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so you're trying to say some companies might have been overpriced at 60 and all they did was go to 50 and say big deal so you're trying to find companies you liked anyway right now you liked them and now they've had a haircut that's what you would do you not not a like it went from overpriced to fairly priced something was fairly priced at the start of this exercise and then had a very you know a five for four sale you know is highly regarded as one of wall Street's legendary money managers he ran Fidel's mellan fund from 77 to 90 at the end of his 13-year Helm it was up over 2700 and had become the world's largest mutual fund he remains On The Board of Trustees at the Fidelity group and his vice chairman of fidelity management and research his new CD rum is called the stock shop with Peter Lynch and its strategies to invest in the stock market with confidence all the profits for this go to charity I think he joins me now to talk about the remarkable record volume day on Wall Street and other matters of investing and I am very pleased to have him back at this table welcome back hey Charlie good to see you it's smart of me smart of me to schedule you on a day like this three months ago I said when you want Lynch to come in I said let's get him on Tuesday something's going to happen in the market that week and so here we are glad to be here explain to me what's going on well we had a huge run I mean the market was 4,000 just you know two and a half years ago and it ran up to 8,300 in August and you know like any big rally sometimes it backs off I mean it's healthy in fact I mean I'd rather gone down a th000 points than gone to 12,000 if you look at Japan Japan went from 5,000 to 15,000 on their Dow and it was fairly priced at 15,000 on earnings and everything else then it went to 40,000 and that caused seven years of inflated real estate people overspending and basically they've been in recession for five or six years because their Market went up too high I mean if the market goes up too high I mean if if the market goes too high you're discounting earnings seven eight 10 years out there's a relation everything is overpriced yeah and that doesn't help anything the market since World War II has sold between 10 times earnings and 20 times earnings if you look at the Dow Jones of the S&P if you add up all the companies and take the earnings you say there's a relationship and it follows McDonald's earnings have been terrific the last 30 years and the stocks been terrific there's a direct relationship so the earnings of the S&P 500 have been between this range of 10 and 20 we were just about to go over the 20 which is the high end of the PE range there wasn't a lot of room left 20 is too is is at the top of high high it should ever be right it's been over there only a few times ever over 20 and that's when usually inflation is about zero in the early 60s when inflation was about zero we got a little bit over 20 now we have a very low inflation rate so if you have subtracted inflation from 20 you've had the P of the market that's been a pretty good ratio when inflation was 12% you remember in the early 80s we had an eight or nine P of the market so Dr Lynch says all of this has been good for us well I'm telling you it would not have been helpful it's like ative or I never thought I'd ever wish for the market to you not go up dramatically but let's just let's argue the market went to 16,000 tomorrow yeah basically there's earnings behind companies okay but I'm not arguing that I know that's true and stock market price ought to be dictated by earnings and earnings performance and future earnings potenti I got that even I got that now let's just take this for me uh was the decline yesterday in a sense it off some of this overvaluation the market was even overvalued at where it was and by letting it off right then we got back to what was reasonable yeah I would say fairly price maybe for the larger companies they're now okay there might be some small companies we've had 3,000 companies come public the last four years that's to a business day some of those companies have gone down dramatically and and that's sort of a research Zone that average people in the stock shop that's we can find some people know a lot about there 10,000 public companies a lot of them are very attractive no one's following there's lots of people fallowing IBM following companies that nobody else followed right I I'd like to go to see companies with unions or companies in trouble or companies that no one looks hotels that had nice beds yeah you have to look at a lot them you panose your wife I story okay you got perer One Imports my wife found that one too but but you have to look at 20 to find one it's just you don't go to the mall and find the stock I mean you have to say my God this sounds like it's good then you have to do some steps you have to do an organized method people are careful when they buy it toaster careful they're careful they buy a they do they do some research but they don't do it with stock they call the broker or they see somebody at lunch and they say man I got this hot stock and you run right out and you spend $5,000 small investors y or even worse they put an option in international data whack they don't even own international data wack they a 90-day but Bill said it was good and they make a lot of money right right and it's and it's like a casino so it's like a casino you get the same results as if there's more paperwork but just stay with me in terms of people who are bedazzled by what's happened right if you look at yesterday and you look at today right nothing has happened in the fundamentals of Economics of any company right right but their stock may have gone down 10% yesterday and up five today one modest point to I mean every time you get you have to get a memory it's like it's very cold in the winter in some parts of the country you get a memory that Winter's coming something did really happen in Southeast Asia I mean those