Shares: How to bag money in the street

THE REAL key to investment success is 20:20 hindsight. Merchant bankers are very good at this. When discussing the past they always seem to have anticipated all the important stock market trends; going liquid before the 1987 crash; selling out of Japan in 1989, and so on. But these financial geniuses fall silent or hedge their bets if one asks for similarly inspired predictions of what will happen next. The truth is, professionals have no more idea than the man propping up the bar about what the investment future holds.

Peter Lynch, author of a US book on investing called Beating the Street (as in Wall Street) is refreshingly candid on this point. Although one of the most successful fund managers in Wall St history, he freely admits never having a clue what the stock market is going to do next. Fortunately, as he argues persuasively, it is unnecessary to know what shares in general are going to do in order to make money.

It is necessary to have strong nerves to cope with the inevitable periodic corrections. On Wall St there have been 40 corrections of 10 per cent or more since the 'mother of all corrections' in 1929, and stocks invariably bounce back. The moral he draws is that stocks should never be sold because of general market weakness or 'weekend worrying' - where the investor sells his shares in Coca-Cola on Monday because he has spent the weekend reading about the hole in the ozone layer.

Lynch made his reputation as a star by building Fidelity's Magellan Fund (like a UK unit trust) from dollars 17m when he took over in 1977 into a dollars 14bn giant before he retired in his mid-forties in 1990. Share prices in general did well over this period, but Lynch consistently beat the stock-market indices in most years by a substantial margin.

Despite his performance, he is contemptuous of most funds (unit trusts) which typically underperform the averages. His conclusion is that for most investors, buying an index tracking fund makes more sense than buying a managed one.

He is at his most disparaging about bond funds, where investors pay a management fee to hold bonds via a fund which invariably underperforms the return they would achieve by (in the UK) popping along to the Post Office and buying any individual gilt (bond) over the counter. Not that he would advise them to do even that, because of evidence that equities vastly outperform bonds over the long haul, even as a source of income. That is a variant on my personal rule, developed in the 1970s when I was a fund manager, which was that whenever bonds looked a good buy you should buy shares, because they would go up more.

The key to success for Lynch is research and common sense. He is a dedicated hands-on researcher, who would drive 100 miles for a meal to check out a restaurant chain. One reason he retired was that the effort of keeping tabs on the hundreds of shares in the Magellan portfolio meant he couldn't stop working.

The effectiveness of this approach leads him to believe amateur investors should not only be able to do well in the market but have a positive advantage over professionals stuck at their desks and buried under statistical research.

His favourite investment technique (admittedly difficult for the average investor) is also mine - to ring up the chairman and ask him how things are going. Much of Lynch's book consists of recounting what he learned and the packets of money he made for the fund in this way.

The goal for investors is to find what he calls 10-baggers - shares that rise tenfold on their initial investment. These make up for the poor performers which, at worst, can only lose 100 per cent of their value. Among the all-time great shares, he cites McDonald's, as a 400-bagger.

One of my favourites, a Yorkshire fabric printer misleadingly quoted under textiles, which has recently reported excellent results despite a fire at one of its factories, is Leeds Group, run by cautious but canny Robert Wade. Leeds is already more than a 100-bagger and still looks full of running. If Lynch knew about the company I am sure he would immediately 'back up the truck', as he describes it when a share is so good you should sell your house and your car to buy the stock.

'Beating the Street' by Peter Lynch, Simon & Schuster pounds 18.99