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Author: gocanucks Big red star, 1000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 41315  
Subject: Notes from Lynch meeting Date: 3/23/2007 1:21 PM
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My favorite perk of the job is we get to sit down with Lynch. Here are some unedited notes from a recent meeting. Most are covered in his books, but there were a few interesting nuggets.

Stock picking and portfolio management:
• Will look at 1000 companies a quarter inch deep, and drill down on maybe 20. Some will jump out at you, and the more you look, the better.
• Any 30 stocks (typical number for average analyst coverage), 28 are holds.
• If I like 10 stocks the best, will put equal weighting in each stock, as the one that will go up the most will always be the surprise.
• Does not believe in “good management” – it is important to business, but the odds of analysts figuring that out is slim to none. Most of what we can do is look at the track record and recent results, which could have been seeded by some other people's moves 7-8 years ago. Prefer good business over good mgmt. Used the example of Toys R Us at 4 stores, didn't matter whether it was run by idiots or a team of Gates/Welch.
• Stay away from 10% grower at 8x PE (traps). Want to own 25% grower at 40x PE. Simple math of compounding.
• Aside from good growth companies, he likes industries that went from terrible to bad. Used the Chrysler example again. When company went from losing $6 to losing $2, market didn't care, that's when he started buying. When company went from losing $2 to making $2, stock tripled. In 1982, 32% of his portfolio companies were losing money (pointed out to him by Pension people at Kodak who are very sharp people). As long as the company is not in risk of bankruptcy (he waited for Chrysler to get loan from government before buying and after the stock went from $2 to $4.5), he doesn't mind.
• On the flip side, when things go from great to less good, he will trim down and put money in improving stories -- “this is what portfolio management should be”.
• Just because a stock is cheap, doesn't mean it will work. His first recommendation at the firm was a disaster – apparel manufacturer caught in a change in fashion, despite net cash and low multiple, inventory was worthless, and the company went bankrupt in a year. Also used BRK example below net net.
• Not interested in stocks that has 30% upside and 30% downside.
• Made a lot of money trading stalwarts for 30% gains. Believes you have to be aggressive with these conservative/steady companies.
• Never care about turnovers (even when transaction cost 15c/share), as long as he puts money into good ideas/great stories.
• Used to be at office 7am on Saturday for 11 straight years.
• If a company is doing better than you expect and your bias was to avoid it, chances are other people think the same way, and you should buy it.
• Doesn't care about what the stocks have done, as long as earning estimate is substantially different from the street (used Home builders again).
• When talking to mgmt, always verify their statements. Always ask about competitors and make them explain why the company can earn above-average ROE.

Personal Portfolio and current market
• Does not believe in a concentrated portfolio -- own ~250 names in the PA now. Many are small dink positions (0.01%). I asked him about the Buffett statement of 50% return on a small portfolio. He smiled and said he is not making that kind of return in his PA.
• Once, 50% of PA was in S&Ls. Have to jump at these opportunities when market is mis-pricing the entire industry (happens once every 2-3 years)
• Will spend time in the sub-prime space, think there are opportunities, but could be difficult to distinguish bad/good operators (loan receivable quality tough to tell)
• Paychex is the business he likes, although PE is still an issue. On that note, think SBUX is a bit expensive, but GOOG looks cheap (considering buying). Don't own MSFT, think 10% downside, 30% upside.
• Believes beaten down techs (software) is a good space, as he thinks corporate spending will go up.
• Very bullish on natural gas, should be $10.
• On home builders, think they will do fine as top players have good b/s even after discounting the write-offs, and consolidating mom-n-pops will help. Compared to buying AZO in the consolidating auto parts industry.

US Economy is doing great
• Thinks economy is doing great. Don't understand why people start worrying about the recession one quarter after the last recession just ended. Thinks “4-year cycle” is garbage, as US economy could have gone 20 years without recession (thinks '90 recession was one of those out of the left field, wars, banking crisis).
• To get a recession, you need some industry way over the norm, but see none of that right now. instead, you have many industries under-spending for decades and just now catching up. (utility, freeway, agriculture, telecom, metals).
• Amazed that companies are buying back so much stock so “late” in the cycle, which indicates mgmt is more careful with capital allocation. I asked if this will cost the shareholders in the long run with less capex, he doesn't think so and believes mgmt is doing the right things returning cash when they are not sure about returns on spending.
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Author: MDCigan Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 25604 of 41315
Subject: Re: Notes from Lynch meeting Date: 3/24/2007 12:05 AM
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Thanks for posting this!

Some random thoughts:

• Will look at 1000 companies a quarter inch deep, and drill down on maybe 20. Some will jump out at you, and the more you look, the better.

