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00:00Barry I want to go back to the time of Magellan 1977 to 1990 where Peter Lynch reinvented portfolio construction. He had the courage to overload on the growth genius of Fannie Mae at the time. Barry that was a revolution. It certainly was. He took over Magellan. It was a 20 million dollar fund. Not really well known and for good reason. And his approach was was really systemic systematic and really insightful. You know where where some some funds have 60 70 80 different 80 different holdings in the stock. He basically ends it up with a thousand and he would buy a broad cross-section of holdings and then turn around and just pare what wasn't working. And it was really a savvy way to do it. He would scream to the meeting I was at. I don't care about your number one holding. I care about your forty seven stock. Where does portfolio analysis rather security analysis fit into the Lynch method. So it's crucial. Remember he's essentially the guy who invented Garp growth at a reasonable price. And so understanding the business understanding what's behind it understanding all of the underlying data points is you know what he did. He said you have to flip over 10 rocks to look at 10 different companies. Eight are probably fairly priced. One is going to be expensive and one is interesting. And the person who flips over the most rocks wins. So so he was all about doing the deep dive doing the research and identifying those companies that had growth potential. So very we're talking about Peter Lynch because you actually named him the greatest long term track record holder when it comes to stock picking individual stocks. And he sort of raises a question at a time when people are wondering the fundamental relationship of a company story with the stock price in the era of GameStop and AMC and fiscal stimulus. Has the era of stock picking been greatly diminished by some of the policy intervention that we've seen. So let me let me reference Bill Miller as opposed to Peter Lynch on this particular question. It's not that the era of stock picker has been stock picking has been diminished by the Fed or anyone else. It's that the era of getting value for paying for stock picking when many of the funds out there are just closet indexes. That's really problematic. So Miller says we want a high active share. We want a portfolio if not concentrated. Well certainly not hundreds of names. So it looks like the index and you have to adapt to whatever the circumstances are. If you go skiing there's always signs up that say be aware of changing conditions rocks ISE snow whatever. Fund managers are the same. If if the Fed is taking rates to zero. Well you can't just rail against that. You can't tilt windmills. You have to build that into your management process. And if you don't well you're going to be very disappointed when the market took off in 0 9 and 10 and you would just you know infinitely shaking your fist. Yeah that's not what people hire managers for. All right. So Barry how does one determine whether an fun investment manager is a closet indexer or whether they're actually doing something different that can differentiate themselves and actually make them a stock picking winner. Well obviously the active share is the biggest and easiest way to quantify that. If somebodies performance and holdings look and behave like the index you could quantify exactly to you know the second decimal point how much that is. Well then you're paying a lot of money for not getting a lot of value. On the other hand if you want to perform differently than the market you have to look very different than the market. And the risk with that you know when we see when we see people like Kevin Landis or Bill Miller or or Catholic Katherine Wood when they're outperformed to the upside that's because they look so different than the market. But people forget. And a lot of people have had great track records punctuated by big drawdowns and bad years. So even if you don't look like the market there's a chance that's what risk is. There's a chance that you're not going to generate the expected returns of those portfolios. There's safety in indexing. There's glory. If you're a great stock picker. But there is this as well. A lot of risk also.

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The Portfolio Revolution of Peter Lynch

Barry Ritholtz, a Bloomberg Opinion columnist, argues that Fidelity Vice Chairman Peter Lynch has the greatest long-term track record in terms of pure stock-picking. He speaks on "Bloomberg Surveillance." Ritholtz's opinions are his own. (Source: Bloomberg)

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