NEW YORK (TheStreet.com) -- Last week I shared a profile of growth stock investor Warren Buffett of Berkshire Hathaway (BRK.A) - Get Report. The Oracle of Omaha made his mark in the investment world by identifying companies with strong business models that can generate long-term profits.
This week we'll consider another growth investor who has made a significant mark in the investment world during the past several decades. He has his own approach to stock-picking and has influenced many of today's most successful and promising fund managers.
At ten years old, Peter Lynch worked as a caddy at Brae Burn, an exclusive golf club outside Boston. There he met many leading executives and picked up his first stock tips. He continued to caddy through high school and college at Boston University, where the young man studied history, psychology and philosophy.
He bought his first stock,
Flying Tiger Airlines
at $7 a share as a sophomore in 1963. The stock did well -- largely because the Vietnam War came along -- and Peter made more than 500% on his investment over the next few years.
Peter's caddying clients at the Brae Burn included D. George Sullivan, president of
. Sullivan urged Lynch to apply for a summer internship at the company. Peter landed a spot and spent the summer after his college graduation at Fidelity. The firm put him to work researching companies.
Peter's profits from Flying Tiger helped pay for his graduate work at the Wharton Business School. He spent two years as an artillery officer in the army and went to work for Fidelity upon his release. He spent five years as assistant research director, and in 1975, the firm made him director of research. In 1977, he took the reins of the
Fidelity Magellan Fund
The rest is history. The fund gained 29% annually and grew from $20 million in assets to $14 billion by the time Lynch retired from the fund in 1990 at the age of 46. If $10,000 was invested in the Magellan Fund at the start of Lynch's tenure, it would have accumulated more than $288,000. That's impressive, especially considering that the same amount invested in a fund that matched the gains of the
over the same period would have grown to only about $65,000.
Lynch became a household name during the bull markets of the '80s when his face appeared on countless magazine covers.
Lynch played a leading role in shaping the Fidelity approach to growth stock investing -- a bottoms-up, research-intensive approach that has served Fidelity and its shareholders well during the past three decades. Lynch was a mentor to many of Fidelity's leading fund managers, including some of the men and women who run the firm's top funds today. Along the way, he's also managed to co-author a couple of superb investment books,
Beating the Street
One Up on Wall Street
Lynch has become associated with the idea that investors should buy what they know from their work and their everyday lives. In fact, Lynch himself identified some of his most successful stocks by investing in shares of firms that made products he spotted at the grocery store or the mall.
However, liking the product isn't enough. Lynch once put together a list of attributes he looked for in a stock:
It sounds dull -- or ridiculous.
Growth stock investors traditionally gravitate toward glamorous industries and companies. Such companies often have little more than a story to sell and that makes them potentially dangerous. Lynch made his name investing in companies such as
Bob Evans Farms
It does something boring or unpleasant or downright depressing.
Lynch cited examples such as
, which makes cans and bottle caps, and
Service Corporation International
, which products for funeral homes.
Lynch liked stocks that nobody else liked at the time. He was thrilled when he could find shares of a promising company ignored by Wall Street analysts and other mutual funds or investment firms. That sort of neglect meant there was still plenty of room for the stock price to increase -- assuming the underlying company could deliver rising earnings over time.
It's in a no-growth industry.
Lynch was scared of high-growth industries. He believed that high-growth industries are hotbeds of competition -- and everyone knows that competition makes it hard for a company to sustain superior earnings growth.
It's got a niche.
So what made Lynch a growth investor? For starters, he looked for companies that could deliver superior growth and he found them. He found many of his favorites among firms that occupied a particular market niche that was relatively easy to defend from competitors. For instance, he liked companies that owned rock pits.
Lynch also liked drug companies because their patents made them niche businesses. He also liked companies with brand names such as
. The bottom line: it's very hard to compete with a business that has a good niche.
People keep buying the company's products.
Lynch didn't want to own a company that made the latest toy. He wanted a company that made drugs or soft drinks or cigarettes or razor blades.
It benefits from technology.
Lynch typically avoided technology companies that had to compete with each other by lowering prices -- but he liked companies that could benefit from those falling technology prices. If he heard about a new supermarket scanner, he might buy supermarkets rather than the company making the scanner.
Fortunately, you don't have to be an investing genius yourself to reach your own investment goals. Instead, you can rely on the stock-picking skills of first-rate fund managers -- many of whom have learned the lessons of Peter Lynch and other masters. That said, the more you know about investing, the more confidence you'll have when you're making judgments about your portfolio of funds or other investments.
-- written by Don Dion in Williamstown, Mass.
At the time of publication, Dion had no holdings in the funds mentioned.
Don Dion is president and founder of
, a fee-based investment advisory firm to affluent individuals, families and nonprofit organizations, where he is responsible for setting investment policy, creating custom portfolios and overseeing the performance of client accounts. Founded in 1996 and based in Williamstown, Mass., Dion Money Management manages assets for clients in 49 states and 11 countries. Dion is a licensed attorney in Massachusetts and Maine and has more than 25 years' experience working in the financial markets, having founded and run two publicly traded companies before establishing Dion Money Management.
Dion also is publisher of the Fidelity Independent Adviser family of newsletters, which provides to a broad range of investors his commentary on the financial markets, with a specific emphasis on mutual funds and exchange-traded funds. With more than 100,000 subscribers in the U.S. and 29 other countries, Fidelity Independent Adviser publishes six monthly newsletters and three weekly newsletters. Its flagship publication, Fidelity Independent Adviser, has been published monthly for 11 years and reaches 40,000 subscribers.