Wow. That's amazing. I guess it depends on what exactly "a quarter inch deep" constitutes, but I'd love to know how much time and what process is used to look at 1000 companies in the most efficent way.

If I like 10 stocks the best, will put equal weighting in each stock, as the one that will go up the most will always be the surprise.

This is a very interesting point because it goes against what alot of other value investors often advocate which is to weight the "stronger" ideas with higher percentage allocations. What Lynch says here really strikes a chord with me, because my experience is that one can have a good process/system for evaluating stocks, but at the end of the day, it really is a crapshoot which ones will be the best performers over some reasonable time frame. I doubt that anyone can really rank their ideas from 1-10, and then have the subsequent performance even remotely match the ranking list.

• Does not believe in “good management” – it is important to business, but the odds of analysts figuring that out is slim to none. Most of what we can do is look at the track record and recent results, which could have been seeded by some other people's moves 7-8 years ago. Prefer good business over good mgmt. Used the example of Toys R Us at 4 stores, didn't matter whether it was run by idiots or a team of Gates/Welch.

Again, another interesting point, because it is at odds with some of the conventional advice. Many seem to stress that "evaluating management" is one of the most important things an analyst can do. I've always been highly skeptical that one can really do any sort of effective qualitative or subjective assessment of management. It seems to me that it does make sense to let the "numbers speak for themselves" in terms of managerial effectiveness.

• Stay away from 10% grower at 8x PE (traps). Want to own 25% grower at 40x PE. Simple math of compounding.

Did he say anymore on this? The academic research supports that low P/E stocks outperform high P/E stocks in aggregate over the long-term. Did he say more about why the 10% grower is a trap?

• Aside from good growth companies, he likes industries that went from terrible to bad. Used the Chrysler example again. When company went from losing $6 to losing $2, market didn't care, that's when he started buying. When company went from losing $2 to making $2, stock tripled. In 1982, 32% of his portfolio companies were losing money (pointed out to him by Pension people at Kodak who are very sharp people). As long as the company is not in risk of bankruptcy (he waited for Chrysler to get loan from government before buying and after the stock went from $2 to $4.5), he doesn't mind.

Did he mention any specific industries that right now are going from terrible to bad, or might be in the next 12-18 months? Could subprime fit this category in the future? I wonder if Countrywide Financial (CFC) is a good value here?

• Made a lot of money trading stalwarts for 30% gains. Believes you have to be aggressive with these conservative/steady companies.

I probably just need to reread my Lynch books, but did he mention the main criteria in evaluating attractive stalwarts?

• Never care about turnovers (even when transaction cost 15c/share), as long as he puts money into good ideas/great stories.

Again, interesting, because it goes against the conventional wisdom that minimizing turnover is in itself a proper objective.

• Believes beaten down techs (software) is a good space, as he thinks corporate spending will go up.

Did he mention specific names? I think Oracle just reported a good quarter.

• Very bullish on natural gas, should be $10.

Very interesting. Did he expand on why he believes this? This is of particular interest to me. I still have a 8% position in Chesapeake Energy (CHK), and I have seriously considered adding to it (Longleaf recently added more) or adding a second name in the industry (Apache, Anadarko, or Conoco Philips). Would love to hear if anybody has opinions on which of the three they find the most attractive. Buffett owns Conoco, and some other value guys own Apache and Anardarko. In any case, if you assume $10 has the long-term price, then these stocks are very undervalued with 50 to 100% upside.

• On home builders, think they will do fine as top players have good b/s even after discounting the write-offs, and consolidating mom-n-pops will help. Compared to buying AZO in the consolidating auto parts industry.

I've got XHB on my watchlist. It still seems to me it gets worse before it gets better. Did he say he was buying right now, or just watching?

http://stockcharts.com/charts/gallery.html?xhb

• Thinks economy is doing great. Don't understand why people start worrying about the recession one quarter after the last recession just ended. Thinks “4-year cycle” is garbage, as US economy could have gone 20 years without recession (thinks '90 recession was one of those out of the left field, wars, banking crisis).
To get a recession, you need some industry way over the norm, but see none of that right now. instead, you have many industries under-spending for decades and just now catching up. (utility, freeway, agriculture, telecom, metals).


I know macro isn't his thing, but you say here he thinks the economy is doing great. Did he mention at all or did anyone ask anything about the amount of credit and debt growth over the past couple of years (especially at the consumer spending level). I don't recall the exact figure but I think consumer spending accounts for 70% of the economy. How much of the recent growth was fueled by MEW withdrawals, and people borrowing because their assets (houses and stocks) kept appreciating.

