Peter Lynch has one of the best track records on Wall Street of all-time. You may have heard quotes from his best selling books, but you probably haven’t heard some of these more obscure investment quotes by Peter Lynch in his monthly columns.

Today we’ll look at some of his best gems in the 1993- 1999 time period, in several published columns from Worth Magazine, shortly after his retirement from Fidelity in 1990.

A little background on Peter Lynch before we dive in…

Now that we have some context on the great Peter Lynch and his fantastic track record in the stock market, let’s look over some of his great investment quotes and think about how they could apply to our own portfolio decisions and stock picking.

1—On the Average Investor’s Possible Edge over Wall Street

“Actually, there are two kinds of investor’s edges: the on-the-job edge, in which you have a working relationship with an industry and the related companies with whom you do business; and the consumer’s edge, with which you can capitalize on your experiences in restaurants, airports, and shopping malls.”

In this 1993 column, Peter Lynch talks about how advice from professionals on Wall Street is actually detrimental to the average investor, and how investors can give themselves an additional edge by zigging while others are zagging.

Wall Street is heavily incentivized to follow each other into the same kinds of hot trends and trades; investors have little career risk or pressure to do the same and could probably do much better by sticking to what they know and ignoring the rest.

“One of the benefits of visiting a retail outlet is that it brings the numbers alive. You can study a company’s earnings potential all day long, but bullish forecasts always seem more believable after you’ve seen the evidence in person at the mall.”

Peter Lynch famously said in his Beating the Street book that his wife helped him find a great stock idea by simply telling him about the incredible lines at this one retail store. No reason why the average investor can’t do the same.

2—On Investing in Uncertain Biotech Stocks

“The three most important lessons I’ve learned from my conversations are these: (1) Don’t buy a biotech company because it announces an exciting new drug that hasn’t yet been tested; (2) Don’t assume that because an exciting drug has survived the first two trials, it’s a shoo-in for Phase III; And (3) the investor’s edge I’m always talking about often doesn’t work in biotech. Investors who ignore these rules may end up getting nothing for something, as the shareholders of Genex already have.

Biotech reminds me of computers in the 1960s–the prospects in general are spectacular, but most of the prospectors are likely to fail. What a waste it is to understand the biotech potential, then put your money on the wrong company and lose it.”

As Lynch relates in this June 1993 article, biotech companies have several problems. For one, they don’t show earnings for a long time. Secondly, so many biotech companies fail at eventually making profits, because so many products fail FDA approval. Third, even the experts can’t reliably guess on which drugs will pass these incredibly stringent tests and which will fail.

Combining all of these factors, most investors are probably well served to stay away from biotech. Funny how the same logic that applied in the 90’s also still applies today, almost 40 years later.

Lynch is not alone in preferring to avoid this kind of uncertainty; another investor with a great track record named Terry Smith has shared his reasons for avoiding biotech/ drug manufacturers, for many of the same reasons that Lynch shared decades ago.

3—On Investing in Cyclical Stocks

“At Magellan, I loaded up on cyclical stocks during the 1981-1982 economic slump. This strategy was one of the keys to Magellan’s success.”

I think those first two sentences sum up how Lynch feels about cyclicals. He likes the stock(s). But there’s some important things to remember with these kinds of stocks—mainly that it really depends when you buy them. He explains:

“If you’re ever in doubt as to whether a certain company is a cyclical, the easiest way to tell is to look at its chart in Value Line, or in one of the chart books published by the Securities Research Company and available in libraries or in a broker’s office. One of the lines on a stock chart is the earnings line, and here a picture is worth a thousand numbers. When the earnings line has a steady upward slope, the way Merck’s does, you’re dealing with a growth stock. When it wobbles up and down, as Alcoa’s does, you’re probably dealing with a cyclical.

The best time to get involved with cyclicals is when the economy is at its weakest, earnings are at their lowest, and public sentiment is at its bleakest. The staff at Standard & Poor’s weekly newsletter, “The Outlook,” once reviewed the eight recessions since World War II to find out what happened to the prices of key cyclical stocks after the stock market hit bottom. In every instance, the cyclical groups gained 50 percent or better in five months, more than double the advance of the S& P 500.”

I think the key thing to underscore here is that cyclicals do really well during an economic recovery. This is when all stocks tend to be the cheapest.

