Video Link: https://youtu.be/YUMm3Tbp2iA
In this episode, Peter Lynch talks about why you shouldn't waste your time by predicting stock market or the interest rates but do this instead.
In this episode, you’ll learn:
Why no one can predict interest rates?
Economics Facts vs. Economics Prediction.
How to take advantage of stock market volatility?
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PETER LYNCH 00:00
People get too carried away.
First of all, they try to predict the stock market. That is a total waste of time. No one can predict the stock market. They try to predict interest rates. I mean this is a – if anybody can predict interest rates right three times in a row, they’d be a billionaire. Certainly, there’s not that many billionaires on the planet.
It's very – I took logic, syllogism, I studied these when I was at Boston College. There can’t be that many people who can predict interest rates because there’d be lots of billionaires, and no one can predict the economy.
I know a lot of people in this room were around in 1981 and 1982 when we had a 20% prime rate with double-digit inflation, double-digit unemployment. I don’t remember anybody telling me in 1981 about it. I read. I study all this stuff. I don’t remember anybody telling me we’ll have the worst recession since the Depression.
So what I am trying to tell you, it would be useful to know what the stock market gonna do. It would be terrific to know the Dow Jones average a year from now would be X, to know we’ll have a full-scale recession, or interest rates is going to be 12%. That’s useful stuff. You never know it, though. You just don’t get to learn it.
So I’ve always said if you spend 14 minutes a year on economics, you’ve wasted 12 minutes. And I – (Laughter) – I really believed it. Now, I have to be fair. I’m talking about economics in the broad scale, predicting the downturn for next year, or the upturn, or M1 and M2, 3B, and all these names. (Laughter)
I'm talking about – economics to me it's when you talk about scrap prices. When I own auto stocks, I want to know what’s happening to used car prices. When used car prices going up, it’s a very good indicator. When I own hotel stocks, I want to know hotel occupancies. When I own chemical stocks, I want to know what’s happening to the price of ethylene. These are facts.
If aluminum inventories go down five straight months, that’s relevant. I can deal with that. Home affordability I want to know about that when I own Fannie Mae, or I own a housing stock. These are facts.
There are economic facts and there are economic predictions, and economic predictions are a total waste.
And interest rate, Alan Greenspan is a very honest guy. He would tell you that he can’t predict interest rates. He can tell you what short rates is going to do in the next six months. Try and stick him on what the long-term rate will be three years from now. He’ll say, “I don’t have any idea.” So how are you, the investor, supposed to predict interest rates if the head of the Federal Reserve can’t do it?
So I think that's a – but you should study history. And history is an important thing you learn from. What you learn from history is that the market goes down. It goes down a lot.
The math is simple. There have been 93 years this century. This is easy to do, the market has had 50 declines of 10% or more. So 50 declines in 93 years, about once every two years the market falls 10%. We call that a “correction” that means – that's a euphemism for losing a lot of money rapidly. (Laughter) But we call it a "correction."
And so 50 declines in 93 years, about once every two years the market falls 10%. Of those 50 declines, 15 have been 25% or more. That’s known as a “bear market.” We’ve had 15 declines in 93 years, so every six years the market is going to have a 25% decline.
That’s all you need to know. You need to know the market is going to go down sometimes. If you’re not ready for that, you shouldn’t own stocks.
And it’s good when it happens. If you like a stock at $14 and it goes to $6, that’s great. You understand the company. You look at the balance sheet. They’re doing fine. You hope to get $22 with it; $14 to $22 is terrific, $6 to $22 is exceptional, so you take advantage of these declines.
They're going to happen but no one knows when they're going to happen. People tell you about it after fact that they predicted it, but they predicted it 53 times. And so you can take advantage of the volatility of the market if you understand what you own. So I think that’s the key element.