Who am I to argue with Peter Lynch. I'm just some schmuck compared to him, but I don't know that you haven't had an industry over the norm. Sure seems like the homebuilding industry and everything connected qualifies. You had record amounts of new construction, lending, mortgage brokers, real estate agents, construction workers, etc. Is the worst behind us? I don't know. Will subprime be "contained"? I don't know. I'm just not sure about being sanguine that everything is great.























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Author: kahunacfa Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 25605 of 41315
Subject: Re: Notes from Lynch meeting Date: 3/24/2007 2:29 AM
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Thanks for posting this!

Some random thoughts:

• Will look at 1000 companies a quarter inch deep, and drill down on maybe 20. Some will jump out at you, and the more you look, the better.

Wow. That's amazing. I guess it depends on what exactly "a quarter inch deep" constitutes, but I'd love to know how much time and what process is used to look at 1000 companies in the most efficient way.

If I like 10 stocks the best, will put equal weighting in each stock, as the one that will go up the most will always be the surprise.

This is a very interesting point because it goes against what alot of other value investors often advocate which is to weight the "stronger" ideas with higher percentage allocations. What Lynch says here really strikes a chord with me, because my experience is that one can have a good process/system for evaluating stocks, but at the end of the day, it really is a crapshoot which ones will be the best performers over some reasonable time frame. I doubt that anyone can really rank their ideas from 1-10, and then have the subsequent performance even remotely match the ranking list.
- MDCigan | Date: 3/24/07 12:05 AM | Number: 25604


I probably look at close to one thousand companies each year a quarter or an eighth of an inch deep. For me, an eighth of an inch deep is to read a recent Value Line Report (Ignoring the Rankings), visit the company's web-page and maybe calling the Investor Relations(IR) Rep.

I find one to five new investment ideas to buy each year. My average holding period is three to five years; I have owned several companies for multiple decades. My "oldest" stock holding is Maui Land & Pineapple(MLP). I bought that in March 1972 - the month and year I left the "Islands" - Honolulu. I lived in Honolulu from January 1969 to March 1972. While there I was a Systems Analyst. Became more interested in Investing. Took this outstanding Investment course - http://www.uwasap.org. The founder of that course was my graduate program adviser - MS Finance & Economics 1976.

Kahuna,CFA

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Author: Metal27 Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 25606 of 41315
Subject: Re: Notes from Lynch meeting Date: 3/24/2007 3:03 AM
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• Stay away from 10% grower at 8x PE (traps). Want to own 25% grower at 40x PE. Simple math of compounding.

Did he say anymore on this? The academic research supports that low P/E stocks outperform high P/E stocks in aggregate over the long-term. Did he say more about why the 10% grower is a trap?


Ken Fisher addresses this question pretty effectively in his book "The Only Three Questions That Count", specifically de-bunking the academic research you mentioned along with a long list of other generally accepted investment proverbs.

Cheers,

Scott



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Author: SpocksBrainRtns Big gold star, 5000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 25608 of 41315
Subject: Re: Notes from Lynch meeting Date: 3/24/2007 8:38 AM
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my comments on your comments - just fwiw

I guess it depends on what exactly "a quarter inch deep" constitutes, but I'd love to know how much time and what process is used to look at 1000 companies in the most efficient way.

I think you have to realize that Lynch was the director of research before taking over Magellan and can command the entire resources of that organization to learn what he needs to know. His Worth articles clearly show the depth of his knowledge, so I don't think these things are particularly surprising.

What Lynch says here really strikes a chord with me, because my experience is that one can have a good process/system for evaluating stocks, but at the end of the day, it really is a crapshoot which ones will be the best performers over some reasonable time frame. I doubt that anyone can really rank their ideas from 1-10, and then have the subsequent performance even remotely match the ranking list.

Well, keep in mind Lynch worked in a mutual fund structure which has its own limitations on holding sizes and the like. The books & Money Masters profiles mentioned him doing this but then paring down and up based on the continuing story lines. Thus, he might start out with this many at equal sizes but it should adjust over time.

Did he say anymore on this?

pg 217 Growth Rate, One Up

I probably just need to reread my Lynch books, but did he mention the main criteria in evaluating attractive stalwarts?

<Sigh> - it is a whole section in One Up. (Historical and current pe ratio)

Again, interesting, because it goes against the conventional wisdom that minimizing turnover is in itself a proper objective.

Again, must be placed in context of the mutual fund structure and the amount of ideas that came across his desk. The advice is pretty simplistic - turnover is not in an of itself a "bad" thing as we all know, but senseless turnover or senseless holding is certainly the wrong course. The idea is the thing - to continually improve the positioning the portfolio.

