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 LYNCH AND BUFFET METHODS CAN POSE SERIOUS THREATS TO THE AVERAGE INVESTOR
 

   This is a translation of the former paper published by André Gosselin on the OrientationFinance.com web site on June 22 2005 ( Read the original paper in French here).

 

   The investment strategies of Peter Lynch and Warren Buffett were created with the set of knowledge and experience unique to Peter Lynch and Warren Buffet. What has worked for them may not necessarily work for the average investor.

   * Extract written by André Gosselin published in his book "Investir dans les titres de valeur".

   "To beat the market", "To beat Wall Street", "To beat the Dow-Jones": so many books about investments which promise you to reach this objective which consists in getting a portfolio yield higher than the average. The titles of some of the best-sellers published these last years in the United States are enough to illustrate the importance of this stake in the investor culture: Beating the Street (by Peter Lynch); Beating the Dow (by Michael O' Higgins); The dividend investor: A safe and sure way to beat the market (by Harvey Knowles and Damon Petty); How to retire rich: time-tested strategies to beat the market and retire in style (by James O' Shaughnessy); The Motley fool investment guide: How the fool beats Wall Street's wise men and how you can too (by David and Tom Gardner). So many shock formulas which mean the same thing: add the few points (2 or 3%) to your portfolio return which make the difference between a golden retirement and a retirement dependent on the public system.

   That can sound ridiculous for some people, but the American investors remember the words of Albert Einstein who affirmed that the compounded yields are the greatest discovery of the history of humanity. Here is another example: a yield of 10% per year during 30 years, starting from an initial investment of 10000$, can appear completely acceptable; however, at this rate, the investor ends with an accumulated capital of 174500$ at the time to retire, against 300000$, as it is well known, if he succeeds in reaching a yield of 12% per year rather than 10%. A little 2% more in compounded annual returns that makes a large difference after 30 years. All is relative, would say Einstein, except financial mathematics.

   The small American investors do not lack of models to help implementing their project to beat the market. Warren Buffett, the greatest living legend in the universe of finance and investments, is described like one of the rare Americans to have become billionaire thanks to the stock market. He has one of greatest fortunes of the United States and is preceded only by Bill Gates, the president and founder of Microsoft, who is a personal friend.

   Buffett has never written any book about its investment strategy but so many works and articles have been published about it that we can say that its investment philosophy exerts an enormous influence on the small American investors and their way of managing their portfolios. The personality of Buffett, his simplicity, his modest way of life and his great talent to popularize the art of the stock exchange investment have everything to win their hearts. If the approach of Buffett has enabled him to be multibillionaire, why wouldn't it make it possible to the average investor to be simply billionaire? The myth of Warren Buffett is attracting, but his strategy of investment, as simple as it is, is not within the range of everyone.

   Peter Lynch is another living legend of the investment which was used as a model to thousands of small investors. Manager of the one of the largest mutual funds of the United States (the Fidelity Magellan funds), Lynch has delivered to the shareholders of his funds an yield of more than 20% per year for 10 years during the 80s. He is also the author of three books on the stock exchange which are as many best-sellers and which have contributed to create one of the investment strategies among the most popular in the United States. His books were translated into many languages, in particular in French, German, Japanese, Korean, Swedish and Spanish. Lynch has taken its retirement as manager of the Magellan funds in 1990, but he continues to be very active on the public place and in the so-called investment popular education industry. He regularly grants interviews to the financial magazines the most in sight, and he has even taken part in the creation of a teaching software on the art of the investment in the stock exchange.

   The investment strategy of Peter Lynch or the one of Warren Buffett is conceived for Peter Lynch and Warren Buffett. They are not necessarily made for the average investor. It is a very creditable effort on behalf of these two large investors to popularize, demystify, criticize and transmit to the greatest number of investors the financial knowledge and the elementary principles of the stock exchange investment. But, in my opinion, this is not sufficient to protect or promote the sake of the small investors. The investor who adopts the methods of Lynch or those of Buffett is far from being assured that he will get, all things considered, the same returns as them. He would be wrong to think that he is likely to beat the market if he applies, strictly as they are, the strategies taught or practiced by these two financial authorities. It is not because they worked for Lynch and Buffett that they will be as effective for all the others.

   I have read few critics on the investment strategies of Warren Buffett or Peter Lynch. These people are untouchable, the equivalent of an Abraham Lincoln, a Neil Armstrong or a Michael Jordan. Legendary characters who can't be attacked since they have succeeded. Don't they personify the American dream in all its splendor? Individuals who had started from nothing and who, through work and of eagerness, had climbed to the top of the financial pyramid. In fact, Those characters can hardly be attacked. They are remarkable men, among the most uncorrupted, the most honest, the most accessible and the most qualified from their profession. I agree, their success is phenomenal and deserves the biggest respect.

   Nevertheless, it is necessary to establish a distinction between the individual and his system, to make the difference between the professional and his investment philosophy. The stock exchange analysis and portfolio management methods of Lynch and Buffett represent serious threats to the average investor. It is necessary to shout it loud, and to be quite aware of it. A minority of investors can undoubtedly succeed thanks to these legendary strategies, but I am convinced that the big majority of those who try these singular adventures are on the road to ruin.

   André Gosselin

 
 
 
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