Jeff Vinik Says Market Not In A Bubble

Jeff Vinik, formerly the portfolio manager of Fidelity's Magellan Fund, recently appeared on CNBC to talk markets.

In the interview, he said that the market's not in a bubble right now, but did acknowledge there's pockets of overvaluation (though nothing like the 1990s.)

Vinik said that, "The economy looks just fine going forward.  It's a good time to be invested ... The economy is cyclical.  The stock market is cyclical.  There will be downturns ... But if you have good companies with strong managements, earnings will grow over time and stock prices will grow."

He said he's a big believer in buy and hold for the long-term.

He also noted his bullishness on the city of Tampa as he lives there now and is working on real estate development and he's the owner of the NHL's Tampa Bay Lightning.  He invited hedge funds to join him down there.

Peter Lynch's Interview With Charlie Rose

Legendary investor Peter Lynch (formerly of Fidelity's Magellan Fund) sat down for a rare interview with Charlie Rose.  In it, he talks about philanthropy, what makes good management, and more.

Lynch notes that he's now working with some young analysts but the only investing he's doing now is for himself and for charity. 

He joked that he was a "bottom down" investor.  He likes to invest in the second or third inning of a story, noting that you could have bought Walmart (WMT) ten years after it went public and still done extremely well on that investment.

He identified the three C's in investing: complacency, concern, and capitulation.  He said complacency is the worst one.

On knowing what you're investing in: "If you don't understand it, you're probably gonna do the wrong thing."

On what's different in investing between then and now:  He said there's a lot of computer driven trading, which he says is a waste of time.  But the other main difference is the freedom of information.  He says, "Investing now is much clearer, they (retail investors) know the same things I do."

On advice he'd give to young investors: Invest in a retirement fund and watch the money compound tax free.  For individual stock investing: run a paper portfolio, check back with it and see how it performed and why.

On today's market: "I think the market's fairly priced in what's happening right now ... The stock market's the best place to be for the next 10, 20 years ... the next two years, who knows."


Embedded below is the video of Charlie Rose's interview with Peter Lynch:



For more wisdom from this great investor, be sure to read Peter Lynch's book: One Up On Wall Street as well as our past post on Lynch's principles and golden rules of investing.

Contrafund's Will Danoff Bullish For 2013: What Stocks He Likes

Will Danoff is manager of Fidelity's Contrafund and he recently sat down with Fidelity Viewpoints to share his outlook for 2013.  He's bullish and so we wanted to highlight what stocks he's looking at.


On Why He's Bullish This Year

"I’m bullish. Stocks are relatively cheap, and U.S. companies have become much leaner. Management teams were worried about the environment, so they were conserving cash and allocating capital prudently. M&A activity was down about 20% in 2012. Boards were saying, 'We’re not going for the long ball. We’re going to focus on maintaining lean inventories, low capital spending, and tight expenses.' As a result, companies are nicely profitable and generating a lot of cash.

So looking forward, I’m hopeful that we’re going to have modest top-line growth that will lead to decent earnings-per-share growth, good free-cash-flow yields, and total returns that may be a lot better than what we will see from cash and bonds."

He also went on to say that,

"My guess is a year from now the economy’s going to improve and stocks are going to be a good place to be. I’m bullish. So, I think if you’re in cash, you have to really think hard about it and say, 'How much cash do I really need?'"

This is a concept that's been talked about by many managers, including Bridgewater's Ray Dalio who said cash will move into 'stuff' in 2013.  David Tepper of Appaloosa Management has also been quite bullish.


What Stocks He Likes

Danoff notes that the key to his strategy has been identifying the best companies in each industry.  There's a few themes/industries he likes this year, and they all seem hinged on an economic recovery: housing, manufacturing, and industrials.

In particular, the Contrafund manager says he's finding most opportunities that should benefit from more competitive US manufacturing (companies are moving plants back from overseas).

He also likes US companies with lots of international exposure, like Colgate-Palmolive (CL), Estee Lauder (EL), and Starbucks (SBUX).

In tech, he likes internet plays such as Google (GOOG), Facebook (FB), and Yahoo (YHOO).  He also is bullish on the software as a service trend, fancying the likes of Workday (WDAY), Salesforce.com (CRM), and Concur (CNQR).


On Tech Giants Google (GOOG) & Apple (AAPL)

These two tech giants are some of his fund's largest holdings.

Danoff's take on Google: "The stock has done basically nothing since 2007, but the earnings have roughly doubled, and the company is generating a huge amount of free cash flow—we estimate the stock is producing roughly a 9% free-cash-flow yield. And net of the cash, the stock has been trading around 13 times earnings while core revenues have been growing almost 20% annually. So I have believed that Google could continue to grow and had the potential for P/E (price-to-earning multiple) expansion."

We've also highlighted how Ricky Sandler's hedge fund Eminence Capital has been bullish on Google as well as it's their largest position at around a 9% position for them.

Danoff also notes that AAPL has been a good holding for his fund as the company's been generating a ton of free cash flow.  The problem is that most of it is overseas (and it's a massive amount of money too) and he also pointed out that competition has intensified in the smartphone and tablet markets.  You can read more of Danoff's outlook here.

Peter Lynch's Principles & Golden Rules of Investing

Peter Lynch ran Fidelity's Magellan Fund for 13 years and was regarded as one of the most successful investors during his tenure.  Lynch outlines the broad gist of his investment philosophy with various pearls of basic wisdom in his book, Beating the Street. 

