Peter Lynch, the former Fidelity Magellan Fund manager, said investors should be able to explain a stock holding in simple terms, a test meant to clarify the reason behind ownership.
In a recorded address labeled 1994, Lynch said a holder should have a concise reason for owning the shares. “If you can’t explain to a ten year-old in two minutes or less why you own a stock, you shouldn’t own it,” he said.
Lynch named Dunkin’ Donuts as a business he understood. He also cautioned that someone buying after hearing a tip, without first checking a company’s finances, might lack a clear basis for sticking with the shares if the price dropped. The speech described stock ownership as a stake in a company, rather than simply a bet on a rising share price.
In One Up on Wall Street, Lynch treats familiarity as a prompt to examine a company, not as a reason on its own to own its shares. The book points readers toward a business’s earnings potential, financial health, ability to compete and plans for growth. That separates noticing a product or restaurant from deciding whether the company behind it meets an investor’s criteria.
Fidelity’s historical fact sheet says Lynch managed Magellan from 1977 to 1990 and puts the fund’s assets at the start of his tenure at $20 million. Lynch gave the same starting figure in a PBS interview. The Washington Post reported in 1998 that the fund’s average annual return during Lynch’s 13-year tenure was 29.2%, compared with 15.8% for the S&P 500.
That record gives context to Lynch’s career; the test in his speech and book focused on the reasoning behind an individual stock holding.
