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But if you didn't understand the company, if you 're only buying because the stock price went from 26 to 16 and then back to 10, what would you do when it dropped nine? What would you do when it dropped eight? What would you do if it dropped seven? This is the problem people face: they sell stocks because they don't know why they bought them.
Then the price drops and they don't know what to do: flip a coin, take a walk around the block, what do you do? Today we're going to learn from one of the greatest investors in history. Peter Lynch was a legendary mutual fund manager at Fidelity Mellan Fan. He achieved an annual return of 29%, far outperforming the stock market for 13 consecutive years.
During that period, he grew the fund's size from $18 million to $14 billion. Then he retired young at 46, and now Mr. Peter Lynch is teaching us how to make millions during a stock market crash— something of utmost importance to know in the current economic conditions. I'll leave you with his words: you should study history, and history is what's important.
You learn that the market goes down. The math is simple: there have been 93 years, a century. This is easy to do. The market has had 50 declines of 10% or more. So, it has 50 declines in 93 years. That means once every two years the market falls 10%. We call this a correction, which means losing a lot of money quickly.
We call this a correction. So, 50 declines in 93 years means that approximately once every two years the market falls 10%. Of those 50 declines, 15 have been 25% or more. That's known as a bear market. We've had 15 declines in 93 years. So, every six years the market will have a 25% drop. This is all you need to know.
You need to know that the market is going to go down at some point. If you're not prepared for that, you shouldn't own stocks. And it's good when it happens. If you like a stock at 14 and it drops 6, that's great. You understand the company, you look at the balance sheet, and it's fine. You expect it to reach 22.
From 14 to 22 is excellent, from 6 to 22 is exceptional. So you take advantage of these declines; they're going to happen, nobody knows when they're going to happen, so you can take advantage of market volatility if you understand what you own. One of the things I find useful is that many times people buy based on a stock having dropped a lot, but how do you know how much further it can go?
I remember when Polaroid went from 130 to 100, people were saying, "Here's a great company with a great track record. If it ever goes below 100, just buy all the shares." And it did go below 100; many people bought under that premise, saying, "We have to buy." And after a year, it was at 18, and this comes without debt.
I mean, it was so overvalued that it went down on its own. I did the same thing in my first or second year with Fidelity. Kaiser Industries had dropped from 6 per share to 16. I thought, "How much further can it go? It's 16." So I think we bought Kaiser Industries on the US stock exchange at 14. I said, "You know, it's gone from 26 to 16, how much further can it go?" Well, when it got to At 10, I called my mother and said, "Mom, you have to look at this.
Kaiser Industries, I mean, how much lower can it go? It's gone from 26 to 10. Well, then it went down to six, then to five, then down to four, down to three, and when it was at three, I realized there's something very wrong here because Kaiser Industries owns 40% of Kaiser Steel, owns 40% of Kaiser Aluminum, owns 32% of Kaiser Cen, owns Kaiser Broadcast, owns Kaiser Salt Gravel, owns Kaiser Engineers, owns business after business, and they had no debt.
I learned this very early on. This might be a breakthrough for some people; it's very difficult to go bankrupt. If you have no debt, it's complicated. Some people can come close to that; it's a real achievement, but they have no debt, and the whole company at 3 is selling for approximately 75 million.
And at that point, it was equivalent to buying a Boeing 747. I said, there's something very wrong with this company selling for 75 million. I was a little premature at 16, but I said everything was fine, and eventually, it worked out. And what they did was give all their shares away to their shareholders.
They distributed shares, and You got around $50 per share, but if you didn't understand the company, if you were simply buying based on the fact that the stock had gone from 26 to 16 and then reached 10, what would you do when it reached nine? What would you do when it reached eight? What would you do when it reached seven?
This is the problem people have: they sell stocks because they don't know why they bought them. Then they go down and they don't know what to do. Now, if you flip a coin, walk around the block, you already know what to do. Are you worried about volatility in the financial markets today? Do you think something needs to be done to reduce it?
I love volatility. I remember back in 1972 when the market went down dramatically and Taco Bell went from $4 to $1. They had no debt, they never closed a restaurant. I started buying at seven, but I held it and it went down to one, and it was the largest position I ever held in 1978. Then it was bought at $2 by Pepsi Cola.
I think it would have gone up to 400 if they hadn't bought it. So I think volatility is great, but the market goes Human nature has n't changed much in 25,000 years, and some event will come out of nowhere and the market will go down or the market will go up. So volatility will occur and markets will continue to have these ups and downs.
I think it's a great opportunity if people can understand what they own. Basic corporate profits have grown approximately 8% per year historically. So corporate profits double approximately every 9 years. Therefore, the stock market should double approximately every 9 years. I do n't know what will happen in the next few months, but I do know what will happen in the next few years.
Then the market should double again in 8 or 9 years after that because profits will increase 8% per year and stocks will follow. And that's all there is to it. October has always been a special month. I remember in 1900, I was very, you know, very convinced that the market was not in trouble and I wasn't worried about things.
Karen and I had planned this golf holiday to Ireland. We were going to visit a course and rent a small house and then go along the We went to the west coast of Ireland to play golf, and we left on a Thursday night. The market dropped 55 points that day, which wasn't very good. The next day we arrived in Ireland, and because of the time difference, we made it through the day.
When I got back to the hotel, they called and said the market had dropped 112 points on Friday. I said to Caroline, "You know, I think if the market drops on Monday, we're going to have to come back." So we could stay there for the weekend. On Monday, the market dropped 580 points, and my fund went from being worth 12 billion to 8 billion.
That's quite something, you know, in just two trading days. I said, "At the end of this week, I'm not going to have any fun." There wasn't much I could do. I mean, there I was on Monday because the market wasn't open. You know, by 12 o'clock I was in Ireland; it was still 7 in New York. So we spent that day playing golf in the morning, and then we went somewhere, and we watched the market deteriorate.
I came back, and there was nothing I could do. There was just nothing I could do about it. So I came home and suffered like everyone else. Fortunately, I was very consistent when I ran Magella. In 13 years, the market went down nine times, and every time the market went down, Millan went down too. He did it nine out of nine times.
If you invest $0 in a stock, the most you can lose is $1,000. I've done that several times, but if you're right, you can make $5,000, $10,000, or $ 20,000 in this business. You don't have to be right one out of two times; you might be right one out of four times. It's a long way. The times you're right, you know the company is doing well; you know they're doing a great job, so you can make more money on the upside.
So I just throw these things out there, and now I'm going to flip a coin to tell you when the market will go to $6,000—this year or next year. Heads means it goes up. It's a two-headed coin; the market will go up next year. That's all I know about the stock. You'll be very satisfied in 10, 20, or 30 years.
This is It's important to ask yourself what I'm going to do when the market goes down because I've had audiences like this, larger audiences, and I'll say, how many people in the room are short-term investors? I've never seen one raise their hand. I mean, everyone is a long-term investor until the market goes down.
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