The problem is that timing an economy recovery perfectly is really difficult, so you should have the fortitude to survive continuing falling prices until things turn around.

That said—trust me, when the cyclicals do pop they pop fast. So rather than try and time when these stocks explode, which is impossible to do consistently, just buy when cyclicals appear cheap and hold them through the recovery. You’ll probably get some downside exposure, but that eventual upside is likely to whoop the S&P in the months to follow.

If you need additional encouragement to hold (or buy) these cyclicals as a downturn drags on, Lynch has this great quote:

“Yet even though the cyclicals have rebounded in the same fashion eight times since World War II, buying them in the early stages of an economic recovery is never easy. Every recession brings out the skeptics who doubt that we will ever come out of it, and who predict that we will soon fall into a depression, when new cars will sit unsold in the showrooms forever and houses will stand empty, and the country will go bankrupt. If there’s any time not to own cyclical stocks, it’s in a depression.

‘This one is different,’ is the doomsayer’s litany, and, in fact, every recession is different, but that doesn’t mean it’s going to ruin us. In order not to get sucked into the gloom, I always remind myself that although we once suffered from chronic depressions leading to the Great Depression of 1929 (in fact, that one was no “greater” than several others), we are no longer the same economy.”

He speaks more on this topic, this time relating it to the average investor’s “edge”:

“To succeed at investing in cyclicals, you have to have some way of tracking the fundamentals of the industry and the company involved. This is where the Investor’s Edge comes in. Of the 110 million Americans who have jobs, at least 50 million are involved in cyclical industries, where they are in a position to see a business turn before the news reaches Wall Street. People who build houses or sell houses, make cars or sell cars or parts of cars, work in a chemical plant or install aluminum siding, work in the airlines or the travel agencies, have a front-row seat from which they can watch the prices, the inventories, and the sales go up or down. Employees in the temporary-help agencies are the first to know which companies have more work than they can handle, a sure sign that business is getting better.

This is the sort of “inside information” that can be put to profitable use, although most people fail to take advantage of it. Even if you decide it’s too late to buy your favorite cyclical in the current recovery, in the next five years, ten years, or 15 years there will be another down cycle, and another buying opportunity. Cyclicals are very forgiving. They always give you a second chance.”

I love that brilliant overview. Sometimes as average investors we discount our experience and observations as we experience changes “on the ground”, since we are not insiders at massive multi-national corporations.

But we can sometimes be right smack in the middle of fundamental changes in pockets in the economy, and if not ourselves then sometimes our friends and family.

That’s not to say that we should rely solely on these observations; Peter Lynch would never advocate buying a stock just because you observe what you appear to be greatness.

Rather, look at these observable trends and combine them with solid fundamental analysis of companies, and use the observations to confirm what you see in the financial data of these companies, and use all of that to be bullish on an idea even when Wall Street continues to be bearish on it.

More often than not, that’s where the investor’s edge can come from—but it requires courage to go against the crowd and trust your analysis.

4—On Buying During a Disaster

In the early 1990’s, California had a crisis. The real estate in Orange County in particular, my hometown, went through an extremely strenuous time with crashing prices and panic.

What some people might not remember was that shrewd investors like Warren Buffett and Charlie Munger saw this collapse as an opportunity, and loaded up on a company with huge exposure to that area (Wells Fargo).

Needless to say, that was a fantastic investment for Buffett and his shareholders.

In this column by Peter Lynch in 1994, he mentions several companies which he saw as great opportunities at that time, relaying his logic on the overall theme in this way:

“Recently, the decline and fall of California made the front page of the New York Times, in a three-part series, no less. It made me want to buy some California stocks.

The Decline and Fall of California bears an uncanny resemblance to the Decline and Fall of New England, which made the front page of the New York Times on July 23, 1990. In four years, New England had gone from economic miracle to economic disaster, and all the talk on the news was about the lost jobs and the death of the real estate market. You would have thought that Massachusetts, my home state, would have to be liquidated.

Now that New England has bounced back and Massachusetts is still in business, we can view the “disaster” with more dispassion. Housing prices never did collapse, except in the high end of the market, and even the fancy houses are selling again at somewhat fancy prices. People have cheered up and resumed shopping. The amazing part is, the recovery in New England has occurred without the jobs coming back.

