Value Investment Research | Port Wren Capital | Stocks vs. Mutual Funds - Peter Lynch

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You might think this is about the Peter Principle by Laurence J. Peter that goes like this, “In a hierarchy, every employees tends to rise to his level of incompetence.” And you would be kind of correct. Correct in the sense that that is the Peter Principle, but kind of incorrect, in that in this case we are talking about the one’s developed by Peter Lynch.

Peter Lynch put together his 25 Investing Principles a number of years ago. Sometimes they are referred to as the “Peter Principles,” in some discussions. As you might know Peter Lynch was the manager of Magellan Fund from 1977 to 1990 at Fidelity Investments and had an average annual return of 29.2%. Peter’s Principle #6 caught my eye the other day. It states: “As long as you’re picking a fund, you might as well pick a good one.” Here it is in full text:

“At the time Lynch wrote his book, there were more American mutual funds than there were listed companies! The majority of fund managers would rather be part of the Wall Street herd than do any serious research of their own. Despite the argument for a fund being that you are entrusting your money to a professional who will spend more time doing research than you ever could, the level of analysis in all but a minority of funds is very shallow, and tends to be the corporate equivalent of keeping up with the Jones's. Funds with big entry fees are not necessarily any better than funds without, the fund that comes out of nowhere and gets the top ranking one year is probably just highly leveraged in something that happened to do well that year, and will fail the next. In their quest to invest conservatively most managers buy stocks that have already been bought up to expensive levels, shunning investing in out-of-favor industries. Lynch gives a number of tips as to what to look for in a good fund, but his main point is that the majority of funds are duds. Often it takes as much research to find a good fund as it takes to find a good stock, perhaps more research since there are more funds than stocks.”

The point in sharing this was to shade light on what really goes on in the investment community. Most individuals are not aware of the insight Mr. Lynch has given in this one principle. More capital returns can be achieved by focusing in on the out-of favor industries that the fund managers tend to shun. As a matter of fact that is one of the key areas in which Port Wren Capital, LLC spends a great deal of time conducting our research. Because that is where there are larger Margin of Safety (MOS) for value investors. Or put another way, higher than average capital returns. Also, it is more time effective to research individual stocks than funds as Mr. Lynch points out since there are fewer individual stocks than funds.

In summary, even today there are less stocks than mutual funds. Which makes it easier to pick good stocks over mutual funds. And you can get much higher returns from individual stocks than mutual funds. So why not invest in individual stocks?

One of the many benefits of our investing service is we seek higher returns using individual stocks to invest our on capital. Plus we can help you with the research. Our research is designed to give you the information on which stock to buy and at what price and when to sell it and at what price to obtain higher returns. We find specific investment opportunities using security analysis research to find undervalued opportunities for our subscribers in our PWC STOCK REPORTSSM service. And you too can reap the rewards.

At Port Wren Capital, LLC, we specialize in picking specific undervalued U.S. stocks using fundamental analysis developed by Benjamin Graham using a five step process. We have beaten the S&P500, DJIA and NASDAQ benchmarks since we started 5 years ago on our own investments. Discover the difference for yourself. To learn more contact us today.

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Peter Principle Number 6