TIME: Almanac 1993/TIME Almanac 1993.iso/time/caps/87/87capts.4

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                                                                                January 4, 1988

ECONOMY & BUSINESS

Up, Up, then Doooown


For the No. 1 money manager, the year of the crash was a scary
roller coaster


Of the many Americans who were hurt in the Crash of '87, few
feel as let down as the millions who invested in stock mutual
funds. Their money, after all, was in the hands of savvy
professionals who, if they saw a disaster coming, would take the
necessary precautions to ease the blow.

Wrong. More than 1 million households in Boston's Fidelity
Magellan, the biggest and most celebrated mutual fund, watched
the price of their shares plunge by nearly 23% in three days of
trading. In an unusually candid and revealing series of
interviews with TIME, Peter Lynch, Magellan's manager, offers
no excuses. "I was caught in a trap," he says. "I should have
paid more attention to the red flags out there."

On the morning of Black Monday, Oct. 19, when financial markets
everywhere suddenly seemed to disintegrate, Lynch was playing
golf on a windswept course in Killarney, Ireland. He tried to
concentrate on keeping his shots straight, but his mind kept
veering back to the gathering Wall Street storm that threatened
to destroy everything he had worked to achieve over the past
decade. By the time Black Monday was over and Lynch realized
the full magnitude of what had happened, he knew his Irish
vacation would have to be cut short. By 6 a.m. the next morning
Lynch was on his way to Shannon Airport, pondering the stunning
news that in the two business days he had been away, Fidelity
Magellan's assets had plunged by 28%, from $10.7 billion to $7.7
billion.

More than a vacation was wrecked. So was Lynch's aura of
invincibility. For ten years, Lunch, 43, had been the
wunderkind of the investment world, the man who could do no
wrong. Magellan was the brightest star in the galaxy of mutual
funds offered by Fidelity Investments, which manages more than
$75 billion for investors. Between 1977, when Lynch took over
Fidelity Magellan, and the beginning of last October, the value
of the fund's shares grew by more than 2000%. A $1,000
investment made ten years ago was worth $21,437.70. No other
mutual fund came close to that performance.

But when the market started to fall sharply on Oct. 14,
customers began bailing out of Fidelity's 75 stock funds.
Caught off guard with not enough cash on hand to meet the flood
of redemptions, Fidelity was forced to sell shares heavily. On
Oct. 19 alone, it sold nearly $1 billion worth of stock and thus
helped to intensify the crash. Because Lynch is an aggressive
fund manager who is usually light on conservative stocks, the
Magellan Fund was especially hard hit by the collapse. An
investment of $1,000 made on Sept. 30 is now worth $782.

Since the crash, Lynch has gone over the year's events in his
mind many times. Interviewed in the relaxed surroundings of his
seaside home on a promontory north of Boston, he admitted to
having qualms as early as January, when the Dow Jones industrial
average broke 2000 and stood more than 157% above its 1982 low
point. What bothered him was that the market seemed to bear no
relationship to the performance of the companies whose stocks
were being traded. Corporate earnings for 1986 had been no
larger than they were in 1982 and 1983, and yet stock prices
were more than twice as high.

That was worrisome for a fundamentalists like Lynch. Unlike
the market timers and technicians, who rely on esoteric theories
and elaborate charts of trading data to tell them when to jump
in and out of the market, Lynch looks at bricks and mortar:
output and sales, productivity and profit potential. he probes
companies the way doctors used to examine patients, by making
house calls. Magellan's boss visits at least 20 companies a
month and speaks with executives of dozens more every week. "I
don't like blind dates," he says. "I have to get my own
picture."

Early in the year he got a disturbing picture:  stock prices
could not justifiably go higher without a substantial rise in
corporate profits. He had a premonition that 1987 would be
Magellan's first down year since he took over the fund. And yet
the market surged, as the fever of speculation rose. For the
first time in years, large numbers of individual investors
joined the frenzy. "The public missed the rally in 1985 and
1986," says Lynch, "so they started investing heavily in 1987."
At the same time, Japanese investors invaded the U.S. market
in force. American stocks may have been expensive, but not when
compared with the shares being traded on the overheated Tokyo
exchange.

Lynch sensed that things were getting out of control and that
he should be conservative. Describing the Dow's incredible
surge, he said, "We went over 2100 on Jan. 19, then 2200 a month
later. Then 2300 in March, 2400 in April, 2500 in July. Then
you get 2600 in August and 2700 a week later. Bang!  Bang!
Bang!  These were scary numbers."  But he was by nature
venturesome, like the Portuguese navigator for whom his fund was
named. He told himself that he and his clients were investing
for the long haul and should not worry about short-term blips
and dips in the Dow. Besides, eight times his fund had declined
by 10% to 30%, and each time it had bounced back.

