Thursday, November 15, 2012

Lessons in Contrarian Investing from Peter Lynch and Chrysler

This article is about famous portfolio manager Peter Lynch who headed the Fidelity Magellan Fund from 1977 to 1990. He began with $20 million in assets and grew into the largest fund with $13 billion in assets and still delivered over a 2,700% return during his time at the helm, over a 29% annual return. With such a large fund he may have actually bought more stocks than Samuel L. Jackson has starred in movies. Maybe. He is mistakenly known for his small-cap growth stocks. He invested in all kinds of industries and companies. Many of his investments like buying Volvo when it was selling for only its cash in the bank would be considered more value oriented. One of his keys to his success, he told Louis Rukeyser of Wall Street Week was he saw 200 companies and checked out 700 annual reports a year.

In the Spring of 1982 most professional money managers thought Chrysler the then number three auto maker was going to go bankrupt. Lynch thought otherwise and was not scared to go against the crowd. He did an enormous amount of scuttlebutt in companies. Seeing $1 billion on Chrysler's balance sheet in cash and government loan support, combined with great new products he bet against other investors fears in the hated automaker. He put the maximum 5% of his assets into Chrysler common stock. He said he would have put up to 15 to 20% if he could have.

Chrysler doubled after eight months thanks largely to the first mini-van and was a 50 bagger(increased 50 fold) by 1987. What can we learn from all this? By not making decisions based on what others are doing and using good fundamental analysis to find cheap beaten down stocks is a good foundation to investment success.

"Stockpicking is both an art and a science, but too much of either is a dangerous thing. A person infatuated with measurement, who has his head stuck in the sands of the balance sheets, is not likely to succeed. If you could tell the future from a balance sheet, then mathematicians and accountants would be the richest people in the world by now."

-Peter Lynch

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