One thing that stood out about Lynch was his flexibility. Lynch wasn’t value, he wasn’t growth, he wasn’t size and he wasn’t quality. Instead, he was all of those things at the same time. For example, in his book, One Up on Wall Street, (3) Lynch describes the way he categorizes stocks into different kinds of opportunities:
This was very unusual. I can confidently say – as a professional portfolio manager that has invested with hundreds of fund managers – that almost nobody invests like this. Fund managers usually stick to a style (e.g. large cap growth), a particular valuation methodology (e.g. free cash flow to firm, forecast over 10 years with a terminal value) or a type of company (e.g. profitably companies with reinvestment opportunities at fair prices). In other words, each manager has one philosophy/opportunity/method that they stick with.
Not only was Lynch unique among fund managers, his eclectic approach was quite different to Buffett’s. The Oracle of Omaha has focused primarily on opportunities within his “circle of competence.” The outline of this “circle” can be roughly drawn around the following sectors:
Buffett also holds relatively few, concentrated positions. This is in stark contrast to Lynch, who owned approximately 1,400 stocks at the time he wrote One Up on Wall Street!
Lynch was a true all-rounder, comfortable investing in all sorts of opportunities. Meanwhile, Buffett’s investment process has gradually migrated over time through 3 stages:
- Slow Growers – aging companies growing slightly faster than GDP. Usually bought for their dividends and buybacks.
- Stalwarts – large quality companies that are profitable and are growing slightly faster than slow growers.
- Cyclicals – A company whose sales and profits rise and fall in a regular if not completely predictable fashion.
- Fast Growers – Small, aggressive new enterprises growing at 20-25% per year.
- Turnarounds – Battered bruised and possibly in or facing bankruptcy. The performance of these stocks is largely uncorrelated with the broad market.
- Asset Plays –A company that’s sitting on something valuable that the market has overlooked, for example real estate.
This was very unusual. I can confidently say – as a professional portfolio manager that has invested with hundreds of fund managers – that almost nobody invests like this. Fund managers usually stick to a style (e.g. large cap growth), a particular valuation methodology (e.g. free cash flow to firm, forecast over 10 years with a terminal value) or a type of company (e.g. profitably companies with reinvestment opportunities at fair prices). In other words, each manager has one philosophy/opportunity/method that they stick with.
Not only was Lynch unique among fund managers, his eclectic approach was quite different to Buffett’s. The Oracle of Omaha has focused primarily on opportunities within his “circle of competence.” The outline of this “circle” can be roughly drawn around the following sectors:
- Banking
- Insurance
- Media
- Consumer non-durables
Buffett also holds relatively few, concentrated positions. This is in stark contrast to Lynch, who owned approximately 1,400 stocks at the time he wrote One Up on Wall Street!
Lynch was a true all-rounder, comfortable investing in all sorts of opportunities. Meanwhile, Buffett’s investment process has gradually migrated over time through 3 stages:
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