I know macro isn't his thing, but you say here he thinks the economy is doing great.

fwiw, I think again you have to remember who he is - this isn't some guy on the beach in a one-room office with a dog outside the door. This is a big guy at Fidelity, perhaps the premier asset manager in the country. Imagine how much information comes across over time, in how many industry - macro may not be his thing, but Lynch was famous for the specific economic/macro nuggets in those Barron articles.


Fwiw, reading this article was sublime in a way. I don't know the Lynch guy in person but I know the book Lynch well enough to have written 90% of what gohockey wrote up.

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Author: SpocksBrainRtns Big gold star, 5000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 25609 of 41315
Subject: Re: Notes from Lynch meeting Date: 3/24/2007 8:42 AM
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Ken Fisher addresses this question pretty effectively in his book "The Only Three Questions That Count", specifically de-bunking the academic research you mentioned along with a long list of other generally accepted investment proverbs.

no offense, but that book was a POS.


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Author: TMFTomG Big red star, 1000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 25610 of 41315
Subject: Re: Notes from Lynch meeting Date: 3/24/2007 9:01 AM
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The one area where I disagree with Lynch is in management evaluation. This is, as I see it, the primary differentiating factor between Lynch and Buffett -- that which makes Buffett a grand master and Lynch a master. The stories of Buffett buying companies after five hours of due diligence, in my opinion, are because Buffett knows how to evaluate ownership and leadership structures quickly. I believe this is core to the Buffett line, "I'm a better businessman because I'm an investor, and a better investor because I'm a businessman." Certainly, Peter Lynch has had a ton of "business" experience, but nothing compared to that of Warren Buffett running Berkshire. That makes Lynch's approach more transaction heavy and less reliant on finding ownership cultures with leaders managing the business as if it's their only family asset for the next 100 years. Lynch isn't searching for those factors at all. I submit that Buffett looks for them upfront, as a gating variable.

I think management evaluation adds as much as 5% per year to Buffett's annualized returns which Lynch misses out on. Factor in the lower turnover, and I think you add a few more percentage points to Buffett. Where I think Lynch makes up ground on Buffett is in his willingness to buy the rapid growers at loftier multiples. Lynch's approach reminds me of a disaster I dodged in the early 1990s. I had been shorting successfully and repeatedly Bed Bath and Beyond, at a multiple of 45-50, growing cashflow at 30% per year. I repeatedly made 20-25%. Eventually, the gap of short-term overvaluation narrowed, and I moved on. Ten years later, Bed Bath & Beyond had grown 12 times in value. That's the power of high growth compounding over long periods. The other compelling factor about BBBY? Their two founders own a slug of stock, had already made their fortune, but remained full-time with the business they knew and loved. Buffett met Lynch -- ownership meets sustainable high growth -- and thank God I stopped shorting it. Too bad I didn't buy. :)

Thank you for the Lynch notes -- always interesting. He is truly one of America's all-time greats.

Tom Gardner

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Author: zenbro Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 25611 of 41315
Subject: Re: Notes from Lynch meeting Date: 3/24/2007 9:06 AM
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"The one area where I disagree with Lynch is in management evaluation"

Yeah, that comment blew me away too. With small caps especially,
management is crucial. ( large caps too, for that matter )

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Author: SpocksBrainRtns Big gold star, 5000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 25612 of 41315
Subject: Re: Notes from Lynch meeting Date: 3/24/2007 9:50 AM
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The one area where I disagree with Lynch is in management evaluation. This is, as I see it, the primary differentiating factor between Lynch and Buffett -- that which makes Buffett a grand master and Lynch a master.

While I have a bias, I think you are missing the point. Let's reread:

Most of what we can do is look at the track record and recent results, which could have been seeded by some other people's moves 7-8 years ago. Prefer good business over good mgmt. Used the example of Toys R Us at 4 stores, didn't matter whether it was run by idiots or a team of Gates/Welch.

and

When talking to mgmt, always verify their statements. Always ask about competitors and make them explain why the company can earn above-average ROE.

So what does this mean on practical terms?

*does it mean Lynch would ignore the options history with a business? of course not
*does it mean Lynch would ignore management goals for the business?
of course not
*does it mean Lynch would not verify compensation schedules?
of course not
*does it mean Lynch won't follow capital allocation plans?
of course not

What does it mean, exactly? Does it mean that simple saying that you'd rather have a good business than good management? That you rather own a business that a monkey could run cause eventually a monkey will run it? Yes. Buffett makes these statements. The Toys'r'Us example makes this clear - at the time, that business was so strong that management was less important. Does that mean management wasn't important? Of course not. Remember, this was a private conversation between Lynch and one of his employees - there is a great deal that wouldn't need to be explained in this situation. No one in their right mind would read anything Lynch has written and suggest that 'management is irrelevant'.

