Legendary investor Peter Lynch advised investors to analyse companies’ balance sheets when investing in 2023 while dismissing fears of recession and a banking crisis.
Lynch managed the Magellan Fund at Fidelity Investments for 13 years, averaging a compound annual return of 29.2%. It is one of the best 20-year returns by any mutual fund in history.
Unsurprisingly, Lynch is considered the best money manager in history, growing the Magellan Fund from $18 million to $14 billion.
Lynch retired at 46 after managing the Magellan Fund for 13 years.
Throughout his career, Lynch has been committed to helping the average retail investor beat the market through his books “One Up on Wall Street”, “Beating the Street”, and “Learn to Earn”.
These books teach investors how to analyse companies and industries and understand the fundamentals of any business.
For Lynch, the most important rule when investing is knowing and understanding the company you own.
In a 1997 speech, Lynch said, “If you can’t explain to an 11-year-old in two minutes why you own a stock, then you shouldn’t own it.”
He also claimed that good companies could be found anywhere, and so long as you understand the industry, there is no reason to avoid stocks commonly seen as ‘boring’.
How to invest in 2023
Lynch said, “It is sad when people are careful when buying a refrigerator or an aeroplane ticket, yet do not extend that caution to buying stocks.”
Investors must be careful when investing and understand what they are buying.
In particular, Lynch urged investors to study a company’s balance sheet before investing in it and ask themselves, “What is the reason this stock should be higher?”.
“The sucker’s going up is not a good enough reason.”
Lynch also encouraged investors to look for something different, as good companies can be found anywhere.
He estimates that he probably bought 15,000 individual shares in his 13 years managing the Magellan fund as he was constantly looking for new companies to invest in.
“If you look at ten companies, you will find one that is mispriced. Looking at 20, you will find two… the person that turns over the most rocks wins.”
Simply put, the investor studying more companies will find more investment opportunities.
Recession fears are overblown
Lynch dismissed fears of a recession in the United States, claiming it would be the most predicted recession ever.
“We have had 13 recessions since World War II, and we have had 13 recoveries”.
There is always something to worry about, “I would be worried if somebody did not bring up something to worry about”, said Lynch.
America’s banking system has improved markedly since 2008/2009, with many having much stronger balance sheets and higher liquidity levels.
However, there will be failures, even in a sound banking system – “that is the nature of it”.