The Millionaire Next Door

Millionaire Investors Leverage Their Knowledge

The Wall Street Journal recently reminded its readers of Peter Lynch’s hall of fame batting average during his tenure as manager of Fidelity Investments Magellan Fund:

Delivering 29% annualized returns from 1977 to 1990. . .

Mr. Lynch’s work has had a profound influence on the way I invest. I once heard him speak at a Fidelity conference in Boston where we shared the platform.  He hammered home many of  the themes that are detailed in his two books, Beating the Street and One Up On Wall Street: How To Use What You Already Know To Make Money in the Market:

By sticking with stocks all the time the odds are 6 to 1 in our favor that we’ll do better than the people who stick with bonds.

If you invest $1,000 in a stock all you can loose is $1,000.  But you stand to gain $10,000 or even $50,000 over time if you’re patient.  You need to find only a few good stocks to make a lifetime of investing worthwhile.

Plus, Mr. Lynch also believes that one does not have to hire a highly compensated investment manager to “beat the street.”  

An amateur who devotes a small amount of study to companies in an industry he or she knows something about can outperform 95 percent of the paid experts who manage the mutual funds.

This comment reminded me of an interview I conducted for The Millionaire Next Door.  Dr. North, a highly regarded orthopedic surgeon and self made multimillionaire, told me:

I have made most in the stock market from the medical industry. . . . Drug companies and medical instrument companies. . . I know this area.  I do research on the medical drug field. . . .  That’s what Warren Buffett does. . . invests in companies that he knows and understands.  

Mr. Lynch’s axioms about companies whose stocks he bought are congruent with the philosophies held by many of the millionaire business owners whom I’ve studied.  Much of Mr. Lynch’s success in selecting stocks was predicated on the enormous number of personal interviews he conducted with key players and the visits he made to corporate headquarters.  Some of his most colorful conclusions or “Lynchisms” include:  

  • One way to judge a company’s commitment to frugality is by visiting the headquarters.  The extravagance of any corporate office is directly proportional to management’s reluctance to reward the shareholders.
  • If you could tell the future [performance of a stock] from a balance sheet then mathematicians and accountants would be the richest people in the world.
  • The amateur investor. . . can beat the market by ignoring the herd.
  • All else being equal, invest in the company with the fewest color photographs in the annual report.
Especially noteworthy are some of Mr. Lynch’s observations about several companies that he correctly predicted would become winners:

  • . . .corporate headquarters. . . no executive dining room. . .no limos in the parking lot. . . no corporate jet at the airport.
  • Avoid[s] spending money on a Greek temple for the main office, Queen Anne furniture for the lobby, blimps, billboards, celebrity sponsors, and original artwork for the walls.  Travel posters. . . suffice.
  • . . .executives get no bonuses unless the company does well in a particular year.   Success and not [occupational] status is the basis for rewards.
This last Lynchism is in close harmony with factor three that underlies the lifestyle of the millionaire next door: they believe that financial independence is more important than displaying high social status (see The Millionaire Next Door).

4 thoughts on “Millionaire Investors Leverage Their Knowledge”

  1. Case in point: Walmart. Current corporate headquarters’ decor from the 1960’s. High-level executives sleep (or did sleep back in the day) two to three to a hotel room on business trips!

  2. I’ve visited the headquarters of Southwest Airlines several times. When Herb Kelleher was CEO, his office had a lineoeum floor. His office decor was nothing but 8 x 10 photos of Herb with employees at birthdays, anniversaries, employee parties. The office “view” is of parking lots and taxiing jets. I wonder why SW continues to make money?
    I make it a habit to personally visit local public companies and have done so for years. One time, a broker buddy and I went to see a local computer company. The CFO spent time with us and when we commented on the costumes employees were wearing (it was Halloween) he invited us to their Friday afternoon “Ho-Ho”. That was a Silicon Valley tradition of start up firms serving beer on Fridays. Yes, the stock tripled the next year and sold out to a larger firm.
    Conversely, when I see a company with opulent HQ, I see limos, jets and waste.

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