As Lynch put it in a Fidelity Magellan brochure sent to
potential customers, "If all you care about is what the fund's
going to be in six months or three months, you probably should
be in Atlantic City or in Las Vegas at the casino."  While some
fund managers were hedging by building up cash reserves, Lynch
could not bring himself to sit on money. "If the public puts
the money in, even when I'm negative on the market," he thought,
"I'm just not going to take all the money they're giving me and
put it into cash."

Resisting the temptation to invest more money in
recession-resistant utility and food-company stocks, Lynch
continued to hunt for securities that had lagged the market and
still had the potential to rise. He bought shares of telephone,
paper, chemical and media companies. One part of his portfolio
that he reduced was his stock in savings and loan associations.
He figured that they would be squeezed by rising interest rates
and increasing competition from commercial banks.

By the summer Lynch was less nervous. In fact, he once again
became a true believer in the bull. Reason:  the healthier
corporate profits he had been looking for had started to arrive.
"Here I had this lurking fear that there were no longer any
values in the stock market, and, lo and behold, what was
starting to unfold was that earnings were coming back."  Behind
the rise were a determined cost- reduction campaign by American
business and the long decline of the dollar, which encouraged
U.S. exports and made imports less competitive. Says Lynch:
"The popular opinion is that America is no longer competitive.
But I was getting the felling that from a combination of cost
cutting and the weaker dollar America was creating a world-class
competitive environment."

In retrospect, Lynch kicks himself for not paying more attention
to some ominous signs that were flashing in September. Despite
the weak dollar, the trade deficit did not improve as hoped.
The July figure, released in September, set a new record.
Meanwhile, the prime rate that banks charge on commercial loans
kept creeping up, from 7.5% in march to 9.25% in early October.

On Wednesday, Oct. 14, the stock market, shocked by
disappointing trade figures, suffered its first big quake--a
record 95.46 drop in the Dow. That posed a dilemma for Lynch
and his wife Carolyn, 41, a physical therapist. They had long
been planning to leave on Oct. 15 for a trip to Ireland.
"Should we do this?" they asked each other. But Lynch rarely
took long vacations, and he was especially reluctant to cancel
this one. Though his roots are as irish as homespun Donegal
tweed, he had never been to the home of his ancestors. Besides,
could an avid golfer who shoots in the low 70s pass up a chance
to visit the country that, in his estimation, boasts six of the
25 best courses outside the U.S.?  So Lynch packed his bags and
left his deputies with a list of 100 stocks to sell, if
necessary, and 100 stocks worth buying if their prices went
lower.

As the couple toured the scenic mountains of West Ireland on
Friday, Oct. 16, they stopped at Blarney Castle, where Lynch
kissed the legendary stone. "All I could think of was the
market," he recalls, "as I swung backward, head down, into
space, holding onto a steel bar for dear life."  He hoped that
the stone would give him luck rather than eloquence. But when
he called the office that night, he learned that the DOw had
plunged another 108.36 points. Worse, Magellan customers
besieged Fidelity's 1,500 telephone operators with orders to
redeem shares. Net withdrawals on Friday amounted to $265
million, or about 2.5% of the fund. "I told Carolyn that if
this continued, we would have to go back," says Lynch.

When he finished playing 18 holes at Killarney on the morning
of Black Monday, it was two hours prior to the opening of the
New York Stock Exchange because of the five-hour transatlantic
time difference. Lynch called up his traders with sell orders,
since the wave of redemption requests had swelled over the
weekend. On his list of stocks to be dropped:  Abbott
Laboratories, Amoco, Capital Cities/ABC and many more. Then
Lynch traveled to the small coastal town of Dingle and checked
in at the Sceilig Hotel just before 2:30 p.m., as the 9:30 a.m.
starting bell at the Big Board was about to ring. Lynch got on
the phone and stayed riveted to the receiver as his colleagues
at Fidelity described the sickening free fall of stock prices.
He took a break for dinner with Irish friends at Doyle's, one
of the country's best-know seafood restaurants, but he cannot
remember what he ate. As the Dow plummeted a record 508
points, 500,000 calls jammed Fidelity's toll-free number. Many
customers were buying, but many more were selling, and the fund
lost an additional $150 million, or 2%.