it did the cause of what happened in this market I think so that was the reminder saying by the word you know profits can go down I mean there is a downside but why was that the cause I mean did did what's happening in Southeast Asia affect the earnings potential of all these companies you're talking about it did because they can't sell small way no because those econ been growing double digit and all of a sudden now they're because of Bank problems because they're over financed they're underl I mean they're going to have they're going to have to run their belts those part and then people said whoa maybe that'll become it'll happen China is now the fourth largest economy in the world maybe China can go in recession so this sort of woke people it it's like a wakeup call saying whoa maybe there's a chance earnings going go out I mean this is not a big deal for the United States when Mexico went down much more important but it sort of said people why was it much more important to Mexico much more the United States than Thailand is or the Philippines or their economy is very important to us they're big consumer very important they're a neighbor a lot of people there that's a very important when that went down that affected Latin America was more important so the recession of 199 but it sort of reminded people to say wait a second there is a downside we have we've had nine recessions since World War II we'll have other ones tell me what took place overnight between yesterday at the close of market and today at the beginning Market what were the guys that you used to work with saying to each other at Fidelity and what were the people you know saying for example IBM made a decision to buy back their stock and that presented some kind of push on the market and their stock went up six points well one thing you're trying to do is say of all these public companies out there here's the company I really like the fundamentals are terrific their earnings are doing well their competitors are doing poorly I think this company's doing terrific and all of a sudden the stock might have gone from 40 to 30 because of this decline that would say wow here's a chance to buy it so you're trying to say some companies might have been overpriced 16 all they did was go to 50 and say big deal so you're trying to find companies you liked anyway right now you liked them and now they've had a haircut that's what you would do not not a like it went from overpriced to fairly priced s there was fairly priced at the start of this exercise and then had a very you know five for four sale you know if you had been managing the mellan fund this morning you would have been buying like crazy I would have been researching like crazy I would been saying which companies are the same story is there anything really happen this is a non-event for them they're still doing well even if we have a recession is nothing to do with them and that's the kind of Kinds I trying to buy but let's say if a comp just think of this as being you say to yourself I think this compan is going to earn something in the future if it's already discounting that if it's selling at a huge multiple you say it's already it has to work and then it's only going to stay even so you have to say yourself if I'm right how much I I going to make if I'm wrong how much I going to lose that's the risk reward ratio in stock shop we talk about if I'm right I hope I'm going to double trip my money if I'm wrong May I'll lose 30 40% that's a favor ratio you say if I'm right the Stock's not going to go up it's already discounting terrific things if discounting terrific things are already in the stock I don't want know okay so this morning you get up and you go in and you look at at those companies that fit that you that you know something about you have to have an inch I let's say C industry goes from crummy to semic crummy to fairly good the stocks are going north you're going to make money that's the industry you know when if you know the publishing industry you you some people have you have an edge you work I mean when if you last 30 years you work in the restaurant industry you would have seen Taco Bell you have seen Saros you would have seen Pizza Hut you would have seen chilies You' have seen these companies doing very well you should have bought those instead of trying to buy biotechnology stuff you know nothing about I mean I know nothing about local area networking a lot of people are buying this Cisco they're buying the equipment saying we're going to root together all these peripherals and put together the servers well they but but that's not a bad buy because they own a huge percentage of their Market no but that was they're saying only a few people had that my God if it works for us other people try it then colleges will try it high schools will try it then they'll go overseas they knew they were early in the ball game right and they should been buying that company instead of out buying something they don't know anything about some oil drilling company I mean people have this tendency to always buy something they don't all you need is a Charlie all you need is a few good stocks this is your song this has been your song for a long time only buy what you know no but people wake up in the morning and say there's 5,000 companies out there which one should I buy the average person ought to be able to follow four or five companies they ought to be able to lecture on them they understand the companies and this forces you this tool says you right down the store all right you keep saying this the stock shop is what what is it this is a CD ROM that you plug into your CD ROM and play through your right PC and you come up with what well also it's a data stream you can update information on five or 6,000 companies right like that you can get 10 years of financial data 10 years of income statements 10 years of inventory you can get updates in all these companies but that's what you get on a blueb terminal no but it's only right now and you know it doesn't pick 50 