This is, as I see it, the primary differentiating factor between Lynch and Buffett -- that which makes Buffett a grand master and Lynch a master.

no offense, but the distinction is utterly irrelevant.

Certainly, Peter Lynch has had a ton of "business" experience, but nothing compared to that of Warren Buffett running Berkshire. That makes Lynch's approach more transaction heavy and less reliant on finding ownership cultures with leaders managing the business as if it's their only family asset for the next 100 years. Lynch isn't searching for those factors at all. I submit that Buffett looks for them upfront, as a gating variable.

again, no offense, but it would have been interesting to see WEB try to manage a multi-billion dollar portfolio where investors could take their money on on a moment's notice and he had to deal with restrictions on sizes and ownership


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Author: gocanucks Big red star, 1000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 25615 of 41315
Subject: Re: Notes from Lynch meeting Date: 3/24/2007 1:07 PM
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GM had answered most of the questions. Quite frankly, I may be stepping on a fine line when I post these notes, but I felt most of the stuff was covered very well in his 2 books.

"Wow. That's amazing. I guess it depends on what exactly "a quarter inch deep" constitutes, but I'd love to know how much time and what process is used to look at 1000 companies in the most efficent way."

He has done this for over 40 years, and I think it won't be any stretch to say he knows most of the non-microcap companies "a quarter inch deep". Heck, he could have well invested in half of the companies at one time.


"Stay away from 10% grower at 8x PE (traps). Want to own 25% grower at 40x PE. Simple math of compounding.

Did he say anymore on this? The academic research supports that low P/E stocks outperform high P/E stocks in aggregate over the long-term. Did he say more about why the 10% grower is a trap?"

I think his point is simply he would like to own a fast grower, provided that he could be sure of the future growth. I neglected to mention that he stressed the 25% grower "for a few years". Obviously determining how long/sustainably they can grow is probably what differentiates him from an ordinary growth investor.

"Did he mention any specific industries that right now are going from terrible to bad, or might be in the next 12-18 months? Could subprime fit this category in the future? I wonder if Countrywide Financial (CFC) is a good value here?"

I asked him about subprime, and his response was if he had time in the next month, subprime would be the area he would look at.

"• Made a lot of money trading stalwarts for 30% gains. Believes you have to be aggressive with these conservative/steady companies.

I probably just need to reread my Lynch books, but did he mention the main criteria in evaluating attractive stalwarts?"

Valuation. Valuation. Valuation. He would trade these names just on valuation if the story does not change. I asked him what about the large caps which have seen multiple compressing over the last few years. He said it all depends on the starting multiples. He couldn't understand why everyone was so high on PFE/MRK in 2000 -- compared them to IBM in 80's when every PM had to own it. PG on the other hand did ok in the same time period.

On natural gas, nothing special as far as I can remember. basically supply & demand (need to replenish supply 20% a year, and the relationship between oil and gas).

On economy, I didn't bother asking him about the consumer, coz I was virtually sure of his response -- never bet against US consumers. Like you said, he never spends much time on macro stuff anyway (not that he doesn't know or does not have the resources).

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Author: gocanucks Big red star, 1000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 25616 of 41315
Subject: Re: Notes from Lynch meeting Date: 3/24/2007 1:22 PM
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"The one area where I disagree with Lynch is in management evaluation. This is, as I see it, the primary differentiating factor between Lynch and Buffett -- that which makes Buffett a grand master and Lynch a master. "

"I think management evaluation adds as much as 5% per year to Buffett's annualized returns which Lynch misses out on. Factor in the lower turnover, and I think you add a few more percentage points to Buffett."

Obviously I am biased, but I don't know how you reached your conclusion. Lynch may put less emphasis on evaluating management, but that doesn't mean he doesn't pay attention to it -- just read his two books.

As far as 5% per year, all I know was Lynch compiled a 29% compounded return over 13 years vs. 22% over 40 years for Buffett. I could be wrong, but I would venture to guess that their return was probably more of a function of AUM rather than other factors --- Buffett's early years probably produced higher returns when he placed less emphasis on management. Also at the end of his tenure, Lynch was running a $10 billion mutual fund and still beating the market, which in today's money would be close to a $100 billion fund. Just think about that for a second.

From all what I have read, Lynch and Buffett had utmost respect for each other. I just cannot understand why people have to judge one is better than the other. Both are my heroes.