Between 10 p.m. and 2 a.m., as Carolyn repacked to go home,
Lynch plotted his strategy for the next day. Realizing that he
would have to sell a huge bundle of stocks to meed redemptions,
he decided to concentrate on unloading issues that were down
only 10% or so, rather than take heavy losses on shares that had
taken a worse beating. In particular, he chose to sell many of
the British stocks in the Magellan portfolio, since the London
Exchange had not fared as badly as Wall Street. But even as
Lynch was deciding what to sell, he was overcome by a bold urge
to buy. "I was expecting a major rally the next day," he says.
Prominent on his shopping list were Merck, Eastman Kodak and
Pacific Telesis.

As soon as Lynch reached the Shannon Airport on Tuesday at 10
a.m., he called one of his traders. Barry Lyden, who arrived
at Fidelity's main office in Boston before dawn. Twice the call
went dead, until Lynch pleaded with the Irish operator to stay
on the line because "we're talking about hundreds of millions
of dollars here."

Boarding the plane, Lynch felt "like a prizefighter who knows
that in six hours he will walk into the ring."  Despite his
confidence that the market would bounce back, he was troubled
by fears and doubts, just like every other investor, large or
small, during the historic crash. He thought about his mother,
who lived through 1929 and "always said you should never own
stocks."  He wondered, "Maybe this is the start of the real
thing."  Most of all, he thought of the people who had bet on
him, though he had always told them up front that in any
downturn, Magellan would do worse than the market. Then Lynch,
who had been earning between $2 million and $3 million a year,
began thinking about his own finances. He felt relieved that
the money for his three daughters' college educations had been
set aside in money-market funds, saving accounts and a few
selected stocks. But he decided that maybe he should pay down
the mortgage on his house.

Back in Boston, he was whisked in a Fidelity limousine to his
office, where he worked on what is now known as Terrible Tuesday
until just before midnight. Though the blue-chip stocks in the
Dow staged a rally, the rest of the market took a drubbing
again. The price of a Magellan share fell by another 2%. Says
Lynch:  "Tuesday was the worst day of my career."

Fortunately, the worst was over. The market kept gyrating
during the next few weeks, but there were no more crashes.
Lately, the inflow of new investments has started to outpace
redemptions, and Lynch is pleased that only 50,000 out of the
1 million-plus Magellan customers have abandoned the fund
completely. Even after the crash, Magellan investors are 2%
ahead for 1987 as a whole. According to an independent study
by Lipper Analytical Services, investors who have been in
Magellan for three years have earned 68% on their money as of
the end of November. Over the same period the Standard &
Poor's Index of 500 stocks has gone up only 56.7%, and the
average stock fund has risen 38.6%.

Lynch's peers in the money-management business think that he
came through the crash remarkably well, considering the enormous
size of the fund he had to handle. Says Barton Biggs, a global
strategist for Morgan Stanley:  "Lynch is still the most
consistent mutual-fund manager in the country, even if he does
not outperform the market every time. None of us are supermen
in a prolonged bear market." Agrees Anthony Thatcher, a
portfolio manager at Scudder Stevens & Clark:  "Lynch's
reputation, though somewhat tarnished, is not obliterated."

Lynch did learn some lessons though. For one thing, he never
intends to be caught again without enough cash on hand. From
now on, he will keep 3% to 5% of Magellan in money-market
instruments or other cash equivalents, at least three times as
much as in the past. Says he: "If $300 million wants to go out
in a day now, I want to be ready." That way, if the market falls
and redemptions suddenly run high, he will not be forced to sell
stocks that he expects will rebound later.

Sobered by the crash, Lynch is wary about what will happen to
the market. He does not foresee a recession yet, but is fearful
of the plunging dollar. "If the dollar declines from here," he
says, "it will probably accelerate our inflation and persuade
the Europeans and Japanese to stay out of the U.S. stock
market."  Lynch also frets that the market is at the mercy of
sophisticated, new computerized trading techniques that
sometimes run out of control. Says he: "Program trading,
portfolio insurance, stock options and index trading accelerated
the crash. Without them, instead of an 508-point decline, we
might have had 150 to 250 points."

Yet Lynch does not waste much time agonizing about what could
happen next week. He has been too busy snapping up stocks that
he considered well worth buying at their depressed postcrash
prices: Goodyear, Chrysler, Intel, Texas Instruments, Carnival
Cruise Lines and Toys "R" Us, along with companies that most
people have not yet heard of such as Metro Mobile CTS, a
cellular phone system, and Comcast, a cable-TV operator.

Lynch remains convinced that America is returning to
competitive shape. To abandon the stock market now would be to
lose faith in those bustling factories, offices and stores he
inspects every week. He believed in the long-term value of U.S.
companies before the crash. He still does.

--By Frederick Ungeheuer/Boston