The Rational Investor #042: Peter Lynch on Why What Happens Next Doesn’t Matter
Happy Saturday to you,
Welcome to the 42nd edition of The Rational Investor Newsletter.
Today’s quote actually comes from a quick 2-minute video of Peter Lynch from 1994. Feel free to watch the video, but I’ve provided a lightly edited transcript below (solely to clean it up and shorten the text) for your convenience. It’s an incredible amount of market wisdom shoved into a short two minutes.
Onto the main event…
Here’s Peter Lynch on Why What Happens Next Doesn’t Matter:
“The market is going to go up and down. Human nature has not changed a lot in 25,000 years.
And some event will come out of left field and the market will go down or the market will go up.
So, volatility will occur and the market will continue to have these ups and downs. I think that’s a great opportunity if people can understand what they own…and keep adding to it.
Basically, corporate profits have grown by about 8% per year historically. So, corporate profits double about every nine years. The stock market ought to double about every nine years.
So, I think—the market is about 3,800 today or 3,700—I’m pretty convinced that the next 3,800 points will be up; it won’t be down.
The next 500 points, the next 600 points, I don’t know which way they’ll go.
So, the market ought to double in the next eight or nine years. It ought to double again in the eight or nine years after that.
Because profits will go up by eight percent per year and stocks will follow.
That’s all there is to it.”
Okay, let’s first test Lynch’s math. When he made those statements in 1994, the market was at 3,800 and he said the market should double every nine years [referencing the Dow]. If the market doubled every nine years since 1994, here’s what would have happened…
1994: 3,800
2003: 7,600
2012: 15,200
2021: 30,400
Today, the market sits at: 43,092 (on pace for yet another doubling, just as Lynch said)
He was unbelievably spot on as it has averaged a doubling every nine years just as he said.
I love how he ended this section of his statements…”That’s all there is to it.”
Because he’s right. Successful investing is incredibly simple: Own great companies and never (ever) sell! But few people want to do that—which explains why so many investors fail.
Investors think they need to know what the future holds in order to be successful. Yet, not even the greatest investors in the world know what will happen next.
As he states, he doesn’t know which direction the next 20% move in the market will be, but that doesn’t matter, because he’s confident in which direction the next 100% move will be. The key is not missing that next doubling and there’s only ONE way to ensure you don’t…that’s to be a permanent owner of the market.
All we need to do is to be patient and wait for the next doubling.
As Lynch said, “That’s all there is to it.”
Thanks for reading. I’ll be back next week with more timeless wisdom from great investors.
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