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Author: SpocksBrainRtns Big gold star, 5000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 25618 of 41315
Subject: Re: Notes from Lynch meeting Date: 3/24/2007 2:47 PM
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Buffett's early years probably produced higher returns when he placed less emphasis on management.

I posted this reference before which clearly supports this:

http://boards.fool.com/Message.asp?mid=19015454

-----------------------------------------------------------------

In the 89 Annual in the midst of his famous (to us at least) examples of the virtues of holding a terrific investment over the long term vs. turning over a terrific investment each year, Buffett makes this comment:

We have not, we should stress, adopted our strategy
favoring long-term investment commitments because of these
mathematics. Indeed, it is possible we could earn greater after-
tax returns by moving rather frequently from one investment to
another. Many years ago, that's exactly what Charlie and I did.


I know Buffett has gotten more dogmatic on this issue but there it is: a rather candid statement that turnover wasn't an issue for them, after-tax return was, regardless of how that was accomplished.

You can easily make the case that it was Buffett's capital size and practice of buying entire operating companies that led to the hold forever dogma to which he is associated with. I'm not knocking the advice, have a lot to learn from it myself, but there is room for other viewpoints. You can easily fall into the tendency to apply his philosophy so rigidly that you can't see a similar "root" philosophy in action because it doesn't 'look like Buffett'.

Supporting this view:

Now we would rather stay put, even if that means slightly
lower returns. Our reason is simple: We have found splendid
business relationships to be so rare and so enjoyable that we
want to retain all we develop. This decision is particularly
easy for us because we feel that these relationships will produce
good - though perhaps not optimal - financial results.
Considering that, we think it makes little sense for us to give
up time with people we know to be interesting and admirable for
time with others we do not know and who are likely to have human
qualities far closer to average. That would be akin to marrying
for money - a mistake under most circumstances, insanity if one
is already rich.


If you aren't rich already, if you aren't big enough to enter into those splendid relationships on a personal level, maybe turnover isn't the beast people think, though clearly everyone acknowledges the drawbacks associated with rapid sales. But you can be crappy with high or low turnover, and it isn't the turnover itself that makes you crappy; that can be achieved with any approach.

(just an opinion)

----------------------------------------------------------


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Author: SpocksBrainRtns Big gold star, 5000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 25619 of 41315
Subject: Re: Notes from Lynch meeting Date: 3/24/2007 2:52 PM
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As far as 5% per year, all I know was Lynch compiled a 29% compounded return over 13 years...

in the something I'd like to learn department, Lynch had mentioned somewhere (and for once I can find the reference) that in his privately managed accounts, where he didn't have to deal with the rules of diversified fund world, his returns were higher. I'd be curious how much higher if you have any way of finding out one day...

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Author: TheNajdorfDefens Big funky green star, 20000 posts Feste Award Nominee! Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 25621 of 41315
Subject: Re: Notes from Lynch meeting Date: 3/24/2007 3:20 PM
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The academic research supports that low P/E stocks outperform high P/E stocks in aggregate over the long-term. Did he say more about why the 10% grower is a trap?

Ken Fisher addresses this question pretty effectively in his book "The Only Three Questions That Count", specifically de-bunking the academic research you mentioned along with a long list of other generally accepted investment proverbs.


Most of those P/whatever research is flawed because it doesn't control for the overall price level of the stocks.

Low-priced stocks [in pure $-terms] outperform middle or hi-priced $ stocks. There is sufficient data proving this in academia land, and it also nicely fits with behavioral theory. [$5 is cheap! $50 is expensive... :( ]
So any P/E or P/B ratio is going to be badly distorted by the fact that investors may be buying on the "P effect" alone. Unless you separate them out, the conclusions are generally nonsense. That's why 'Low' P/S or E or B or etc all show the same conclusions historically.

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Author: stillwater9999 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 25623 of 41315
Subject: Re: Notes from Lynch meeting Date: 3/24/2007 4:08 PM
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Lynch is one of my favorites. Wish I would have read his books much sooner in my investing career.

On the p/e growth story - the way to go is to buy companies growing at 20-25% /year when the p/e is 8 (These do exist if you look hard enough -UUU......)

sw

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Author: 52758 Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 25627 of 41315
Subject: Re: Notes from Lynch meeting Date: 3/24/2007 7:57 PM
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Again the automatic recommend affix. This sort of self-congratulatory code is not desirable.
52758

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Author: Metal27 Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 25629 of 41315
Subject: Re: Notes from Lynch meeting Date: 3/25/2007 2:03 AM
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Ken Fisher addresses this question pretty effectively in his book "The Only Three Questions That Count", specifically de-bunking the academic research you mentioned along with a long list of other generally accepted investment proverbs.

no offense, but that book was a POS.


