Peter Lynch, known as the “Lover of the stock market”, is famous for his flexibility. He has traded in over 15,000 stocks, and when recommending stocks to Barron’s, he often suggests hundreds or even thousands of them. It seems like there’s no stock he isn’t interested in.
In the early stages of his career, when he made the leap from analyst to fund manager, his style of trading was similar to that of the average Chinese stock investor today, with short-term trades and frequent stock turnover. The difference is that he succeeded, while many others who frequently buy and sell stocks like him, don’t make much money.
What’s the difference? The answer lies in Lynch’s commitment to certain “important stocks”
Finding good stocks worth investing in is like looking for little bugs under a rock. You might only find one if you turn over 10 rocks, or two if you turn over 20
Peter Lynch
Every year, he turns over thousands of rocks to ensure that he finds enough little bugs to satisfy the growing appetite of the Magellan Fund. Many of the stocks he buys may only be a result of turning over rocks, and he will immediately discard them if he doesn’t find any little bugs. This is why he seems to have a high frequency of trading. In fact, as long as he finds a rock with little bugs, he will hold onto it, but that happens only rarely, and most people don’t notice it.
In order to find enough little bugs, Lynch’s life is very compact: he visits about 500-600 companies a year, starts work at 6 am every day, and doesn’t return home until after 7 pm. Even the time he spends on the road is spent reading. During lunch, he may be in talks with a company, and when he’s shopping with his wife and daughter, he’s also paying attention to companies he’s interested in. When he’s on vacation with his family, he runs off to investigate nearby companies related to his investments. “In 1980, I visited a total of 214 listed companies. In 1982, I increased it to 330, in 1983 to 489, in 1984 it decreased slightly to 411, in 1985 it increased again to 463, and in 1986 it increased even more to 570,” Lynch said.
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Story of the Body Shop
The legendary investor Peter Lynch once discovered that his three daughters all used cosmetic products from the same company – The Body Shop. He also noticed that the company’s chain stores were doing very well during a shopping trip with his daughters. This piqued his interest, and he began to investigate the company’s potential as an investment opportunity.
Founded in the UK in 1976, The Body Shop rapidly developed by promoting natural product concepts and focusing on retail specialization. The company’s products are unique, made from natural ingredients such as bananas, nuts, strawberries, beeswax, orchids, carrots, honey, and oats. The company went public in the UK and quickly expanded its business overseas.
Lynch studied the company in great detail, observing its performance through various channels and methods. He found that The Body Shop’s stores were crowded with customers and were among the most profitable stores in the shopping centers he surveyed. The revenue generated by a 3,000 square foot Body Shop store was comparable to that of a 100,000 square foot Sears department store. Moreover, customers of all ages seemed to love the company’s products.
Another thing that impressed Lynch was the company’s focus on social responsibility and its promotion of a fresh lifestyle. The Body Shop used only natural ingredients to make its products, and its employees were given a paid day off each week to participate in community service work. The company also encouraged recycling, such as by offering discounts for returning shopping bags or buying new shower gel in old bottles. The company’s philosophy emphasized healthy beauty rather than simply putting beauty first.
Although the company expanded rapidly, it did so with caution rather than recklessness. Lynch learned this from his friend Stephenson, who opened a Body Shop franchise store in a Burlington mall. Although Stephenson had proven her ability to run a successful store, when she applied to open a new store in Harvard Square, the chairman of The Body Shop flew from the UK to the US to conduct a site survey and carefully evaluate Stephenson’s management skills. If The Body Shop had used its own funds to expand and open new stores, such caution would have been understandable. However, Stephenson used her own money to open the second franchise store, and the company did not grant approval without careful evaluation. This surprised Lynch.
After careful analysis, Lynch concluded that The Body Shop had great potential as an investment target, but he needed to further explore whether there were any development risks and sufficient prospects for growth.
From a product standpoint, The Body Shop’s products are still standardized and priced moderately. The most common products, such as shampoo and shower gel, are cheaper than those in boutique stores but more expensive than those in discount stores.
The company expanded by adding franchise stores, which required almost no debt and had low risk. The company also expanded into international markets from the beginning, demonstrating strong market expansion capabilities that had not yet reached saturation levels. The Body Shop had the most stores in Canada, with around 92 franchise stores, but it had only one store each in Japan and Germany and only 70 stores in the US. If a small population in Canada could support 92 franchise stores with high profits, how many stores would be appropriate for the US, Japan, and Germany, with populations ten times that of Canada? Even with conservative estimates of around 1,000 stores, the company’s growth rate would be about eight times.
In conclusion, The Body Shop was a rapidly growing company with popular products, rapid expansion, high profits per store, and little debt. Its successful replication of its franchise business model across borders ensured a stable growth rate for the company.
