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The investment strategies of Peter
Lynch and Warren Buffett were created with the set of knowledge
and experience unique to Peter Lynch and Warren Buffet. What has
worked for them may not necessarily work for the average investor.
* Extract written by André Gosselin published in his
book "Investir dans les titres de valeur".
"To beat the market", "To beat Wall Street", "To beat
the Dow-Jones": so many books about investments which promise you to reach this
objective which consists in getting a portfolio yield higher than the average.
The titles of some of the best-sellers published these last years in the United
States are enough to illustrate the importance of this stake in the investor
culture: Beating the Street (by Peter Lynch); Beating the Dow (by Michael O'
Higgins); The dividend investor: A safe and sure way to beat the market (by
Harvey Knowles and Damon Petty); How to retire rich: time-tested strategies to
beat the market and retire in style (by James O' Shaughnessy); The Motley fool
investment guide: How the fool beats Wall Street's wise men and how you can too
(by David and Tom Gardner). So many shock formulas which mean the same thing:
add the few points (2 or 3%) to your portfolio return which make the difference
between a golden retirement and a retirement dependent on the public system.
That can sound ridiculous for some people, but the
American investors remember the words of Albert Einstein who affirmed that the
compounded yields are the greatest discovery of the history of humanity. Here
is another example: a yield of 10% per year during 30 years, starting from an
initial investment of 10000$, can appear completely acceptable; however, at
this rate, the investor ends with an accumulated capital of 174500$ at the time
to retire, against 300000$, as it is well known, if he succeeds in reaching a
yield of 12% per year rather than 10%. A little 2% more in compounded annual
returns that makes a large difference after 30 years. All is relative, would
say Einstein, except financial mathematics.
The small American investors do not lack of models to
help implementing their project to beat the market. Warren Buffett, the
greatest living legend in the universe of finance and investments, is described
like one of the rare Americans to have become billionaire thanks to the stock
market. He has one of greatest fortunes of the United States and is preceded
only by Bill Gates, the president and founder of Microsoft, who is a personal
friend.
Buffett has never written any book about its investment
strategy but so many works and articles have been published about it that we
can say that its investment philosophy exerts an enormous influence on the
small American investors and their way of managing their portfolios. The
personality of Buffett, his simplicity, his modest way of life and his great
talent to popularize the art of the stock exchange investment have everything
to win their hearts. If the approach of Buffett has enabled him to be
multibillionaire, why wouldn't it make it possible to the average investor to
be simply billionaire? The myth of Warren Buffett is attracting, but his
strategy of investment, as simple as it is, is not within the range of
everyone.
Peter Lynch is another living legend of the investment
which was used as a model to thousands of small investors. Manager of the one
of the largest mutual funds of the United States (the Fidelity Magellan funds),
Lynch has delivered to the shareholders of his funds an yield of more than 20%
per year for 10 years during the 80s. He is also the author of three books on
the stock exchange which are as many best-sellers and which have contributed to
create one of the investment strategies among the most popular in the United
States. His books were translated into many languages, in particular in French,
German, Japanese, Korean, Swedish and Spanish. Lynch has taken its retirement
as manager of the Magellan funds in 1990, but he continues to be very active on
the public place and in the so-called investment popular education industry. He
regularly grants interviews to the financial magazines the most in sight, and
he has even taken part in the creation of a teaching software on the art of the
investment in the stock exchange.
The investment strategy of Peter Lynch or the one of
Warren Buffett is conceived for Peter Lynch and Warren Buffett. They are not
necessarily made for the average investor. It is a very creditable effort on
behalf of these two large investors to popularize, demystify, criticize and
transmit to the greatest number of investors the financial knowledge and the
elementary principles of the stock exchange investment. But, in my opinion,
this is not sufficient to protect or promote the sake of the small investors.
The investor who adopts the methods of Lynch or those of Buffett is far from
being assured that he will get, all things considered, the same returns as
them. He would be wrong to think that he is likely to beat the market if he
applies, strictly as they are, the strategies taught or practiced by these two
financial authorities. It is not because they worked for Lynch and Buffett that
they will be as effective for all the others.
I have read few critics on the investment strategies of
Warren Buffett or Peter Lynch. These people are untouchable, the equivalent of
an Abraham Lincoln, a Neil Armstrong or a Michael Jordan. Legendary characters
who can't be attacked since they have succeeded. Don't they personify the
American dream in all its splendor? Individuals who had started from nothing
and who, through work and of eagerness, had climbed to the top of the financial
pyramid. In fact, Those characters can hardly be attacked. They are remarkable
men, among the most uncorrupted, the most honest, the most accessible and the
most qualified from their profession. I agree, their success is phenomenal and
deserves the biggest respect.
Nevertheless, it is necessary to establish a
distinction between the individual and his system, to make the difference
between the professional and his investment philosophy. The stock exchange
analysis and portfolio management methods of Lynch and Buffett represent
serious threats to the average investor. It is necessary to shout it loud, and
to be quite aware of it. A minority of investors can undoubtedly succeed thanks
to these legendary strategies, but I am convinced that the big majority of
those who try these singular adventures are on the road to ruin.
André Gosselin
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