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So, Peter, your investment philosophy is often summed up as " buy what you know." And there is some truth to this , but it is often oversimplified. Can you explain what you meant and what you didn't mean? Well , what worries me is that people take a lot of risk when they invest. This phrase " playing the market" is a dangerous term.
But if you do a little work, research, know what you own, look at the balance sheet, you can add eight to eight and get almost 16, you will find out that the company has a lot of debt, no cash , they are in trouble. They should have known that. So, a little research. People carefully choose their refrigerator, carefully plan their vacation, and then invest five or ten thousand dollars in a stock they heard about on the bus or at a party.
This is dangerous. So when you say " buy what you know," you also mean that the average investor can gain an advantage by sticking to an industry they are familiar with or spotting a great product. Imagine if you had been in a shopping mall for the last 50 years. You would see Gap when it was popular, you would see Limited when it was popular.
You would have seen when it stopped being popular. You would notice when people stopped being interested in Gap, or you do research and say, "Oh, there are a lot of Limited stores , but there are only 20 of them, they could grow to 400." So, you see the company. I made a very good living at Dunkin' Donuts, a local company.
I made good money at Stop&Shop. You see people actually coming, or, for example, at Sunglass Hut, there's no one there anymore . So, this is research. This is fundamental analysis. So, in Ale you don't leave the shopping mall and buy the same day. You have a little more work to do. This is an important point.
Yes. Today there is so much information everywhere, information overload. Does this make life more difficult for active investors? Index investors say, “Everyone has access to the same information at the same time . You can't beat the market." Well, the way to beat the index is to avoid stocks that are falling.
You avoid steel companies, oil companies, Sears and Penney, where companies are doing poorly. I mean, companies are dynamic. Behind every stock is a company. These are not lottery tickets. So, you're trying to find companies in the S&P 500 that are performing better . They go from terrible to mediocre and then to good.
This may take several years. Or they will develop for a long time. And you try to avoid companies whose business is deteriorating. That's how you get around them. Or you find companies outside the S&P 500 that are great companies. Harman International was not in the S&P 500. They grew 200 times. Many companies make it to the list, and many of them are successful even before they get there.
Now, many people, when they get lucky or are smart enough to pick a growing company, immediately take their profits. And you argued in your book that it's actually worth holding on to really great stocks. And you even got a call from Warren Buffett as a result. So, 1989, I'm at home, the phone rings, I thought it was one of my friends, but one of my daughters, I think it was 6-year-old Annie, picked up the phone and said, "This is Mr.
Buffett." I said, "This must be a joke." I pick up the phone, and it's Buffett from Omaha, Nebraska: "You know, I read your book." "My annual report is due in 2 weeks." " Can I use this phrase?" He said it all in about 7 seconds. And I said, "That's great." "I'd be happy to do that." "What phrase is this?" He said, " I like it." "I've been waiting to do this." "When you sell your great companies and buy up losers, it's like watering weeds and cutting flowers." He said, "I want to insert this." He added, " If you ever come to Nebraska, be sure to call me." " You will be a guest throughout Nebraska." So, did he call him?
Oh, yes. We played bridge together a few times . We had several meetings. Great guy. Another argument you made, which I think is especially relevant 10 years after the start of the "bull market," is that you said that more money was lost in anticipation of the downturn than during the downturn itself.
Can you explain? Well, obviously the market has grown tenfold since I started running Magellan. So you make more money from growth. The market will be much higher in 10 years, in 20 years, in 30 years. Trying to predict the market is futile. I don't know what he will do. He can go down. When I ran Magellan for 13 years, the market fell 10% or more nine times.
I had a perfect score. I lost more than 10% each time. No matter how much the market fell, I fell even harder. But in the long run, the gains outweigh the losses. So you have to ask yourself, "Do I need money next month? Do I need money next year? Are my kids going to college? Is my wedding coming up ?
If so, you're a bad investor. If you can keep investing, you have 5, 10, 15, 20, 25 years, you should be fine. One thing that we think a lot about at Barron's is the long-term changes that we see in the market, where there's so much disruption that we wonder if certain industries that might be cheap are going to continue to get cheaper.
I mean, retail would be an obvious example in some cases, victims of Amazon. But even the auto industry has very low price-to- earnings ratios. Maybe the market is seeing something. Do you think that long-term changes are happening faster now than they were in the '80s when you were managing money? No, I saw the textile industry go down.
I recommended all those stocks while they were falling. I saw the shoe industry disappear. Industries can go from great to terrible. There's a great saying in the textile industry that helped me a lot. The textile industry, yes. It's always darkest before the darkest. Just when you think things are terrible, they get squared off.
I mean, if an industry is going bad, that's no reason to invest. Wait until things get better. Because, again, someone might be involved in steel , in coal, in iron ore. They might be in plastics. They'll see the recovery in aluminum before I do. So you can... It's a cyclical reversal. It can take two or three years.
You can see it much earlier than Wall Street. One broad area that you mentioned recently that's interesting is energy. And it's very much out of favor on Wall Street right now. What you see it? The difference between the surplus now and the deficit is about 1 million barrels a day. You know, the world uses 100 million barrels a day.
1 million one way or the other. So if the economy holds up, and these shale wells produce 1,000 barrels a day in the first month. A year later they produce 300. That's it. And then 150. A big downturn. It's a real race for survival. And now, you know, private equity, no IPOs, no bond market, banks want to get out, private investors want to get out.
Shale production is going to slow down. So people who think shale production is going to grow by 2 million to 3 million barrels a day—we went from 5 million barrels a day in the United States to 12.5 million barrels a day. People think it's going to continue like that. I don't believe that's going to happen. Peter Lynch, very Thank you.
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