There is an ancient bit of wisdom that says we “stand on the shoulders of giants” whenever we make a discovery or achieve success. Put differently, our accomplishments are only possible because we can build on the knowledge gained and discoveries made by those who went before us. Sir Isaac Newton used this quotation in regards to his accomplishments, though it is believed to have been coined centuries earlier. Because it is as true in investing as in other endeavors, at J. V. Bruni and Company we often refer to the wisdom of the successful investors we study. One of these is Peter Lynch, the legendary Fidelity Magellan Fund manager.
Although Mr. Lynch retired from running Magellan 25 years ago, he is still an active investor (as a philanthropist) and is oft-quoted. Long-time clients have heard us use his term “di-worse-ification” to debunk some investors’ belief that there is no theoretical limit to the benefit of diversification (reducing risk in a portfolio by adding more securities to it). As Mr. Lynch’s succinct term indicates, however, there comes a point where putting additional securities into a portfolio does not further reduce its riskiness, but does, in fact, dilute its performance—i.e., di-WORSE-ifies it. When you add, for example, your 50th best idea to an already well-diversified portfolio, the only thing you’re likely to reduce is performance.
In contrast with Mr. Lynch’s wise advice, he has been misquoted as saying that people should “invest in what they know.” In a recent Wall Street Journal interview, Mr. Lynch strongly denied ever making such a simplistic—not to mention misleading—suggestion. “I’ve never said, ‘If you go to a mall, see a Starbucks and say it’s good coffee, you should … buy the stock.’” On the contrary, he emphasized how dangerous it can be to pursue an investment when all you know about a company is its products—or that the company pays your salary.
According to Mr. Lynch, thanks to a lack of confidence in mutual fund managers that has developed over the years, Exchange Traded Funds and index (also called “passive”) investing have proliferated. “People accept that active managers can’t beat the market, and it’s just not true.” Lynch believes that active managers pursue in-depth research and analysis that is typically beyond the abilities of untrained and inexperienced individuals. “People buy a stock and they know nothing about it …That’s gambling and it’s not good.”
At J. V. Bruni and Company, investment research and analysis take up the majority of our time and effort in pursuing superior investment returns on behalf of our clients. Because of our decades of investing experience, not to mention many hours spent learning from the wisdom of investing giants, we know a great deal about many industries and companies. Beyond that, we put our analytical tools to work distilling the endless streams of data available on those industries and companies to build and manage your portfolios. As Lynch told the Journal reporter, “Picking individual stocks is hard even for the professionals.” It certainly is hard. But “hard” and “impossible” are very different things, which we continually aim to prove.