That's exactly what he expected you to say.




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Author: SpocksBrainRtns Big gold star, 5000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 25631 of 41315
Subject: Re: Notes from Lynch meeting Date: 3/25/2007 9:55 AM
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That's exactly what he expected you to say.

Yes, that's true! I actually have enjoyed Fisher's columns from time to time in Forbes. Plus, given his heritage, you couldn't help but have high hopes for this particular book. So what do you get? Well, obviously you like it, so that's good enough and I will say little else other than I didn't care for it (obviously), and think that in a year or two everything in it will be forgotten which is always the primary indicator of a book's usefulness. Of course, clearly the book has another purpose - to sell the Fisher empire. In fact, it becomes fairly evident that's really the ONLY purpose of the book, so if one choose to believe in him who am I to argue?



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Author: howardroark Big red star, 1000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 25632 of 41315
Subject: Re: Notes from Lynch meeting Date: 3/25/2007 1:15 PM
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Thanks very much for posting your notes.

If I like 10 stocks the best, will put equal weighting in each stock, as the one that will go up the most will always be the surprise.

Here are some Buffett comments on this issue from his year-end 1965 Partnership Letter:

The question always is, "How much do I put in number one (ranked by expectation of relative performance) and how much do I put in number eight?" This depends to a great degree on the wideness of the spread between between the mathematical expectation of number one versus number eight. It also depends upon the probability the probability that number one could turn in a really poor relative performance. Two securities could have equal mathematical expectations, but one might have a .05 chance of performing fifteen percentage points or more worse than the Dow, and the second might have only .01 chance of such performance. The wider range of expectation in the first case reduces the desirability of heavy concentration on it...The above might make the operation sound very precise. It isn't.





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Author: tytthus Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 25635 of 41315
Subject: Re: Notes from Lynch meeting Date: 3/25/2007 8:43 PM
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Naj said:

So any P/E or P/B ratio is going to be badly distorted by the fact that investors may be buying on the "P effect" alone. Unless you separate them out, the conclusions are generally nonsense. That's why 'Low' P/S or E or B or etc all show the same conclusions historically.

so i've spent all of about 8 seconds trying to decide if quintile or decile studies of P/whatever circumvent this, and nope...i'm not gonna figure it out on a sunday night.

but, P to 'whatevers' are low because the price has gone down and the 'whatever' has not. or the P hasn't changed much and the 'whatever' has gone up. both sound like reasonable places to look to put money.

best,
--tytthus (maybe if i read ken fisher?)

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Author: mklein9 Big gold star, 5000 posts Feste Award Winner! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 25636 of 41315
Subject: Re: Notes from Lynch meeting Date: 3/25/2007 9:57 PM
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but, P to 'whatevers' are low because the price has gone down and the 'whatever' has not. or the P hasn't changed much and the 'whatever' has gone up. both sound like reasonable places to look to put money.

Careful though if you look at too small a sample. If you take the 10, or 50, or maybe even 100 or more, lowest P/X stocks you will likely get a rather strange set of companies in bizarre situations. Some very low P/E businesses I've run across are companies going out of business and liquidating assets, for example. A better approach seems to be to throw out wild outliers and then look at the most attractive of the remaining. Where to draw that line isn't usually that obvious from a mechanical point of view.

-Mike

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Author: kahunacfa Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 25638 of 41315
Subject: Re: Notes from Lynch meeting Date: 3/26/2007 11:31 AM
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Ken Fisher addresses this question pretty effectively in his book "The Only Three Questions That Count", specifically de-bunking the academic research you mentioned along with a long list of other generally accepted investment proverbs. - Metal27 | Date: 3/24/07 3:03 AM | Number: 25606

I have never been a "Big Fan" of Ken Fisher or of his investment methodology. I have always been a "Value" investor or "Growth at A Reasonable Price"(GARP) investor. I may read his book, The Only Three Questions That Count, however.

My primary investment questions are: Is this stock slling for less than Net, Net Working Capital?, or failing that test, is this stock selling for significantly less than the Company's Intrinsic Value?, as determined by the Valuation Model I developed in 1977, and update and recalibrate from time to time.

Kahuna,CFA





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Author: UsuallyReasonabl Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 25642 of 41315
Subject: Re: Notes from Lynch meeting Date: 3/26/2007 2:30 PM
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Again the automatic recommend affix. This sort of self-congratulatory code is not desirable.

What does that mean? To whom was it addressed?