Last week we detailed Lynch on using your edge in investing.  This time we wanted to focus on some more of his advice, taken both from "Peter's Principles" and his "Golden Rules of Investing":


Peter's Principles

- "Never invest in any idea you can't illustrate with a crayon"

-"You can't see the future through a rearview mirror"

- "When yields on long-term government bonds exceed the dividend yield of the S&P 500 by 6 percent or more, sell your stocks and buy bonds."

- "The best stock to buy may be the one you already own."


Peter Lynch's Golden Rules of Investing

- "You have to know what you own, and why you own it."

- "Never invest in a company without understanding its finances.  The biggest losses in stocks come from companies with poor balance sheets.  Always look at the balance sheet to see if a company is solvent before you risk your money on it."

- "Everyone has the brainpower to make money in stocks. Not everyone has the stomach. If you are susceptible to selling everything in a panic, you ought to avoid stocks and stock mutual funds altogether."

- "Time is on your side when you own shares of superior companies. You can afford to be patient –even if you are missed Wal- Mart in the first 5 years, it was a great stock to own in the next 5 years. Time is against you when you own options."

You can find the rest of Lynch's principles & rules in his book Beating the Street.


And to learn more about this great investor, check out his other book One Up On Wall Street and our recent post: Lynch on using your edge in investing.

Peter Lynch on Using Your Edge: Timeless Advice For Investors

A reader sent us an old article from Peter Lynch entitled "Use Your Edge."  If you're unfamiliar, Lynch is a well-known fund manager that ran billions in Fidelity's Magellan Fund for a long time and is also the author of One Up On Wall Street and Beating the Street.  Below we highlight some excerpts from the old article:

Invest In What You Know

Peter Lynch has long preached his old adage of "invest in what you know."  Lynch writes,

"This is where it helps to have identified your personal investor's edge.  What is it that you know a lot about?  Maybe your edge comes from your profession or a hobby.  Maybe it comes just from being a parent.  An entire generation of Americans grew up on Gerber's baby food, and Gerber's stock was a 100-bagger.  If you put your money where your baby's mouth was, you turned $10,000 into $1 million."

Warren Buffett advocates a similar approach in investing in "your circle of competence."


Let Your Winners Run

Lynch then goes on to touch on another old Wall Street Adage: "let your winners run, and cut your losers."  He says that:

"It's easy to make a mistake and do the opposite, pulling out the flowers and watering the weeds.  If you're lucky enough to have one golden egg in your portfolio, it may not matter if you have a couple of rotten ones in there with it.  Let's say you have a portfolio of six stocks.  Two of them are average, two of them are below average, and one is a real loser.  But you also have one stellar performer.  Your Coca-Cola, your Gillette.  A stock that reminds you why you invested in the first place.  In other words, you don't have to be right all the time to do well in stocks.  If you find one great growth company and own it long enough to let the profits run, the gains should more than offset mediocre results from other stocks in your portfolio."


On Growth Stocks

And given the propensity for many investors to focus on growth stocks these days, we thought it worthwhile to share Lynch's thoughts:

"There are two ways investors can fake themselves out of the big returns that come from great growth companies.  The first is waiting to buy the stock when it looks cheap.  Throughout its 27-year rise from a split-adjusted 1.6 cents to $23, Wal-Mart never looked cheap compared with the overall market.  Its price-to-earnings ratio rarely dropped below 20, but Wal-Mart's earnings were growing at 25 to 30 percent a year.  A key point to remember is that a p/e of 20 is not too much to pay for a company that's growing at 25 percent.  Any business that an manage to keep up a 20 to 25 percent growth rate for 20 years will reward shareholders with a massive return even if the stock market overall is lower after 20 years.

The second mistake is underestimating how long a great growth company can keep up the pace.  In the 1970s I got interested in McDonald's.  A chorus of colleagues said golden arches were everywhere and McDonald's had seen its best days.  I checked for myself and found that even in California, where McDonald's originated, there were fewer McDonald's outlets than there were branches of the Bank of America.  McDonald's has been a 50-bagger since."


On When to Exit the Market

Next, we wanted to highlight Lynch's rule for when to exit stocks.  He says that,

"The only time I took a big position in bonds was in 1982, when inflation was running at double digits and long-term U.S. Treasurys were yielding 13 to 14 percent.  I didn't buy bonds for defensive purposes.  I bought them because 13 to 14 percent was a better return than the 10 to 11 percent stocks have returned historically.

I have since followed this rule: When yields on long-term government bonds exceed the dividend yield on the S&P 500 by 6 percent or more, sell stocks and buy bonds."

Applying his rule to the current market, we see that long-term (20 year) Treasuries currently yield around 2.52%.  The S&P, on the other hand, currently yields around 1.9%, so Lynch would advocate staying in stocks. 


Advice For Investing $1 Million

Lynch says to find your edge and put the money to work via the following rules:

- Know the reason you bought the stock
- Pay attention to facts, not forecasts
- Look for a risk-reward ratio of 3:1 or better (know how much you can lose)
- Be patient
- Enter early (investing in growth companies in the 3rd inning)
- Buy cheap stocks not because they're just cheap, but because fundamentals improve


 For more wisdom from the former Magellan Fund manager, check out his books: One Up On Wall Street and Beating the Street.