You buy a shirt at The Gap and you pick up a bag of mulch at Target. You grab a cup of espresso at Starbucks. You take the kids to the latest Disney movie or you get a birthday present at Toys R Us.
You shop. You spend. So should you invest?
Peter Lynch, the brilliant stock picker, best-selling author and advertising fixture for Fidelity, has said for years that many of his best investment ideas originated from shopping or eating out.
So, should you? Can you? In a market where the stars are techs and biotechs?
Right now, unless you have some kind of technical knowledge or super sense for what’s ahead in biotech, an ordinary person’s buy-what-you-know portfolio is not in favor.
Many found-at-the-mall stocks are downright depressed. In the year ended July 28, stocks in specialty stores had fallen 4.5 percent, general retailers were down 19.6 percent, and apparel sellers had tumbled 23 percent, according to Standard & Poor’s. Has the easy-to-understand, everyday encounter with investment ideas run its course?
Sure, consumer-oriented stocks are not hot, but Lynch says it’s not the market that he looks at. And neither should you.
“If you think a stock at $20 is going to $40 but in the middle it drops to $10, that’s terrific,” Lynch said from his Boston office “It’s not so bad that stocks go down. The difference is if you understand what you’re buying, and a group is out of favor, when it goes down, you buy more,” he said.
The tricky part, of course, is picking. The ideas you get at the mall are just the beginning, he said. You take them home as a list for more research. Then you do the research. His is an old-line method, one that involves actually figuring out what the company does, how it makes money and what its future holds.
You don’t have to make a career out of it. “The average person with a full-time job can know five or six companies very well. And they can become expert on one or two of them,” Lynch said.
“You don’t have to call the Psychic Hotline to know what’s going on.”
Consumer habits are still an adequate starting point, no doubt. But anyone who has followed Lynch’s admitted technophobic ways has missed out on plenty of gains.
The mall hasn’t been a great place lately, either. Take retailers. Since the end of last year, the market has erased one out of every five dollars that investors have put into the Gap. Target has fared only slightly better. Toys “R” Us would have lost almost half of what anyone invested in it over the last five years. You wouldn’t even want to consider some of the other mall dwellers. Clothing designer Tommy Hilfiger’s stock is worth about a quarter of what it was worth a year ago.
Or you could pick an old favorite: Disney. Although you’d be sitting pretty in the short term, with big gains in the last seven months, you would have been better off during the last five years in an index fund. It lagged the S&P 500 by 77 percentage points.
What’s wrong here?
“High-quality companies, many of which are consumer product firms, did much better in the `80s and early `90s than in recent years,” said Rob Isbitts, president and chief investment officer of Emerald Asset Advisors in Weston, Mass.
Isbitts was trying to explain this perplexing situation to clients. He compiled two lists that he calls The Haves and The Have Nots.
On one list is Gillette, Coke, Pitney Bowes, Sears, Campbell Soup, American Home Products, Allstate, First Union, Sara Lee and other well-known brands. These would fit Lynch’s bill of being easy-to-understand companies that people encounter in their everyday lives.
That’s the Have Nots. As a group, they fell an average 27 percent last year. When Isbitts shows that list to clients, “they’re shocked. People will take a look at one year’s result like that and fire their money manager,” he says.
The market is, frankly, fickle. What investors value the most may or may not coincide with your personal habits. “Just because you love the sector doesn’t mean it’s going to grow,” says Marc Singer, president of Singer Xenos Investment Management in Coral Gables, Fla.
Singer also points out that Lynch’s stock-picking success required patience, because he often focused on companies whose value had not been recognized by the market. Lynch said some of his best performances came in the second or third year of owning a stock. As he points out, you don’t just pick a company, you pick it when it’s on its way up The market’s speed has changed, too. People are making fortunes in record time, in months rather than years. Isbitts’ list of The Haves, the winning companies of 1999, all tech companies such as Quaalcom, Nokia, Nextel, Oracle and Global Crossing, had an average return of 433 percent. That was in one year, not four. Who needs patience?
There’s also far more to a stock’s fate than simply the company’s top line, its revenue, which is powered by consumer purchases. Buy-what-you-know is a “nice idea, but I wouldn’t buy Coca-Cola even though I drink a lot of it,” said Ft. Lauderdale investor James Lietaert, president of First Preferred Mortgage. “My consumption hasn’t gone down, but the stock has.”
And if someone were to be very simplistic about following the buy-what-you-know idea, and what the individual knows is what he consumes, his portfolio would not be diversified. He’d be in retailing, food, and a little entertainment and recreation, leaving out every other asset class.
Those sectors are not the ones that are changing the world and powering the economy. That is technology, which Lynch famously said he wouldn’t invest in if he couldn’t understand it. And so he missed out. So would the rest of us, too, if as investors we were oblivious to the Internet or wireless communications.
“How could you possibly know what an upstart Internet company really does or, for that matter, what Nortel Networks does?” Singer says.
Forbes, in its February issue, studied Lynch’s stock picks mentioned in his column in Worth magazine since 1993. He underperformed the Standard & Poor’s 500 by 27 percent, the magazine says. “The 1990s were all about Cisco, EMC Oracle and the like — makers of revolutionary products that have changed our lives but that no one ever sees,” the magazine said.
Lynch hasn’t changed his tune about tech completely, but he has opened up to it. In the most recent edition of his book, he nodded to the Internet and discussed ways to play in that boom, as well as his new interest in biotechnology stocks.
For the Net, he suggests looking at non-Internet companies that benefit from its growth, such as package delivery firms. Or trying to find companies that have an Internet business inside of an Old Economy corporation. Or, for an old-fashioned bricks and mortar company that uses the Internet to cut costs or improve operations.
It all comes down, he said, to doing the research and figuring out not just about a company’s growth but whether it will actually make money. “You have to know something. And I’ll tell you something else, you have to have an edge. You don’t make money sitting in the park dreaming.”
Or at the mall, sipping coffee.