Finding good stocks worth investing in is like looking for little bugs under a rock. You might only find one if you turn over 10 rocks, or two if you turn over 20
Peter Lynch
In reality, The Body Shop’s performance was impressive. When it first went public in the UK in 1984, its stock price was only 5 pence (equivalent to 10 cents), with a total market value of 8 million pounds. During the stock market crash and the US attack on Iraq in 1987, its stock price plummeted, but by 1990, it had risen to 362 pence. In 2006, the company was acquired by L’Oreal for a total value of 652 million pounds.
The Importance of Diligence and Hard Work in Investing
Many people believe that to become a successful investor in the stock market, one must have exceptional talent, high education, and a deep financial background. According to this logic, investment geniuses like Peter Lynch must be exceptionally gifted, highly educated, and have a strong financial background.
While it is true that Lynch is exceptionally intelligent and holds an MBA from the Wharton School, he has often attributed his success to his diligence and hard work. In fact, he once said, “Investing is 99% hard work and 1% inspiration,” on his first appearance on Wall Street Week.
Investing is 99% hard work and 1% inspiration
Peter Lynch, on his first appearance on Wall Street Week
It might be tempting to dismiss this statement as false modesty on Lynch’s part, but there is truth to it. Diligence is not just about hard work, but also about diligent thinking. Lynch’s success in investing came from the combination of his hard work and the ability to identify hidden gems in the market, which he could hold onto patiently. If there is a secret to his success, it is this.
As an investor working for a fund management company, Lynch faced the pressures of company discipline and public scrutiny. Buffet could use various strategies to deal with these pressures, but Lynch could not. Thus, his investment career needs to be viewed in stages.
In the early stages of his career, Lynch’s Magellan Fund faced significant redemption pressure from investors. Lynch’s frequent buying and selling of stocks were partly due to this pressure. However, this period was a preparation stage for Lynch and his stock-picking instincts. His diligence, research, and deep wisdom enabled him to handle the pressures from all sides.
Lynch said, “My stock-picking method is a combination of art, science, and legwork. It hasn’t changed for 20 years.” As we discussed earlier, science refers to the need to examine a large number of financial statements and conduct appropriate quantitative analysis. Art requires a subtle insight that is difficult to put into words, and it is based on the premise of having access to a large amount of first-hand information about companies. Both require hard work as a foundation.
“My stock-picking method is a combination of art, science, and legwork. It hasn’t changed for 20 years
Peter Lynch
As an MBA graduate of the Wharton School, Lynch could have joined other Wall Street fund managers who sit in their offices all day, reading reports from analysts and buying a bunch of blue-chip stocks. Even if they lost money in the future, others would only blame external factors. However, Lynch went to great lengths to conduct research and finally held stocks in small companies that were a bit strange, but had a relatively high growth rate. If he loses money in the future, it is undoubtedly his fault, and the leadership and fund investors will hold him accountable.
But that’s Lynch. His success is due to his unrelenting diligence and hard work.
The Charm of Retail Stocks: Invest in a Successful Replicated Business Model.
In my long-term observations of various industries, I have found that investing in retail and catering company stocks will bring higher returns than investing in cyclical company stocks and stocks of companies that are undervalued in special situations
Peter Lynch
Retail stocks have a unique appeal that has caught the attention of investment experts such as Peter Lynch. The logic behind successful retail companies is simple: a popular product with a rapid expansion rate, high profits per store, and minimal debt can successfully replicate its business model across multiple countries while minimizing risk.
Peter Lynch is a firm believer in business models that can be replicated successfully, a common characteristic in the retail industry. His interest in the retail sector stems from the fact that it allows investors ample time to observe companies and wait for them to prove their potential before investing. “The most attractive aspect of the retail industry is that you can fully observe the development of companies in the industry for a long time. When they prove their huge potential with facts, it is not too late to buy their stocks,” Lynch describes retail companies in this way.
A business model that can be replicated successfully indicates strong management efficiency and effective internal operations, which can lead to significant cost savings when expanding into different regions. Investors are drawn to this business model because it implies that increasing sales points and standardizing operations can lead to increased profits. In successful replicated models, apart from geographical differences, sales, management, finance, and production can all be transplanted equally. This means that by simply expanding the scale, profits can be directly increased without changing anything else.
Everyone likes simplicity, predictability, and low risk but increased profits. This business model perfectly caters to these psychological tendencies.
Peter Lynch once said, “In my long-term observations of various industries, I have found that investing in retail and catering company stocks will bring higher returns than investing in cyclical company stocks and stocks of companies that are undervalued in special situations. Retail and catering companies not only grow as fast as high-tech companies but also have generally lower risks.”