still loves to find those good companies and to analyze them.

You can't count out the value of innovation. "Who knew of Wal-Mart or Target 20 years ago?" he pointed out.

But how can the ordinary investor know whether there's something fishy going on in a company's books? Shouldn't the government step up oversight? "You can't legislate morality. You can't legislate integrity," he said.

Looking at the downside, he noted that "you can only lose 100 percent on a stock, but you can make 50 times or 60 times or 100 times your money."

"We're in an ugly period" in this economy, Lynch said. "Clearly, we had a down year in 2001. The economy was weak before Sept. 11 happened, then it dropped," he said. "Would you have thought, six months ago, that the market would be better now?"

Surprises do happen.

As Lynch points out, what would you have made of a time when 50,000 U.S. troops were readying for battle in the Middle East, the banking system was in poor shape, commercial real estate was wobbly, there was a recession, and oil prices were rising? That was in 1991, one of the best bull market years.

In the extreme, focusing on the negatives in the market can be downright silly. Imagine someone listening to the news in the morning and learning that stocks in Japan had tanked. "You hear the Nikkei is down and your day is ruined. It's 7:15 a.m.," he said with a smile.

Negatives and fear are part of the economic landscape, much as recessions are.

Those, Lynch feels, have been cushioned by such buffers as the Social Security system, federal insurance for bank accounts, the economy's shift away from manufacturing and into services, the emergence of the two-earner family that tends to hold onto at least one job during a downturn and a flexible Federal Reserve that lowered interest rates. By contrast, in the 1930s it raised rates in troubled times.

The key to this peculiar time, in which manufacturing has suffered but consumer spending has not, has been job creation.

While the headlines focus on how many jobs have been lost, Lynch focuses on the 40 million jobs that have been added to our economy in the past 20 years. That compares with virtually no net new jobs in the 1990s in Europe.

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