The same sort of thing happened in Old England in the 1980s. The British economy looked so hopeless that people were delighted when it managed to muddle through. British stocks did brilliantly after that. California in 1993 reminds me of New England in 1990 or Old England in the early ’80s.”

 5—On Holding on to a Great Stock Instead of Selling

If this story of an average investor finding phenomenal success in the stock market doesn’t inspire you, I don’t know what will.

Peter Lynch met this man named Charles Silk in 1992, and shares his story in 1994:

“I’ve often said that a couple five-baggers every decade is enough to make do-it-yourself investing a worthwhile pastime. With a 150-bagger like Cook Data, one every half century or so is all anybody needs.

Call Charlie a lucky man for stumbling onto Cook Data Services, but luck didn’t make him a millionaire. The hard part was holding on to the stock long enough to get the full benefit. After the price had doubled and then tripled, he didn’t say to himself, I’ll take my profits and run, like many investors who invent arbitrary rules for when to sell. He wasn’t scared out when the price dropped, as it did several times, and he ignored the highly publicized negative comments made by forecasters and “experts” who knew less about Blockbuster than he did. He had the discipline to hold on as long as the fundamentals of the company were favorable. It was not a guess on his part. He was doing his homework all along.

In my investing career, the best gains usually have come in the third or fourth year, not in the third or fourth week or the third or fourth month. It took eight years for Charlie to get his 150-bagger, but in a way, he’d been preparing for the opportunity since college.”

Lynch goes on to explain just how Charlie continued his conviction on this stock, that massive success we now remember as Blockbuster video, even after Wall Street changed its tune on the company and believed that competition would eat away at its massive success.

But Charlie followed the numbers, and used his “Investor’s Edge” to visit the stores, and saw that there was still growth to come.

That knowledge and then confidence to hold helped Charlie multiply his money many times over. It really shows the power of how companies can grow and compound wealth in a significant way, and how much it can pay to think for yourself.

Note that this was way before the days that most people even had VCRs yet, and was many years before the company eventually went bankrupt.

Taking that story full circle can remind us that you should probably hold a stock longer than you’d think, but you can’t also always expect to hold a stock forever, as the business can change.

That’s again where your fundamental analysis of the company comes in.

6—On Buying Quality Growth Stocks at the Right Time

In his masterful way, Peter Lynch explained again an easy way to determine when the right time is to buy quality growth stocks.

Like with cyclicals, it’s not all the time.

What I found particularly interesting is that of the growth stocks he mentioned then, many of them still did extremely well for many years. These are names like Home Depot, PepsiCo, McDonald’s, Gillette, Rubbermaid, and H&R Block.

And many of them grew not only earnings but also dividends. I noticed how there’s not much mention of sales growth, which is one of those buzzwords for many of today’s growth stocks.

“In early 1991, I noticed this situation and issued a warning: Avoid expensive growth stocks. But don’t give me the swami award for this call. I saw it coming on the charts. The technical mumbo jumbo that usually goes along with chart reading is beyond me, but there’s a simple exercise that I’ve found to be invaluable. You can do it yourself. In fact, once you’ve digested the next two paragraphs, you’ll be as capable as I am of sounding the alarm the next time the growth group gets overextended.

If you were to examine a chart showing Johnson & Johnson’s annual earnings per share going back more than 15 years, you would see a steady, straight line of earnings growth. This is the typical footprint of a quality growth company: steady increases in earnings with only the occasional bobble.

A line showing Johnson & Johnson’s stock price over the same period would looks like it was drawn with a shaky hand. The stock hit a high of $58 in late 1991, and it’s been mostly downhill since. On such a chart, the price line and the earnings line, taken together, serve as an important reminder of what we’re buying when we buy a stock: a share of the earnings. A glance at these two lines gives us a visual history of the price-to-earnings ratio of the company–what investors have been paying for the earnings along the way.

When the price line strays far above the earnings line, as it did for Johnson & Johnson in 1991, it means the stock is very expensive, and people are paying an unusually high price for owning Johnson & Johnson. I found similar gaps up and down the quality-growth list.

That’s what told me three years ago that it wasn’t the time to be adding Home Depot and Wal-Mart to a portfolio.”

Another valuable and practical lesson that all investors can take note of. When it comes to Peter Lynch and many of his great investment quotes, you might notice a common theme—great businesses matter, growth matters, but price (valuation) also plays a big role too.

Be cognizant of all of these things.