data points it doesn't go over five years this on the companies you want to look at will give you all the information out of this it cost 69 $66.95 a month in addition and it's you get a free trial you get a free trial we got a cut rate deal and you can also buy it you get it from Fidelity for special programs but this is something this will help you update it so you can say this compan I want to look at I want to see what are the cash look like and if you don't understand what cash is if you don't understand what debt is I always said let's say you're looking at companies that are doing poorly that they're not doing very well why don't you buy the one that has $3 million in cash instead of the one that's almost bankrupt I mean a lot of companies are selling $2 or three a year they might be losing 1010 millioner isn't it but people don't do it they because they don't know how to do the research they can look up the balance sheet say listen they got $300 million in cash they're losing 10 million a quarter they'll be okay this other company's got no no cash $700 million in debt they're about to blow Taps but you're telling every small investor in America anyway they'll invest in a mutual fund aren't you I'm telling you you could do both you ought to you could be investing mutual funds and occasionally you should be able to find a stock that's going to make a difference in your life if it's an industry you know something about industry or Local Company there's a lot of people that s they saw theint motorin in Texas they said my God I mean there a lot of people have seen local companies friendly there companies come along locally the people made St Jude Medical made a lot of money for people what was that Motel you stayed in and then you went and bought a bunch of it yeah lint mot was that lint that's what it was right you stayed overnight there and I also got advice from somebody that was a competitor this there was a holiday in Guy saying this guy Bo they're killing us they're tough you know so that you get a lot of information don't throw it away all right before you go so what you buy this thing and is it going to charity or not well all my profits I mean h nin is the person marketing this and they're they're keeping some profits you haven't made them a Char and the company at the the company that's selling of the do you go to Borders or you go to Copa they're not they're not everything I've done all my books and on this my wife and I everything to Cherry is this because you made a bunch of money and so therefore what you do now you want to be that's part of it I it's but also even if I had made a bunch of money I'd like to see people do a better job these are people me you when you your Crusade is to influence the investing habits of America to do have them do a better job if they're not ready to do it properly they shouldn't do it and and used to be you used to be able to retire and you get half of your last year salary you'd have a pension you could rely on that now you have to do it for yourself some people are presented they're about they're let go or their early retirement they're given $500,000 and they say this is it this is your retirement lady you got to take care of it now and some people have lost all that money in options in the last three months so what you're saying to people today about the future of the market over the near term is what what's your feeling got to buy business we can take a coin out and flip it I have no idea what the next thousand points going to do the next 6,000 points going to be up the next 14,000 points going to be up the next 20,000 points going be up but you don't know where the next thousand is going to be it could be down could be up nobody does and and it's futile to try and guess it corporate profits will be a lot higher 10 years from now they'll be a lot higher 20 years from now that's what you got to rely on Microsoft didn't exist 20 years ago Staples didn't exist 20 years Federal Express didn't exist 20 years ago new companies will come along that's what EX 20 years ago that's what makes Amgen has two1 billion drugs they didn't exist 20 years ago new companies have come along that's what makes this country work you got to keep your eyes open okay is the game over in Asia no God no that you can with you know some of these countries have a 56% savings rate they have a high literacy rate the game's not over you know they're going they're going to have to but have they lost something well they're going to have to some of their lending they got carried away there was I mean they're going to have to you know step back figure it out and go ahead it's certainly not over in Asia no way so Emerging Markets is still a big deal right big deal what about all the ISM of derivatives and the the impact they have had that's a little complicated for me all I know is I mean I don't know about it's way over my head I've never bought an option in my life I never B time's on your side when you're on a stock you know I don't know about putting you know 3% down and buying a future in a strap and a straddle that way over my head can't can't deal with that right let somebody else deal with that yeah all right so you're optimistic about the future of the American economy earnings Potential from most well-run companies will do all right but people have to understand we've had nine recessions since to we'll have other recessions but we're not in one now but we may have one in the future and don't get worried about it will have one sometime it will happen and no one will tell you when it's going to happen it's well but what the fundamentals tell you no you'll find out after the fact you'll all of a sudden you'll notice orders slowing prices get more competitive then earnings are down I mean usually you find out after no one declare everybody's been saying we're going to have recession for five years it just hasn't happened it's great to see you I hope you'll come back anytime Peter excellent thank you
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