UsuallyReasonable


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Author: TheNajdorfDefens Big funky green star, 20000 posts Feste Award Nominee! Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 25643 of 41315
Subject: Re: Notes from Lynch meeting Date: 3/26/2007 3:08 PM
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From 1990-Sept 2006 inclusive, simply buying the bottom quintile, in dollar price-terms, of SPX stocks would have returned over 1.1% per year better than buying the entire index.

With extremely wide dispersion: In 1998 [remember those years?] big-priced stocks did 35% better. Wow! In 2003, the bottom quintile did, again, 35% better. Overall, an outperformance of 42% over the time period, which may [or may not] be worth the extra volatility to you.

Naj

ps Obvs to do such an analysis you need to use the correct 'raw' dollar price in your FDS download/data set from CompStat. Which is easy to do, it has it's own field, after all.

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Author: TheNajdorfDefens Big funky green star, 20000 posts Feste Award Nominee! Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 25644 of 41315
Subject: Re: Notes from Lynch meeting Date: 3/26/2007 3:14 PM
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Careful though if you look at too small a sample. If you take the 10, or 50, or maybe even 100 or more, lowest P/X stocks

Using solely SP500 stocks over several decades. My dataset is robust!

Where to draw that line isn't usually that obvious from a mechanical point of view.

Bottom 20%, or 100 stocks, seems like a robust, diverse, and easy starting point everyone can agree on. I'm not going to datamine and say bottom 78 or 112 stocks.

Again, this is one of those market 'anomalies' that will persist ad infinitum because of selection biases and heuristics inherent in human beings. Some easy examples:
http://quote.fool.com/chart.aspx?s=DYN&q=l&l=off&t=2y
http://quote.fool.com/chart.aspx?s=SUNW&q=l&l=off&t=2y
http://quote.fool.com/chart.aspx?s=GLW&q=l&l=off&t=5y
http://quote.fool.com/chart.aspx?s=VC

I remember when you couldn't give some of these stocks away.

Obviously cherry-picked [at random] by me, but it makes the point. There are 100 of these every year. Many, if not most of them, are temporarily 'oversold.' But I've got >1500 datapoints out of >7500 that prove me right, plus some academic studies to boot.

Naj



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Author: mklein9 Big gold star, 5000 posts Feste Award Winner! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 25646 of 41315
Subject: Re: Notes from Lynch meeting Date: 3/26/2007 5:20 PM
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Using solely SP500 stocks over several decades. My dataset is robust!

OK, certainly if you are restricting your universe to the S&P 500 then yes. And if you take even the lowest quintile of the entire market of tradable stocks, then that is fine also. The trouble occurs when you take the lowest 100 of the entire market, for example. You get a lot of really bizarre basket case companies.

-Mike

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Author: Metal27 Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 25652 of 41315
Subject: Re: Notes from Lynch meeting Date: 3/27/2007 2:28 AM
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That's exactly what he expected you to say.

Yes, that's true! I actually have enjoyed Fisher's columns from time to time in Forbes. Plus, given his heritage, you couldn't help but have high hopes for this particular book. So what do you get? Well, obviously you like it, so that's good enough and I will say little else other than I didn't care for it (obviously), and think that in a year or two everything in it will be forgotten which is always the primary indicator of a book's usefulness.


Spock,
Hey, I just quoted Fisher--I haven't decided whether I like him yet! I wasn't acquainted with the man before, so I'm doing my DD on him before I decide. He did pretty well destroy the P/E study, but I don't see any particularly practical effect. Both the study and his debunking have to do with the markets as a whole. I don't buy and sell markets, just stocks, and the market's P/E at the time is only one of many background factors.

I do enjoy someone with intelligence who comes at problems from a different perspective than anyone else, challenging conventional wisdom, and he certainly does that. His points seem to be well-reasoned and supported by fact, even if they are unpopular and doomed to be forgotten. At least for me, his book has been very thought-provoking.

Cheers,

Scott




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Author: SpocksBrainRtns Big gold star, 5000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 25725 of 41315
Subject: Re: Notes from Lynch meeting Date: 4/2/2007 11:12 AM
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Ken Fisher addresses this question pretty effectively in his book "The Only Three Questions That Count", specifically de-bunking the academic research you mentioned along with a long list of other generally accepted investment proverbs.

fwiw, I made it a point to check this out of the library again and re-examine it in case I'd taken too harsh a viewpoint. Well, after re-reading it again - in places, because Fishers uses a truly stunning amount of words to say a staggering small amount - I had the sensation of walking in black murky water up to my waist with no idea what was swimming underneath me. And I know this is a subjective opinion at best (because Fisher is not worth taking the time otherwise), but the only thing he succeeded in 'de-bunking' was my high opinion of his name.


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