Mutual fund manager Peter Lynch received a surprise phone call 35 years ago that would become a legendary dialogue in the world of finance. Lynch's six-year-old daughter informed him of a certain 'Mr. Buffett' on the line, leading Lynch to question the call's authenticity initially. However, to his astonishment, it was Warren Buffett, the Oracle of Omaha.
The story goes that Buffett, having read Lynch's book "One Up on Wall Street," sought permission to use a specific quote in his year-end report. Lynch willingly agreed, and when asked which line he liked, Buffett promptly chose: "Selling your winners and holding your losers is like cutting the flowers and watering the weeds."
This quote, embodying the essence of letting winners run and cutting losers, made its way into Buffett's shareholders' letter. His addition emphasized the importance of avoiding the common mistake of holding on to underperforming businesses.
This line from Lynch's book remains as relevant today as it was. Lynch, in a 2002 CNBC interview, highlighted the significant misstep of prematurely selling promising companies, urging investors to revisit the reasons for their initial investment and stay connected to a company's narrative. Using Walmart as an example, he emphasized the potential for remarkable returns by holding onto a stock with a compelling long-term story.
Buffett, known for his 'forever' holding period, aligns with Lynch's philosophy. Despite occasional portfolio adjustments, Buffett's overarching strategy emphasizes a long-term outlook. Buying Coca-Cola shares in 1988 exemplifies this dedication, as Berkshire Hathaway retained the stock despite market ups and downs. It serves as clear evidence of the advantages of a steady, long-term investment approach.
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Lynch took over the Magellan Fund at Fidelity, a major investment brokerage, achieving remarkable success. His investment strategy has been characterized as adaptable to the changing economic conditions. Still, Lynch highlighted the necessity of understanding what you have.
Buffett is the head of Berkshire Hathaway. This conglomerate owns stakes in several businesses, including Geico, Duracell, and Dairy Queen. Buffett is committed to philanthropy. He has also donated a portion of his wealth to foundations.
While Lynch and Buffett use different techniques, one fact is clear: their approach to letting winners run and having a long-term investment view has helped them succeed. For 13 years of running Magellan Fund, which Fidelity owns, Lynch generated an average annualized return of 29.2%. Correspondingly, the stock performance of Buffett's Berkshire Hathaway also outperformed the S&P 500, giving annualized returns of 19.8 % from 1965 to 2022.
These trendsetters show us how a couple of evergreen ideas can light the way to lasting success for investors in an industry of continual change - finance.
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